SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO
--- ---
COMMISSION FILE NUMBER 0-22662
UNITED VIDEO SATELLITE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1290412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7140 SOUTH LEWIS AVENUE
TULSA, OKLAHOMA 74136-5422
(Address of principal executive offices) (Zip code)
(918) 488-4000
(Registrant's telephone number, including area code)
Indicate by check 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 periods
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
--- ---
Number of shares outstanding of each of the registrant's classes of
common stock as of November 1, 1997:
TITLE OF CLASS NUMBER OF SHARES
Class A Common Stock $.01 Par Value 24,420,120
Class B Common Stock $.01 Par Value 12,373,294
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED VIDEO SATELLITE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, December 31,
1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,142 $ 42,796
Marketable securities, at market 113,146 58,581
Accounts receivable, net of allowance
for doubtful accounts 48,098 58,813
Prepaid expenses and other 12,534 9,916
Deferred tax asset 1,894 2,210
-------- --------
Total current assets 199,814 172,316
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 51,048 56,381
Goodwill, net of accumulated amortization 29,815 31,459
Deferred tax asset 79 --
Other assets, net of accumulated
amortization 2,717 2,427
-------- --------
Total assets $283,473 $262,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,498 $ 6,744
Accrued liabilities 52,934 46,336
Current portion of capital lease
obligations and long-term debt 8,029 10,519
-------- --------
66,461 63,599
Customer prepayments 95,692 108,059
-------- --------
Total current liabilities 162,153 171,658
Deferred compensation 803 1,452
Deferred tax liability -- 765
Capital lease obligations and
long-term debt 18,109 20,718
Minority interest 3,280 3,830
Stockholders' equity
Preferred stock, $.01 par value -- --
Class A common stock, $.01 par value 244 238
Treasury stock, at cost (114) (77)
Class B common stock, $.01 par value 124 124
Additional paid-in capital 39,109 34,865
Note receivable from stockholder -- (509)
Retained earnings 102,686 70,234
-------- --------
142,049 104,875
Minority interest deficit in Superstar/
Netlink Group LLC (42,921) (40,715)
-------- --------
Total stockholders' equity 99,128 64,160
-------- --------
Total liabilities and stockholders' equity $283,473 $262,583
======== ========
See accompanying notes.
2
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Satellite services $107,762 $105,646 $323,870 $264,688
Advertising sales 7,594 5,763 21,745 16,785
Systems integration
services 10,427 6,100 31,001 24,260
Other 122 192 266 732
-------- -------- -------- --------
125,905 117,701 376,882 306,465
Operating expenses:
Programming and
delivery 64,139 63,677 193,587 157,275
Selling, general
and administrative 34,510 34,785 108,650 95,771
Depreciation and
amortization 4,669 4,512 13,833 11,936
-------- -------- -------- --------
103,318 102,974 316,070 264,982
-------- -------- -------- --------
Operating income 22,587 14,727 60,812 41,483
Other income
(expenses), net 1,255 423 3,048 1,069
-------- -------- -------- --------
Income before income
taxes and minority
interest 23,842 15,150 63,860 42,552
Provision for income
taxes (7,207) (4,241) (18,983) (13,371)
Minority interest
in earnings (4,733) (3,400) (12,297) (6,602)
-------- -------- -------- --------
Net income $ 11,902 $ 7,509 $ 32,580 $ 22,579
======== ======== ======== ========
Common and common
equivalent shares
outstanding 37,245 37,042 37,073 37,044
Earnings per
share $ 0.32 $ 0.20 $ 0.88 $ 0.61
See accompanying notes.
3
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating activities:
Net income $ 32,580 $22,579
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,833 11,936
Minority interest in earnings 12,297 6,602
Non-cash compensation expense 288 1,633
Deferred income taxes (309) 979
Amortization of bond premiums 547 386
Other (203) (50)
Changes in operating assets and
liabilities:
Accounts receivable 10,738 (2,523)
Prepaid expenses and other (2,739) (4,979)
Accounts payable (1,310) 5,381
Accrued liabilities 9,825 2,946
Customer prepayments (12,431) (4,389)
Other (427) (2,809)
------- ------
Net cash provided by operating activities 62,689 37,692
Investing activities:
Capital expenditures (6,135) (10,000)
Purchases of marketable securities (81,692) (42,352)
Maturities of marketable securities 26,233 15,742
Other (548) (870)
------- -------
Net cash used in investing activities (62,142) (37,480)
Financing activities:
Repayment of capital lease obligations
and long-term debt (5,099) (2,260)
Debt borrowings -- 3,627
Issuance of stock 2,553 1,522
Repurchase of stock (2,078) --
Distributions to minority interests (15,000) --
Net proceeds from subsidiary stock
transactions (86) --
Decrease in notes receivable
from stockholder 509 --
------- -------
Net cash provided by (used in)
financing activities (19,201) 2,889
------- -------
Net increase (decrease) in cash and
cash equivalents (18,654) 3,101
Cash and cash equivalents at beginning of
period 42,796 28,485
------- -------
Cash and cash equivalents at end of period $24,142 $31,586
======= =======
Supplemental Disclosures of Cash
Flow Information:
Interest paid $ 1,569 $ 1,470
Income taxes paid $15,880 $12,777
See accompanying notes.
4
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Basis of Presentation
United Video Satellite Group, Inc. ("the Company"), a majority-
controlled subsidiary of Tele-Communications, Inc. ("TCI"), provides
satellite-delivered video, audio, data and program promotion services
to cable television systems, direct-to-home satellite dish users, radio
stations and private network users primarily throughout North America,
and software development and system integration services to commercial
entities, the federal government and defense related agencies in
locations throughout the United States.
The accompanying interim financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial position of the Company and its results of
operations and cash flows for such periods. Operating results for any
interim period are not necessarily indicative of the results that may
be expected for the full year. Certain amounts in the 1996 financial
statements have been reclassified to conform with the 1997
presentation.
The operating results include the results of the combined retail
operations of the Company's Superstar Satellite Entertainment division
and Liberty Media Corporation's Netlink division beginning on April 1,
1996. (See Note 3).
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
2. Contingencies
On October 8, 1993, the Company received correspondence from
attorneys representing StarSight Telecast, Inc. ("StarSight") bringing
to the Company's attention the existence of three patents and various
patent applications containing claims relating to certain functions
performed by interactive television program scheduling services,
alleging that the Company is or may be infringing StarSight issued
patents, including U.S. Patent No. 4,706,121 and then-pending
Reexamination Certificate B1 4,706,121 (collectively