GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Description of Business and Summary of Significant Accounting Policies
|
Description of Business
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 products and services targeted at the video guidance and entertainment needs of consumers worldwide.
Pending Acquisition by Macrovision Corporation
On December 6, 2007, the Company signed a definitive agreement for Macrovision Corporation (NASDAQ: MVSN) to acquire the Company in a cash and stock transaction. The transaction requires, among other customary
closing conditions, approval by two-thirds of the outstanding shares of the Company’s common stock, and a majority of the shares of Macrovision Corporation common stock. News Corporation, which owns approximately 41% of the Company’s
common stock, has agreed to vote in favor of the proposed transaction, subject to the terms of a voting agreement. On January 11, 2008, the Federal Trade Commission and the Department of Justice granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act, which ends the U.S. government’s antitrust review of the transaction.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
or majority owned subsidiaries and entities in which it has a controlling financial interest and exercises control over operations (collectively, “Subsidiaries”). All material intercompany balances and transactions have been eliminated in
consolidation. In 2007, in conjunction with implementing a new centralized financial system, the Company changed its calendar to a 52-53 week fiscal year ending on the Sunday nearest to December 31. Prior to 2007, the Company maintained a
calendar fiscal year ending on December 31, except for TV Guide magazine, which maintained a 52-53 week fiscal year ending on the Sunday nearest to December 31. As such, all references to December 31, 2007 relate to the year ended
December 30, 2007. To make comparability easier, the Company continues to date its financial statements as of December 31. This change in fiscal year end did not have a material effect on the comparability of the Company’s
consolidated statements of income for the years ended December 31, 2007, 2006 and 2005.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards
No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS 157 also requires expanded disclosures
regarding fair value measurement. SFAS 157 is effective for the Company’s 2008 fiscal year. The Company anticipates that the adoption of SFAS No. 157 will not have a material impact on its results of operations or financial position.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets
and Financial Liabilities – including an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value
recognized in earnings. SFAS 159 is effective for the Company’s 2008 fiscal year. The Company anticipates that the adoption of SFAS No. 159 will not have a material impact on its results of operations or financial position.
Investments
The Company accounts for
its 49% share of the operations of the Guideworks, LLC joint venture with Comcast Corporation as an operating expense in accordance with SFAS No. 68,
Research and Development Arrangements
. For the years ended December 31, 2007, 2006
and 2005, the Company recorded $15.4 million, $13.7 million and $12.6 million, respectively, of operating expenses in its Guidance Technology and Solutions Segment relating to Guideworks, LLC. Other investments of 50% or less in entities as to which
the Company has the ability to exercise significant influence over operations, including investments in other corporate joint ventures, are accounted for using the equity method. All other investments are accounted for under the cost method.
F-7
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
Investments are included in other assets on the consolidated balance sheet. Under the equity method,
the Company discontinues recognizing its share of net losses of the investee when the investment balance is reduced to zero and no additional funding is required. If the investee subsequently reports net income, the Company will resume recognizing
its share of net income only after its share of that net income equals the share of net losses not recognized.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the
reporting period. Significant areas requiring the use of management estimates relate to revenue recognition, allowances for doubtful accounts, return allowances, establishing the fair value of tangible and intangible assets and liabilities and the
allocation thereof in purchase accounting for purchase business combinations, determining whether other than temporary declines in the fair value of our investments exist, impairment of goodwill and other indefinite-lived identifiable intangibles
and long-lived assets, accruals for litigation and other contingencies, depreciation and amortization, and income taxes. Actual results could differ materially from those estimates.
Reclassifications
In fiscal 2005,
the Company sold its SkyMall in-flight catalog business (see Note 2) and accordingly this business is shown as discontinued operations in the accompanying consolidated statements of income. Therefore, unless otherwise indicated, amounts provided in
these notes pertain to continuing operations.
Certain financial statement items for prior periods have been reclassified to conform to the
2007 presentation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months or less.
Restricted Cash
Restricted cash represents funds placed in a segregated account on behalf of the Company’s former
Chief Executive Officer under the terms of agreements executed in November 2002 (See Note 10) and $0.5 million held as collateral for surety bonds issued on behalf of one of the Company’s subsidiaries. In January 2008, the $0.5 million was
returned to the Company and reclassified to Cash and Cash Equivalents.
Marketable securities
Marketable securities include commercial paper, time deposits and U.S Government Agency and corporate debt securities. Management determines the
appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. The Company’s marketable securities are reviewed each reporting period for declines in value that are considered to be other-than-temporary and, if
appropriate, written down to their estimated fair value. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other (expense) income, net in the consolidated statements of
income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income, net in the consolidated statements of income.
F-8
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
The following table summarizes the Company’s investments in available-for-sale marketable
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Commercial paper and corporate bonds
|
|
$
|
68,494
|
|
$
|
21,301
|
|
U.S. Federal agency bonds
|
|
|
2,913
|
|
|
6,981
|
|
Time deposits with U.S. institutions
|
|
|
17,023
|
|
|
20,656
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
88,430
|
|
$
|
48,938
|
|
|
|
|
|
|
|
|
As of December 31, 2007, all of the Company’s available-for-sale marketable securities
had maturities of less than 1 year. As of December 31, 2007, gross unrealized gains and losses relating to the Company’s available-for-sale marketable securities were less than $0.1 million, respectively.
Credit Risk
Financial instruments
that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, marketable securities and trade receivables. The Company currently invests the majority of its cash in money market funds and
maintains them with several financial institutions with high credit ratings. The Company also invests in debt instruments of the U.S. government and its agencies and corporate issuers with high credit ratings. As part of its cash management process,
the Company performs periodic evaluations of the relative credit ratings of these financial institutions.
The Company evaluates its
outstanding accounts receivable each period for collectibility. This evaluation involves assessing the aging of the amounts due to the Company and reviewing the credit-worthiness of each customer. Based on this evaluation, the Company records an
allowance for accounts receivable that are estimated to not be collectible.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Assets acquired
under capital lease arrangements are recorded at the present value of the minimum lease payments and are amortized over the shorter of the lease term or useful life of the leased asset. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the useful life of the leasehold improvement. Estimated useful lives are as follows:
|
|
|
|
|
Machinery and equipment
|
|
3 to 7 years
|
|
Transponders under capital leases
|
|
15 years
|
Goodwill and Other Intangible Assets
Under SFAS No. 142,
Goodwill and Other Intangible Assets
(“Statement 142”), goodwill and other indefinite-lived intangible assets
are no longer amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Under Statement 142, indefinite-lived intangible
assets are tested for impairment by comparing their fair values to their carrying values. Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying
value of the net assets of the respective reporting units, including goodwill. If the fair value of the reporting unit is less than the carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes Step 2 to
measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting
unit. If the implied fair value of goodwill is less then the carrying amount of goodwill, an impairment loss is recognized equal to the difference.
Intangible assets that are deemed to have finite useful lives are recorded at cost and amortized using the straight-line method over the estimated useful lives of the assets.
F-9
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of, Excluding Goodwill and
Indefinite-Lived Intangible Assets
Under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(“Statement 144”), which excludes goodwill and other indefinite-lived intangible assets from its scope, 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. If required, the impairment recognized is the difference between the fair value of the asset and
its carrying amount.
Accounting for Stock Options
The Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment
(“Statement 123R”) as of January 1, 2006. Statement 123R requires the Company to expense, in its consolidated statement
of income, the estimated fair value of employee stock options and similar awards. The Company adopted the provisions of Statement 123R using the modified prospective transition method and has not restated prior periods’ results. Under this
transition method, all awards granted prior to, but not yet vested as of January 1, 2006, are included in stock compensation expense using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123,
Accounting
for Stock-Based Compensation
(“Statement 123”). Stock compensation expense for all share based payment awards granted after January 1, 2006, is based on the grant-date fair value estimated in accordance with the provisions of
Statement 123R. The Company recognizes compensation costs for shares that are expected to vest, on a straight-line basis, over the requisite service period of the award, which is generally the option vesting term of four years. For the years ended
December 31, 2007 and 2006, the Company recorded $4.0 million and $2.0 million of stock compensation expense in its consolidated statements of income.
Prior to January 1, 2006, the Company followed the disclosure-only provisions of Statement 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation—Transition and Disclosure—an
amendment of Statement 123
. The Company measured compensation expense for its stock option awards under the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock
Issued to Employees
(“APB 25”) and related interpretations. APB 25 required compensation expense to be recognized based on the excess, if any, of the quoted market price of the stock at the date of the grant and the amount an employee
must pay to acquire the stock.
The pro forma table below reflects net income and basic and diluted net income per share for the year ended
December 31, 2005, had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement 123. For purposes of this pro forma disclosure, the fair value of the stock options is estimated
using the Black-Scholes option pricing model and amortized to expense over the options’ vesting period (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
|
2005
|
|
|
Net income:
|
|
|
|
|
|
As reported
|
|
$
|
54,815
|
|
|
Add: Stock-based compensation cost included in reported net income, net of related tax effects
|
|
|
132
|
|
|
Less: Stock-based compensation cost, net of related tax effects
|
|
|
(29,013
|
)
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
25,934
|
|
|
|
|
|
Basic and diluted income per share:
|
|
|
|
|
|
As reported
|
|
$
|
0.13
|
|
|
Pro forma
|
|
|
0.06
|
|
F-10
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
On August 9, 2005, the Compensation Committee of the Board of Directors of the Company approved
the acceleration of vesting of unvested “underwater” stock options granted prior to August 9, 2005 under the Company’s 1994 Stock Incentive Plan, as amended and restated. The affected options were those with exercise prices
greater than $3.03 per share, which was the closing price of the Company’s common stock on the Nasdaq Stock Market on August 9, 2005. The Compensation Committee’s decision to accelerate the vesting of these options was in anticipation
of compensation expense to be recorded subsequent to the applicable effective date of Statement 123R. In addition, the Compensation Committee considered that because these options had exercise prices in excess of the current market value they were
not fully achieving their original objectives of incentive compensation and employee retention. As a result of this action, the vesting of approximately 5.7 million previously unvested stock options was accelerated, and those options become
immediately exercisable. The above pro forma compensation expense disclosure for the year ended December 31, 2005 includes $16.7 million due to the accelerated vesting of stock options discussed above as well as $4.6 million due to the
accelerated vesting of stock options, in accordance with the employment agreements, of certain former executives who left the Company during the first quarter of 2005.
The per share weighted-average fair value of stock options granted during the years ended December 31, 2007, 2006 and 2005, was $2.24, $1.73 and $2.21, respectively. The fair value of each option was estimated on
the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
4.6
|
%
|
|
4.6
|
%
|
|
4.1
|
%
|
|
Expected volatility
|
|
44.6
|
%
|
|
49.4
|
%
|
|
46.0
|
%
|
|
Expected life (years)
|
|
6.3
|
|
|
6.3
|
|
|
6.5
|
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
For the years ended December 31, 2007, 2006 and 2005, the Company’s volatility estimate
was based on the Company’s historical daily volatility from April 1, 2003 (the day after the Company restated its 2002 and prior financial results) as well as the implied volatility of the Company’s exchange traded options. The
estimated expected term was determined based on the formula described in Staff Accounting Bulletin No. 107 for estimating the expected term of “plain vanilla” options.
Foreign Currency Translation
The
financial statements of foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the average exchange rate for the
period for income and expense items. Gains and losses resulting from translation are accumulated as a separate component of accumulated other comprehensive income within stockholders’ equity until the investment in the foreign entity is sold or
liquidated. The Company’s transactions predominantly occur in U.S. dollars.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate their fair value because of their short maturities. Available-for-sale marketable securities are reported at their fair value based on quoted market prices.
Revenue Recognition
General
The Company follows the guidance of Staff Accounting Bulletin No. 104,
Revenue Recognition
(“SAB
104”) and Emerging Issues Task Force (“EITF”) 00-21,
Revenue Arrangements with Multiple Deliverables
, for revenue recognition and analogizes to the guidance in Statement of Position 97-2,
Software
Revenue Recognition
(“SOP 97-2”). Under this guidance, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service
has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured.
F-11
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor’s Products),
clarifies the income statement classification of costs incurred by a vendor for certain cooperative advertising and product placement fees. As a result of the EITF consensus, certain of the Company’s cooperative
advertising and product placement costs have been reflected as a reduction of revenues earned from that activity.
License Fees
The Company licenses its proprietary technologies to consumer electronics manufacturers and to service providers (including cable multiple system
operators (“MSOs”) and other owners and operators of cable television systems, telephone networks, Internet service providers, Internet Web sites, digital broadcast satellite (“DBS”) providers, wireless systems and other
multi-channel video programming distributors). It is the Company’s normal practice to enter into written agreements with its customers. The Company generally recognizes such license fees based on a per unit shipped model (with consumer
electronics “CE” manufacturers) or a per subscriber model (with service providers). The Company’s recognition of revenues from per unit license fees is based on units reported shipped in the period by the manufacturers. In certain
instances, manufacturers prepay license fees for a guaranteed minimum number of unit shipments over a specified period. Revenues are recognized as the manufacturers report the number of units shipped. If any portion of the prepayment remains at the
end of the period, it is recognized as revenue in the final month of the period. Fees for shipments in excess of the minimum are recognized in the period the manufacturers report the units shipped. Revenues from per subscriber fees are recognized in
the period services are provided by a licensee, as reported to us by the licensee. See “Multiple-Element Arrangements” below.
Revenues from annual and other license fees are recognized based on the specific terms of the license agreements. For instance, the Company has arrangements under which substantial flat fees are paid upfront in addition to ongoing per-unit
license fees. In such cases, the prepaid fees are deferred and recognized as revenue on a straight-line basis over the term of the agreement. In certain cases, the Company will license its technology for an unlimited number of units over a specified
period of time and for which it has continuing obligations. The Company records the fees associated with these arrangements on a straight-line basis over the specified term. In addition, the Company has licensing arrangements with MSOs under which
it shares a portion of the interactive platform advertising revenue that the Company generates through the MSO. In some cases, the Company guarantees that a substantial portion of the MSO’s license fees will be reimbursed through its ad-sharing
obligation to the MSOs. To the extent the ad-sharing fees are not sufficient to meet these guarantees, the Company is obligated to purchase advertising on the MSO’s platform. Because the license fee is neither fixed nor determinable until
resolution of the sharing or advertising buyback, which is typically settled quarterly, the advertising buyback guarantees and advertising sharing are netted against the license fees so that only a net license fee amount is recognized.
From time to time, the license agreement between the Company and a licensee may expire. While a new license agreement is being negotiated, the
licensee may continue to ship the same units or the same services may continue to be deployed which utilize the Company’s patented or proprietary technologies and the licensee continues to report units shipped or subscriber information on a
periodic basis. License and subscriber fees may continue to be received at the old contract rates and on a timely basis. In such cases, the Company continues to recognize license and subscriber fee revenue. However, revenue is not recognized when
collection is not reasonably assured and in no case when payment is not received for greater than 90 days.
Programming Services
The Company operates a cable network, TV Guide Network, from which it earns monthly per subscriber fees from MSOs and DBS providers. The
Company recognizes revenue in the month the services are provided. Payments received in advance for subscription services are deferred until the month earned, at which time revenue is recognized. The Company’s liability is limited to the
unearned prepayments in the event that the Company is unable to provide service.
Magazine Sales
Subscription revenue is recognized as magazines are delivered to subscribers on a straight-line basis over the term of the contract. Marketing fees paid
to acquire circulation from agent sources are netted against subscription revenue. Newsstand revenues are recognized based on the on-sale dates of magazines. Allowances for estimated returns are recorded based upon historical experience. The
Company’s liability for prepaid magazine subscriptions is limited to the unearned prepayments in the event customers cancel their subscriptions.
F-12
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
Advertising
The Company generates advertising revenue on four main platforms; TV Guide magazine, TV Guide Network, its interactive program guides (“IPGs”) and Online Networks. Magazine advertising is recognized upon
release of magazines for sale to consumers. The Company recognizes advertising revenue for the remaining media when the related advertisement is aired. All advertising is stated net of agency commissions and discounts. See “Multiple-Element
Arrangements” below.
The Company enters into transactions that exchange advertising for advertising. Such transactions are recorded
at the estimated fair value of the advertising received or given in accordance with the provisions of EITF 99-17, Accounting for Advertising Barter Transactions. In addition, the Company enters into transactions that exchange advertising for
products and services, which are accounted for similarly. Revenue from barter transactions is recognized when advertising is provided, and services received are charged to expense when used. Barter transactions are not material to the Company’s
consolidated statements of income in any period presented.
Multiple-Element Arrangements
In accounting for multiple-element arrangements, one of the key judgments to be made is the accounting value that is attributable to the different
contractual elements. The appropriate allocation of value not only impacts which segment is credited with the revenue, it also impacts the amount and timing of revenue recorded in the consolidated statements of income during a given period due to
the differing methods of recognizing revenue by each of the segments, as discussed previously.
For multiple-element arrangements the
Company follows the guidance contained in EITF 00-21 and SAB 104. Under EITF 00-21, revenue arrangements with multiple deliverables are divided into separate units of accounting where the delivered item has value to the customer on a stand-alone
basis and there is objective and reliable evidence of the fair value of the undelivered item. Consideration is allocated among the separate units of accounting based on their relative fair values.
Research and Development Costs
Research and development costs relate to the design, development and testing of new systems, applications and technologies, and are charged to expense as incurred. Research and development costs of $42.1 million, $32.1 million and $33.1
million for the years ended December 31, 2007, 2006 and 2005, respectively, are included in operating expenses.
Advertising Costs
Costs for direct mailings and insert cards sent out by TV Guide magazine are expensed when mailed. All other advertising costs are
expensed when incurred. Advertising costs of $69.6 million, $52.5 million and $62.3 million for the years ended December 31, 2007, 2006 and 2005, respectively, are included in operating expenses. Advertising costs includes costs associated with
TV Guide magazine’s billings, renewals and subscriber acquisition programs of $28.3 million, $27.0 million and $25.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Patent Prosecution and Litigation Costs
Patent prosecution and litigation costs incurred to protect and enforce the Company’s intellectual property rights are charged to expense as incurred. Patent prosecution and litigation costs of $14.7 million, $12.7 million and $9.4
million for the years ended December 31, 2007, 2006 and 2005, respectively, are included in operating expenses primarily in the Guidance Technology and Solutions Segment.
Income Taxes
Income taxes are
accounted for under the liability method. Deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded, if necessary, to reduce deferred tax assets
to an amount management believes is more likely than not to be realized.
F-13
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(1)
|
Description of Business and Summary of Significant Accounting Policies (continued)
|
Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts
basic earnings per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in periods in which such effect is dilutive. Diluted earnings per share for the years ended
December 31, 2007, 2006 and 2005 includes the effect of 1.6 million, 0.07 million and 0.9 million stock options and restricted stock units, respectively. For fiscal 2007, 2006 and 2005, out of the money options for approximately
4 million, 23 million and 26 million shares, respectively, were excluded from the diluted EPS calculation.
|
(2)
|
Acquisitions and Dispositions
|
Aptiv
On March 29, 2007, the Company acquired all of the outstanding shares of privately held PDT Holdings, Inc., which owns 100% of the
outstanding shares of Aptiv Digital, Inc. (collectively “Aptiv”) for approximately $16.3 million in cash, after taking into account certain disbursements made at closing, customary working capital adjustments and transaction costs. Aptiv
is a provider of software solutions for television set-top boxes.
SkyMall
On December 1, 2005 the Company sold its SkyMall in-flight catalog business to a private equity group for $43.3 million in cash. In addition, the
Company retained approximately $4.0 million of SkyMall liabilities and approximately $12.0 million of SkyMall’s cash, cash equivalents, and marketable securities. The Company recorded a pre-tax gain of $43.2 million in connection with the sale.
Revenues of the SkyMall business, which have been included in income from discontinued operations in the Company’s consolidated
statements of income through the date of disposition, were $65.7 million for the year ended December 31, 2005.
SNG Businesses
On March 1, 2004, the Company entered into an agreement to sell 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”). Costs associated with this disposal were estimated at $5.9 million, and consisted principally
of contractual acceleration of certain liabilities, employee-related transfer costs necessitated by the deal structure (asset purchase), and other transaction costs. As of December 31, 2006, $4.9 million of these costs remained unpaid. The
Company paid or reversed all of these accrued liabilities in the three months ended March 31, 2007. The Company also reversed certain accrued liabilities and collected certain previously reserved for receivables related to the operations of the
SNG businesses prior to the sale during that same quarter. These amounts are recorded in discontinued operations in the Company’s consolidated statements of income.
|
(3)
|
Selected Balance Sheet Accounts
|
Receivables
Receivables consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Receivables
|
|
$
|
85,707
|
|
|
$
|
82,600
|
|
|
Allowance for doubtful accounts
|
|
|
(4,079
|
)
|
|
|
(8,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
81,628
|
|
|
$
|
73,786
|
|
|
|
|
|
|
|
|
|
|
|
F-14
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(3)
|
Selected Balance Sheet Accounts (continued)
|
The changes to the allowance for doubtful accounts for the years ended December 31, 2007, 2006
and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning of
Period
|
|
(Credited)
Charged to
Operating
Expense
|
|
|
Deductions
|
|
|
Other (1)
|
|
|
Balance at
End of Period
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
8,814
|
|
(854
|
)
|
|
(2,761
|
)
|
|
(1,120
|
)
|
|
$
|
4,079
|
|
Year ended December 31, 2006
|
|
$
|
10,616
|
|
(71
|
)
|
|
(2,806
|
)
|
|
1,075
|
|
|
$
|
8,814
|
|
Year ended December 31, 2005
|
|
$
|
15,945
|
|
(1,313
|
)
|
|
(1,501
|
)
|
|
(2,515
|
)
|
|
$
|
10,616
|
|
(1)
|
Other in 2007 and 2005 primarily relates to the Company’s discontinued operations.
|
At December 31, 2007, no receivables from any one customer exceeded 10% of the total balance outstanding.
Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Machinery and equipment
|
|
$
|
152,393
|
|
|
$
|
142,051
|
|
|
Leased transponders
|
|
|
13,827
|
|
|
|
13,827
|
|
|
Buildings and improvements
|
|
|
27,289
|
|
|
|
22,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,509
|
|
|
|
177,994
|
|
|
Less accumulated depreciation and amortization
|
|
|
(113,058
|
)
|
|
|
(109,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
80,451
|
|
|
$
|
68,182
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $23.0 million, $17.9
million and $13.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. This includes amortization of property and equipment under capital lease of $0.9 million, $0.9 million and $0.9 million for the same respective
periods.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Accrued legal and other contingencies
|
|
$
|
10,618
|
|
$
|
9,695
|
|
Accrued compensation
|
|
|
28,680
|
|
|
24,238
|
|
Other
|
|
|
51,682
|
|
|
70,326
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
90,980
|
|
$
|
104,259
|
|
|
|
|
|
|
|
|
Deferred Revenue
The Company receives upfront licensing fee payments from certain MSO and DBS providers who provide either our IPG or another party’s IPG under a
patent license to their subscribers and from certain consumer electronics manufacturers who have licensed our IPG technology. In addition, certain of the Company’s customers who subscribe to the Company’s magazine prepay subscription fees.
F-15
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(3)
|
Selected Balance Sheet Accounts (continued)
|
Deferred revenue consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Licensing fees
|
|
$
|
368,159
|
|
$
|
407,797
|
|
Magazine subscriptions
|
|
|
75,122
|
|
|
78,469
|
|
Other
|
|
|
9,512
|
|
|
11,200
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
|
452,793
|
|
|
497,466
|
|
Less current portion
|
|
|
122,922
|
|
|
128,516
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,871
|
|
$
|
368,950
|
|
|
|
|
|
|
|
|
|
(4)
|
Goodwill and Other Intangible Assets and Impairment
|
Impairment of Intangible Assets
The Company performs its annual goodwill and indefinite-lived intangible assets impairment
test as of October 31 of each calendar year. The Company estimated the fair value of its reporting units utilizing a discounted cash flow method and the fair value of its indefinite-lived intangible assets utilizing the relief from royalty
valuation method. The relief from royalty valuation method estimates the benefit to the Company resulting from owning rather than licensing trademarks. Based on the results of these analyses the Company’s goodwill and indefinite-lived
intangible assets were not impaired as of October 31, 2007, October 31, 2006 and October 31, 2005.
In addition to an
annual test, goodwill and indefinite-lived intangible assets must also be tested on an interim basis if events or circumstances indicate that the estimated fair value of such assets has decreased below their carrying value.
Changes in the carrying amount of goodwill and intangible assets with indefinite lives for the years ended December 31, 2007 and 2006 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Trademark
and Trade
Name
|
|
Balance at December 31, 2005
|
|
$
|
259,524
|
|
$
|
61,800
|
|
Additions
|
|
|
979
|
|
|
121
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
260,503
|
|
|
61,921
|
|
Additions
|
|
|
2,088
|
|
|
217
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
262,591
|
|
$
|
62,138
|
|
|
|
|
|
|
|
|
Intangible assets with finite lives consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
Weighted
Average
Remaining
Useful Life
(Years)
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
392,600
|
|
$
|
(371,405
|
)
|
|
$
|
21,195
|
|
2
|
|
Patents
|
|
|
127,212
|
|
|
(68,461
|
)
|
|
|
58,751
|
|
7
|
|
Other
|
|
|
1,522
|
|
|
(228
|
)
|
|
|
1,294
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
$
|
521,334
|
|
$
|
(440,094
|
)
|
|
$
|
81,240
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(4)
|
Goodwill and Other Intangible Assets and Impairment (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
Weighted
Average
Remaining
Useful Life
(Years)
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
388,102
|
|
$
|
(362,292
|
)
|
|
$
|
25,810
|
|
3
|
|
Patents
|
|
|
127,212
|
|
|
(60,682
|
)
|
|
|
66,530
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
$
|
515,314
|
|
$
|
(422,974
|
)
|
|
$
|
92,340
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $17.1 million, $15.3 million and $15.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Scheduled amortization expense of the remaining balance at December 31, 2007 for the succeeding five years is as follows: $17.0 million —2008; $15.5 million —2009; $12.4 million
—2010; $8.2 million —2011; and $7.7 million —2012.
The Company leases office premises,
equipment and satellite transponders. The terms of certain of the agreements provide for an option to cancel the agreements after a period of time, subject to cancellation charges and/or meeting certain conditions. Additionally, certain of the
agreements also provide for options to renew and the lease amounts are subject to adjustment, as defined in the agreements. One satellite transponder is under a long-term lease arrangement that is accounted for as a capital lease. The remaining
satellite transponder lease is accounted for as an operating lease.
Future minimum lease payments under capital and noncancelable
operating leases at December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,600
|
|
|
$
|
15,056
|
|
|
2009
|
|
|
1,600
|
|
|
|
11,653
|
|
|
2010
|
|
|
1,600
|
|
|
|
7,876
|
|
|
2011
|
|
|
1,600
|
|
|
|
7,218
|
|
|
2012
|
|
|
1,600
|
|
|
|
6,868
|
|
|
Thereafter
|
|
|
10,667
|
|
|
|
18,824
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
18,667
|
|
|
|
67,495
|
|
|
Less amount representing interest at 8%
|
|
|
(6,556
|
)
|
|
|
—
|
|
|
Less sublease revenues
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net future minimum lease payments
|
|
$
|
12,111
|
|
|
$
|
67,444
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under operating leases was $15.0 million, $14.6 million and $15.1 million for the
years ended December 31, 2007, 2006 and 2005, respectively. Partially offsetting these rental charges were sublease revenues of less than $0.1 million for each of the years ended December 31, 2007, 2006 and 2005.
|
(6)
|
Guarantees and Indemnifications
|
The Company
guarantees from time to time the obligations and financial responsibilities of different subsidiaries incidental to their respective businesses.
F-17
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(6)
|
Guarantees and Indemnifications (continued)
|
The Company provides indemnification of varying scopes and amounts to certain of its licensees
against claims made by third parties arising out of the incorporation of the Company’s products, intellectual property, services and/or technologies into the licensee’s products and services, provided the licensee is not in violation of
the terms and conditions of the agreement and/or additional performance or other requirements for such indemnification. The Company’s indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee
under the license agreement. Some license agreements, including those with our largest MSO and DBS providers, do not specify a limit on amounts that may be payable under the indemnity arrangements.
In April of 2005, the Company received a notice of a potential claim for indemnification from DirecTV Group, Inc. (“DirecTV”) as a result of a
lawsuit filed by Finisar Corporation (“Finisar”) against DirecTV in the United States District Court for the Eastern District of Texas. Finisar alleged that several aspects of the DirecTV satellite transmission system, including aspects of
its advanced electronic program guide (“EPG”) and the storage, scheduling, and transmission of data for the EPG, infringed a Finisar patent. On July 7, 2006, the Court awarded Finisar approximately $117 million. In addition, the Court
ordered DirecTV to pay approximately $1.60 per activated set top box in licensing fees going forward in lieu of an injunction until the expiration of Finisar’s patent in 2012. The parties both filed appeals to the Federal Circuit. On
January 7, 2008, the appellate court heard oral argument on the appeals. The Company has not established a reserve with respect to this matter in its consolidated financial statements.
In support of a potential claim for indemnification, Comcast put the Company on notice that it had received communications from Finisar asserting
infringement of one of its patents. On July 7, 2006, Comcast filed a declaratory judgment action in the Northern District of California asking the Court to rule that it does not infringe Finisar’s patent and/or that the patent is invalid.
On December 7, 2007, Comcast filed motions for summary judgment of non-infringement and invalidity of the ‘505 patent and that Finisar is not entitled to damages for the period prior to the lawsuit by reason of laches. On January 17,
2008, the Court granted Comcast’s motion on the issue of laches, barring Finisar’s claims for damages incurred prior to the lawsuit, and postponed its ruling on the non-infringement and invalidity summary judgment motions pending the
issuance of the appellate court’s decision regarding the ‘505 patent and related issues in the matter of
Finisar Corporation v. DirecTV, et al.
(discussed above). Comcast has not taken any further action insofar as its potential
indemnity claim against the Company is concerned. The Company has not established a reserve with respect to this matter in its consolidated financial statements.
In connection with the Company’s sale of its SkyMall in-flight catalog business in 2005, the Company has indemnified SkyMall and certain of its affiliates for various matters that are typical for transactions of
this type, subject in certain instances to a negotiated basket and/or cap.
In conjunction with the assignment of a lease in 2004 held by
TV Guide Interactive, Inc. (“Interactive”) to Guideworks, LLC, a 49% owned joint venture (“Guideworks”) Interactive and the Company’s co-venturer jointly and severally guaranteed the obligations of Guideworks under the
lease. Interactive’s guaranty obligations continue as long as the Company is a member of Guideworks.
The Company provides
indemnification to its officers and directors pursuant to the Company’s Certificate of Incorporation and By-Laws and various agreements. Therefore, the Company maintains D&O liability insurance with respect to liabilities arising out of
certain matters, including matters arising under securities laws. This insurance is subject to limitations, conditions and deductibles set forth in the insurance policies.
The Company or certain of its
subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company’s major taxing jurisdictions include U.S. federal and the states of California, New York, Oklahoma and
Pennsylvania. The IRS has concluded its examination of the Company’s U.S. federal income tax returns for years prior to 2005. The Company or certain of its subsidiaries has amended state tax returns to reflect changes resulting from IRS
examinations. Thus, multiple state tax returns remain open to audit. The state of Oklahoma is currently examining the Company’s state income tax returns for tax years 1999 through 2004. The state of New York is currently examining the
Company’s state income tax returns for tax years 2004 through 2006. The Company is no longer subject to state income tax examinations for years prior to 1999.
F-18
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(7)
|
Income Taxes (continued)
|
Assessment of the Company’s current tax exposure includes assessing tax strategies, the status
of tax audits and open audit periods with the taxing authorities. The ultimate resolution of the Company’s current tax exposure items may result in the recognition of significant amounts of income or significant cash outlays in future periods.
Management believes that adequate reserves have been made for any adjustment that might be assessed for open years.
The Company adopted
the provisions of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
as amended (“Interpretation 48”), on January 1, 2007. Interpretation 48 clarifies the accounting for
uncertainty in income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. As a result of the implementation of Interpretation 48, the Company recognized a $56.4
million decrease in the liability for tax contingencies, which was accounted for as a decrease to the January 1, 2007 balance of accumulated deficit. After the date of adoption, the Company had a net balance of $24.5 million recorded for
unrecognized tax benefits, including penalties and interest of $7.9 million.
As of December 31, 2007, the Company had a net balance
of $20.0 million recorded for unrecognized tax benefits, including penalties and interest of $6.7 million. This balance is recorded in other liabilities in the Company’s consolidated balance sheet. If these unrecognized tax benefits are
recognized in future periods, it would favorably affect the Company’s effective tax rate. The Company does not anticipate a significant change in the total amount of unrecognized tax benefits during the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (which does not include penalties and interest) is as follows (in
thousands):
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
22,687
|
|
|
Additions to tax positions of prior years
|
|
|
3,794
|
|
|
Reductions for tax positions of prior years
|
|
|
(4,080
|
)
|
|
Lapses in statutes of limitations
|
|
|
(3,110
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
19,291
|
|
The Company recognizes penalties and interest accrued related to unrecognized benefits as a
component of income tax expense in the consolidated statements of income. The Company recorded a benefit of $1.2 million, an expense of $8.9 million and a benefit of $17.4 million related to interest and penalties during the years ended
December 31, 2007, 2006 and 2005, respectively.
The Company’s income (loss) from continuing operations before income taxes for
the years ended December 31, 2007, 2006 and 2005 consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Domestic
|
|
$
|
14,589
|
|
$
|
44,242
|
|
$
|
(60,173
|
)
|
|
Foreign
|
|
|
74,194
|
|
|
49,984
|
|
|
40,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,783
|
|
$
|
94,226
|
|
$
|
(19,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) from continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,517
|
|
|
$
|
4,752
|
|
|
$
|
21,348
|
|
|
State
|
|
|
(3,232
|
)
|
|
|
(772
|
)
|
|
|
3,502
|
|
|
Foreign
|
|
|
4,761
|
|
|
|
2,966
|
|
|
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,046
|
|
|
|
6,946
|
|
|
|
26,939
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(87,364
|
)
|
|
|
12,498
|
|
|
|
(65,801
|
)
|
|
State
|
|
|
(1,144
|
)
|
|
|
2,318
|
|
|
|
(1,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,508
|
)
|
|
|
14,816
|
|
|
|
(67,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(84,462
|
)
|
|
$
|
21,762
|
|
|
$
|
(40,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(7)
|
Income Taxes (continued)
|
A reconciliation of the expected income tax expense (benefit) from continuing operations using the
U.S. statutory rate of 35 percent to the income tax expense (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected income tax expense (benefit)
|
|
$
|
31,074
|
|
|
$
|
32,979
|
|
|
$
|
(6,925
|
)
|
|
State taxes, net of federal effect
|
|
|
976
|
|
|
|
722
|
|
|
|
1,422
|
|
|
Provision for audit adjustments
|
|
|
(14,132
|
)
|
|
|
10,005
|
|
|
|
(22,729
|
)
|
|
Change in valuation allowance
|
|
|
(107,449
|
)
|
|
|
(25,079
|
)
|
|
|
(14,383
|
)
|
|
Other
|
|
|
5,069
|
|
|
|
3,135
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(84,462
|
)
|
|
$
|
21,762
|
|
|
$
|
(40,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, the Company’s effective tax rate benefited by
approximately $107.4 million from the reversal of a valuation allowance that had been recorded against the Company’s deferred tax assets. The Company now has a history of generating, and accurately forecasting, pre-tax book income. The 2008
annual budget and long-range plan process, which coincided with the preparation and review of the Company’s interim financial statements for the third quarter of 2007, projected adequate future taxable income to utilize our deferred tax assets.
These factors made the realization of the Company’s deferred tax assets more likely than not and therefore, in the third quarter of 2007, in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income
Taxes
, a valuation allowance for all of the Company’s deferred tax assets was no longer necessary.
Deferred income taxes arise
from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. The tax effects of temporary differences that give rise to significant portions of deferred tax assets
and liabilities are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
364
|
|
|
$
|
546
|
|
|
Expense items
|
|
|
23,832
|
|
|
|
31,878
|
|
|
Deferred revenue
|
|
|
137,761
|
|
|
|
152,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
161,957
|
|
|
|
185,020
|
|
|
Valuation allowance on deferred tax assets
|
|
|
(1,552
|
)
|
|
|
(109,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
160,405
|
|
|
|
76,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Tax versus financial depreciation and amortization
|
|
|
(55,265
|
)
|
|
|
(59,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(55,265
|
)
|
|
|
(59,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
105,140
|
|
|
$
|
16,632
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and deferred tax liabilities are reported on the consolidated balance sheets
as follows:
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Included in current deferred tax assets, net
|
|
$
|
34,406
|
|
|
$
|
16,390
|
|
|
Included in long-term deferred tax assets, net
|
|
|
125,999
|
|
|
|
59,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,405
|
|
|
$
|
76,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Included in current deferred tax assets, net
|
|
$
|
(1,282
|
)
|
|
$
|
(2,899
|
)
|
|
Included in long-term deferred tax assets, net
|
|
|
(53,983
|
)
|
|
|
(56,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(55,265
|
)
|
|
$
|
(59,387
|
)
|
|
|
|
|
|
|
|
|
|
|
F-20
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with various acquisitions, the Company has assumed four stock option plans and these
plans, along with the Company’s stock option plan, are collectively referred to as the “Plans.” The Company’s Compensation Committee may grant stock options to purchase common stock of the Company to employees of the Company
(including executive officers) and certain other persons (including directors and consultants) who are eligible to participate in the Plans. Subject to early termination or acceleration provisions, a stock option generally will be exercisable, in
whole or in part, from the date specified in the related award agreement until the expiration date determined by the Compensation Committee. In no event, however, is a stock option exercisable after ten years from its date of grant. The Company
grants stock options under the Plans at exercise prices equal to the market value of the Company’s stock on the dates of grant.
The
Plans allow for the issuance of stock options to purchase a maximum of 30 million shares of the Company’s Common Stock. As of December 31, 2007, there were 29.7 million shares available for future option grants under the Plans.
The following table summarizes information about stock option transactions (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding at beginning of period
|
|
28,510
|
|
|
$
|
6.82
|
|
33,839
|
|
|
$
|
7.32
|
|
33,664
|
|
|
$
|
7.31
|
|
Granted
|
|
5,507
|
|
|
|
4.45
|
|
4,761
|
|
|
|
3.21
|
|
3,672
|
|
|
|
4.32
|
|
Exercised
|
|
(997
|
)
|
|
|
3.79
|
|
(81
|
)
|
|
|
2.80
|
|
(2,091
|
)
|
|
|
2.70
|
|
Forfeited / Expired
|
|
(1,558
|
)
|
|
|
6.35
|
|
(10,009
|
)
|
|
|
6.76
|
|
(1,406
|
)
|
|
|
6.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
31,462
|
|
|
|
6.52
|
|
28,510
|
|
|
|
6.82
|
|
33,839
|
|
|
|
7.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
22,901
|
|
|
|
7.48
|
|
23,573
|
|
|
|
7.58
|
|
32,759
|
|
|
|
7.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options exercised during the year ended December 31,
2007 was $1.8 million.
The following tables summarize information about the Company’s stock options outstanding as of
December 31, 2007 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options
Exercisable
|
|
Range of Exercise Prices
|
|
Number
of Shares
|
|
Weighted-
Average
Remaining
Years of
Contractual Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of Shares
|
|
Weighted-
Average
Exercise
Price
|
|
$2.65-$5.00
|
|
12,468
|
|
7.9
|
|
$
|
3.94
|
|
3,907
|
|
$
|
3.89
|
|
$5.01-$10.00 (1)
|
|
16,605
|
|
1.0
|
|
|
5.70
|
|
16,605
|
|
|
5.70
|
|
$10.01-$15.00
|
|
497
|
|
0.4
|
|
|
13.23
|
|
497
|
|
|
13.23
|
|
$15.01-$30.00
|
|
813
|
|
1.4
|
|
|
21.13
|
|
813
|
|
|
21.13
|
|
$30.01-$45.00
|
|
1,049
|
|
1.8
|
|
|
33.63
|
|
1,049
|
|
|
33.63
|
|
$45.01-$314.25
|
|
30
|
|
1.4
|
|
|
77.94
|
|
30
|
|
|
77.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding at December 31 2007 (1)
|
|
31,462
|
|
3.8
|
|
|
6.52
|
|
22,901
|
|
|
7.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Years of
Contractual Life
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Vested and exercisable at December 31, 2007 (1)
|
|
22,901
|
|
$
|
7.48
|
|
1.9
|
|
$
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in future periods at December 31, 2007 (1)
|
|
29,658
|
|
$
|
6.67
|
|
3.4
|
|
$
|
9,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In January 2008, vested and exercisable stock options to purchase 12.9 million shares at $5.50 per share expired.
|
F-21
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(8)
|
Stock Option Plans (continued)
|
As of December 31, 2007, $12.2 million of total unrecognized compensation cost related to stock
options is expected to be recognized over a period, calculated on a weighted average basis, of 3.0 years.
|
(9)
|
Employee Benefit Plan
|
The Company has a 401
(k) defined contribution plan, which provides most of its employees with the ability to defer a percentage of their annual compensation subject to certain limitations. The Company matches the employee’s deferrals based on certain
percentages of the employee’s deferrals. The Company recorded contribution expense of $2.9 million, $2.8 million and $2.8 million relating to this plan during the years ended December 31, 2007, 2006 and 2005, respectively.
|
(10)
|
Litigation and Other Contingencies
|
Macrovision Transaction
Litigation
On December 7, 2007, a purported shareholder class action lawsuit was filed against the Company, News Corporation, and
members of the Company’s Board of Directors. The complaint alleged that the Company is being sold through an unfair process and for less than its fair value and sought a declaration that the sale is unlawful, an injunction to prevent the sale
from going forward, rescission to the extent that the terms of the sale have been implemented and an award of attorneys’ fees, experts’ fees, costs, and other disbursements. On February 4, 2008, the plaintiffs filed a request that the
Court dismiss their complaint without prejudice as to all defendants.
On December 17, 2007, an additional purported shareholder class
action lawsuit was filed against the Company and members of its Board of Directors alleging that Macrovision Corporation’s proposed acquisition of the Company is unfair to the Company’s shareholders. The complaint contains a cause of
action for breach of fiduciary duty against the Company and members of its board of directors. On February 1, 2008, the plaintiff filed an amended complaint, adding News Corporation as a defendant and asserting a cause of action against News
Corporation for aiding and abetting breach of fiduciary duty. The amended complaint also contains allegations that certain of the Company’s disclosures in connection with the proposed transaction are inadequate. The amended complaint seeks an
injunction to prevent the proposed sale, rescission or rescissory damages in the event that the sale is consummated, rescission of the voting agreement in which News Corporation agreed to vote its shares in favor of the proposed transaction, an
accounting of damages allegedly suffered by the Company’s shareholders, and an award of attorneys’ and experts’ fees.
Claims Under the
Company’s Directors and Officers Liability Insurance Policies
On July 6, 2005, the Company filed a complaint against its
former primary and excess directors and officers liability insurance carriers, alleging that the issuers of insurance policies, with aggregate policy limits of $50 million, for the 1999-2002 policy periods, breached their obligations under these
policies. The Company’s complaint sought declaratory relief, monetary damages plus interest, attorneys’ fees and costs. The Company’s original complaint, as well as a second complaint which asserted similar allegations, were both
dismissed without prejudice. On August 17, 2006, the Company filed its third complaint, as captioned above, against the insurance carriers asserting similar allegations to those contained in the previous complaints. On November 30, 2006,
the Court dismissed the Company’s complaint against its excess insurance carrier, Federal Insurance Company (“Federal”), ruling that the Company’s claims against Federal were premature because the primary insurance policy had not
yet been exhausted (see Note 14).
Patent and Anti-Trust Litigation
On September 28, 2006, Digeo, Inc. (“Digeo”) filed a lawsuit in the Western District of Washington against the Company alleging that the Company violated the Sherman Act, the Clayton Act and state
antitrust law by, among other things, conspiring to restrain trade and monopolizing the interactive program guide market via its licensing practices. Digeo seeks injunctive relief; monetary damages, including treble damages; interest; attorney fees;
and costs. On January 29, 2007, the Court granted the Company’s motion to transfer the case to the Central District of California where the Company’s patent infringement case against Digeo and Charter Communications, Inc.
(“Charter”) is currently pending.
F-22
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(10)
|
Litigation and Other Contingencies (continued)
|
On October 13, 2006 the Company filed a lawsuit against Digeo and Charter in the United States
District Court for the Central District of California alleging that the interactive program guide (“IPG”) distributed by Digeo infringes U.S. Patent No. 6,262,722 and U.S. Patent No. 6,498,895. The Company seeks an order
permanently enjoining them from future infringement of the patents; monetary damages not less than a reasonable royalty, plus treble damages for willful infringement; attorney fees; costs; and prejudgment interest.
On May 17, 2007, the Company’s subsidiary ODS Technologies, L.P. (“ODS,” which does business as TVG Network) filed a patent
infringement complaint against Magna Entertainment Corp. (“MEC”), HRTV, LLC (“HRTV”) and XpressBet, Inc. (“XpressBet”) in the United States District Court for the Central District of California. ODS asserts that
defendants infringe two of its patents related to interactive off-track wagering systems, U.S. Patent No. 6,089,981 and U.S. Patent No. 6,554,709. The complaint seeks injunctive relief prohibiting further infringement by defendants as well
as damages, including damages attributable to defendants’ allegedly willful infringement. In response, MEC, XpressBet and HRTV have asserted that they do not infringe the subject patents, that the subject patents are invalid, and that the
subject patents are unenforceable.
On March 23, 2001, the Company’s subsidiary, Gemstar Development Corporation
(“GDC”), was added as a third-party defendant in a case in which plaintiff SuperGuide Corporation’s (“SuperGuide”) complaint alleged patent infringement by DirecTV, EchoStar, Thomson Consumer Electronics, and Hughes
Electronics (collectively, the “Defendants”) with respect to three patents owned by SuperGuide but licensed to GDC (U.S. Patents Nos. 4,751,578, 5,038,211, and 5,293,357, collectively, the “SuperGuide Patents”). After being added
as a party, GDC brought claims (i) against SuperGuide for declaratory relief and for breach of contract relating to a 1993 license agreement between SuperGuide and GDC; and (ii) against EchoStar for infringing the SuperGuide Patents within
GDC’s defined fields of use. On August 26, 2005, after SuperGuide had agreed to dismiss with prejudice its infringement claims based on the ‘211 and ‘357 patents, the Court entered summary judgment of non-infringement of those
patents. During March 2007, the Court held a bench trial on the licensing issues in the case. On July 20, 2007, the Court decided the licensing issues in favor of SuperGuide. In that ruling, GDC’s cross-claims against SuperGuide for
declaratory judgment and breach of contract were dismissed with prejudice.
In connection with this case, the Company agreed in 2004 to
reimburse EchoStar for legal expenses and liabilities in an aggregate amount not to exceed $3.5 million. In addition, Thomson has asserted claims for indemnification from the Company and made a demand that the Company defend and indemnify Thomson
against SuperGuide’s claims. The Company has denied Thomson’s claims for indemnity. DirecTV has also asserted a potential right to defense and indemnification from the Company with respect to the SuperGuide litigation described herein, and
the Company has denied DirecTV’s claims for indemnity.
Other Litigation
On May 5, 2003, the Securities and Exchange Commission (“SEC”) filed a proceeding pursuant to Section 1103 of the Sarbanes-Oxley Act
seeking an order requiring the Company to maintain approximately $37.0 million in segregated, interest-bearing bank accounts (“1103 funds”). The Company had originally set those funds aside for payment to its former Chief Executive
Officer, Mr. Henry Yuen, and its former Chief Financial Officer, Ms. Elsie Leung, in connection with the Company’s November 2002 management and corporate governance restructuring. On May 9, 2003, after a hearing, the Court
ordered the Company to retain the 1103 funds in those segregated accounts and prohibited the Company from paying any portion of those funds to its former Chief Executive Officer or its former Chief Financial Officer, absent further order of the
Court. Following a settlement between the Company and Ms. Leung, pursuant to which she relinquished, among other things, her claims to her portion of the 1103 funds, on June 13, 2006, the Court dissolved that portion of its May 9,
2003 order pertaining to those funds (approximately $8.4 million). No further orders have been given by the Court with respect to the approximately $31.6 million of 1103 funds originally set aside for payment to Mr. Yuen.
On May 30, 2003, the Company’s former employees, Mr. Yuen and Ms. Leung, commenced arbitration proceedings against the Company to
contest their April 18, 2003, termination for cause, seeking monetary damages, interest, and attorneys’ fees and costs. The Company filed a consolidated response and counterclaim alleging breach of representations and warranties under
agreements entered into in connection with the Company’s November 2002 management and corporate governance restructuring, seeking monetary damages and other relief. In June 2006, the Company entered into a settlement and release agreement with
Ms. Leung regarding the arbitration proceeding against her. As a result of the settlement, the contingent liability the Company carried on its balance sheet for restructuring payments and related interest and accrued payroll taxes totaling
approximately $8.5 million was extinguished in the Company’s fiscal quarter ended June 30, 2006.
F-23
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(10)
|
Litigation and Other Contingencies (continued)
|
Of this $8.5 million liability, $8.2 million was recorded as a reduction in cross platform expenses
and $0.3 million as interest income. In addition, the Company reversed $0.7 million in accrued legal expenses in cross platform costs related to Ms. Leung. The Company also reclassified approximately $8.4 million of restricted cash on its
balance sheet to cash and cash equivalents.
On January 22, 2007 the panel issued a partial final award in favor of the Company,
ruling against Mr. Yuen on his wrongful termination claims and that Mr. Yuen is not entitled to any portion of the1103 funds set-aside for payment to him in connection with the Company’s November 2002 management and corporate
governance restructuring. As a result of the arbitrators ruling, the liability the Company carried on its balance sheet for restructuring payments and related interest and accrued payroll taxes, totaling approximately $31.3 million, was extinguished
in the Company’s fiscal quarter ended December 31, 2006. Of this $31.3 million liability, $29.5 million was recorded as a reduction in Cross Platform costs and $1.8 million as interest income. The Company also reversed $1.7 million in
accrued legal expenses relating to Mr. Yuen during the year ended December 31, 2006. In addition the panel found Mr. Yuen liable to the Company for $93.6 million in damages for his breach of certain representations and warranties made
to the Company. On June 19, 2007, the panel of arbitrators issued their final award, incorporating the previous award and awarding the Company an additional $20.9 million in attorney fees and interest. The Company also prevailed in the
arbitration with respect to the Patent Rights Agreement, which remains in effect until 2010; and the Company may offset amounts owed to Mr. Yuen under that agreement against the approximately $114.5 million total damages and interest awarded to
the Company. Accordingly, the liability the Company carried on its balance sheet as of December 31, 2006 for the Patent Rights Agreement of approximately $10.7 million was reversed in the Company’s financial statements during the fiscal
quarter ended March 31, 2007. The panel’s final award established the amount of the offset to be $25.7 million including royalties under the Patent Rights Agreement plus interest. Additionally, as stated in the panel’s January 2007
ruling, Mr. Yuen is not entitled to any portion of the 1103 funds. Consequently, the net final arbitration award in favor of the Company entitles it to the approximately $120.4 million (approximately $31.6 million in 1103 funds, plus
approximately $88.8 million in damages and interest).
On November 27, 2007, the Supreme Court of the State of New York granted the
Company’s petition to have the arbitration award confirmed.
In addition to the items listed above, the Company is party to various
legal actions, claims and proceedings incidental to its business. Litigation is uncertain, and the outcome of individual cases is not predictable with any assurance. The Company has established loss provisions only for matters in which losses are
probable and can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims, or sanctions, that if granted, could require the Company to pay damages or make other
expenditures in amounts that could have a material adverse effect on the Company’s financial position or results of operations. At this time management has not reached a determination that any of the matters listed above or the Company’s
other litigation are expected to result in liabilities that will have a material adverse effect on the Company’s financial position or results of operations.
|
(11)
|
Related Party Transactions and Other Significant Relationships
|
As of December 31, 2007, News Corporation beneficially owns approximately 41% of the Company’s outstanding common stock and four of the Company’s directors are also officers of News Corporation.
The Company charged entities controlled by News Corporation $10.7 million, $12.5 million and $14.3 million for advertising and other
services during the years ended December 31, 2007, 2006 and 2005, respectively. During those same periods, the Company acquired programming from News Corporation-controlled entities of $1.2 million, $1.2 million and $1.0 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
The Company also provides advertising and other media services to a third party
pursuant to an agreement between News Corporation and such third party, under which News Corporation agreed to provide or procure media services for the benefit of such party. News Corporation pays the Company for the services provided to the third
party, and accordingly reduces News Corporation’s obligation to this third party. The Company charged News Corporation $0.6 million and $2.9 million for the years ended December 31, 2006 and 2005, respectively. There were no similar
charges for the year ended December 31, 2007.
F-24
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(11)
|
Related Party Transactions and Other Significant Relationships (continued)
|
The Company reimburses News Corporation for facilities and other general and administrative costs
incurred on the Company’s behalf. Expenses associated with these costs approximated $4.3 million, $4.3 million and $4.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.
During 2004, the Company entered into a long-term capital sublease with News Corporation’s subsidiary Fox Entertainment Group, Inc.
(“Fox”) for a transponder to be used in the Company’s Media Networks and Guidance Technology and Solutions segments operations. The current and long-term portions of this capital lease obligation were $0.7 million and $11.5 million at
December 31, 2007, and $0.6 million and $12.1 million at December 31, 2006, respectively. During 2007, 2006 and 2005, the Company made payments of $1.6 million, $1.6 million and $1.6 million, respectively. Related amortization and interest
expense for 2007, 2006 and 2005 under this capital sublease were $1.9 million, $2.0 million and $2.0 million, respectively.
The Company
transmits interactive program guide data in the vertical blanking interval of television broadcast stations owned and operated by Fox. In exchange, Fox’s stations are entitled to a preferred position on the IPG in their designated market areas.
In addition, the Company purchases paper through a paper procurement arrangement with News Corporation at negotiated prices with paper suppliers based on the combined paper requirements of the two organizations.
As of December 31, 2007 and December 31, 2006, the Company had receivables due from News Corporation-controlled entities totaling $2.3 million
and $2.4 million, respectively, and payables due to News Corporation-controlled entities totaling $0.1 million and $0.3 million, respectively.
The Company has included in the amounts discussed above transactions with News Corporation and all known entities in which News Corporation has an interest greater than 50%. In addition, the Company has material transactions with entities
in which News Corporation owns, directly or indirectly, 50% or less.
|
(12)
|
Segment and Geographical Information
|
The Company
reports segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding the allocation of resources to the business units. The Company presents its business units to its
chief operating decision maker in three reportable segments. In addition, the Company also has Cross Platform Costs which includes certain company-wide expenditures. Segment information for the prior periods has been reclassified to conform to the
current presentation.
The Guidance Technology and Solutions Segment consists primarily of (i) IPG Patent Licensing to third party
guide developers such as multi-channel video service (cable, satellite and IPTV) providers; consumer electronics (“CE”) manufacturers; set-top box manufacturers; interactive television software and program guide providers in the online,
personal computer and mobile phone businesses, (ii) Company-developed IPG Products and Services provided for multi-channel video service providers and CE manufacturers, and (iii) video recording technology currently marketed under the VCR
Plus+ brand in North America and under other brands in Europe and Japan (collectively referred to as “VCR Plus+”). This segment also includes TV Guide Data Solutions, a data collection and distribution business that gathers and distributes
program listings and channel lineups, and TV Guide Mobile Entertainment.
The Media Networks Segment consists of the Company’s cable
television and online networks and includes the following business units: TV Guide Network, TVG Network, Online Networks, TV Guide Broadband and TV Guide SPOT.
The Publishing Segment consists primarily of TV Guide magazine.
Cross Platform Costs includes costs
related to the Company’s product development and technology group and corporate marketing expenditures, as well as corporate management, finance, legal, information technology, human resources and related expenses such as certain litigation and
insurance costs. The product development and technology group focuses on developing next generation guidance products and services. Corporate marketing is primarily focused on cross-platform marketing initiatives to drive greater usage of our
products and elevate our brand.
F-25
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(12)
|
Segment and Geographical Information (continued)
|
The Company’s chief operating decision maker uses an adjusted EBITDA (as defined below)
measurement to evaluate the performance of, and allocate resources to, the business units. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the
measure of segment profit and loss when reviewed by the Company’s chief operating decision maker. Balance sheets of the reportable segments are not used by the chief operating decision maker to allocate resources or assess performance of the
businesses.
Segment information for the years ended December 31, 2007, 2006 and 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Guidance Technology and Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
286,129
|
|
|
$
|
222,851
|
|
|
$
|
190,962
|
|
|
Operating expenses(1)
|
|
|
100,033
|
|
|
|
87,062
|
|
|
|
85,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
186,096
|
|
|
|
135,789
|
|
|
|
105,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Networks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
199,286
|
|
|
|
196,992
|
|
|
|
183,704
|
|
|
Operating expenses (1)
|
|
|
162,626
|
|
|
|
154,299
|
|
|
|
142,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
36,660
|
|
|
|
42,693
|
|
|
|
41,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
142,328
|
|
|
|
151,411
|
|
|
|
229,526
|
|
|
Operating expenses(1)
|
|
|
162,590
|
|
|
|
193,251
|
|
|
|
321,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
(20,262
|
)
|
|
|
(41,840
|
)
|
|
|
(92,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Platform Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1)
|
|
|
92,475
|
|
|
|
34,567
|
|
|
|
61,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
(92,475
|
)
|
|
|
(34,567
|
)
|
|
|
(61,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
627,743
|
|
|
|
571,254
|
|
|
|
604,192
|
|
|
Operating expenses(1)
|
|
|
517,724
|
|
|
|
469,179
|
|
|
|
610,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
110,019
|
|
|
|
102,075
|
|
|
|
(6,350
|
)
|
|
|
|
|
|
|
Stock compensation
|
|
|
(4,024
|
)
|
|
|
(2,027
|
)
|
|
|
(132
|
)
|
|
Depreciation and amortization
|
|
|
(40,133
|
)
|
|
|
(33,181
|
)
|
|
|
(29,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
65,862
|
|
|
|
66,867
|
|
|
|
(35,666
|
)
|
|
Interest income, net
|
|
|
23,930
|
|
|
|
26,602
|
|
|
|
15,544
|
|
|
Other (expense) income, net
|
|
|
(1,009
|
)
|
|
|
757
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
88,783
|
|
|
$
|
94,226
|
|
|
$
|
(19,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating expenses means operating expenses, excluding stock compensation and depreciation and amortization.
|
|
(2)
|
Adjusted EBITDA is defined as operating income (loss), excluding stock compensation, depreciation and amortization and impairment of intangible assets. The Company believes adjusted
EBITDA to be relevant and useful information as adjusted EBITDA is the primary measure used by our chief operating decision maker to evaluate performance of and make decisions about resource allocation to the segments.
|
F-26
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(12)
|
Segment and Geographical Information (continued)
|
The following table presents revenues earned from customers located in the United States and in
foreign countries. Long-lived assets are grouped by their physical location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
528,832
|
|
$
|
498,961
|
|
$
|
541,220
|
|
Foreign
|
|
|
98,911
|
|
|
72,293
|
|
|
62,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
627,743
|
|
$
|
571,254
|
|
$
|
604,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
579,689
|
|
$
|
520,336
|
|
Foreign
|
|
|
3,010
|
|
|
2,818
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
582,699
|
|
$
|
523,154
|
|
|
|
|
|
|
|
|
No single customer or country other than the United States accounted for more than 10% of total
revenues for the years ended December 31, 2007, 2006 and 2005.
|
(13)
|
Quarterly Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
(in thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
156,734
|
|
$
|
155,609
|
|
$
|
159,551
|
|
$
|
155,849
|
|
|
Income (loss) from continuing operations (1)
|
|
|
30,763
|
|
|
20,775
|
|
|
123,192
|
|
|
(1,485
|
)
|
|
Income from discontinued operations, net of tax
|
|
|
3,641
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income (loss)
|
|
|
34,404
|
|
|
20,775
|
|
|
123,192
|
|
|
(1,485
|
)
|
|
Basic and diluted income(loss) per share from continuing operations
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.29
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
(in thousands, except per share data)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
144,032
|
|
$
|
133,289
|
|
$
|
148,947
|
|
$
|
144,986
|
|
Net income (2)
|
|
|
8,566
|
|
|
14,635
|
|
|
17,452
|
|
|
31,811
|
|
Basic and diluted net income per share
|
|
$
|
0.02
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.07
|
|
(1)
|
In the quarter ended March 31, 2007, the Company recorded a $10.7 million pre-tax benefit from the reversal of a liability related to a patent rights agreement with
Mr. Yuen (see Note 10). In the quarter ended September 30, 2007, the Company reversed the valuation allowance it had recorded against its deferred tax assets. The impact of this reversal on the quarter ended September 30, 2007 was
$115 million.
|
|
(2)
|
In the quarter ended June 30, 2006, the Company recorded a $9.2 million benefit from the reversal of accrued liabilities related to Ms. Leung. In the quarter ended
December 31, 2006, the Company recorded a $31.3 million benefit from the reversal of certain accrued liabilities related to Mr. Yuen (see Note 10).
|
F-27
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
(14)
|
Subsequent Event (unaudited)
|
On February 1, 2008, the Company, National Union, and Federal, resolved all of the disputes
between them (See Note 10). As part of this resolution, the Company will receive payments totaling $32.5 million. These payments, which are taxable, will be recorded in the Company’s consolidated financial statements; as a reduction to selling,
general and administrative expenses within Cross Platform Costs; in the first quarter of 2008.
F-28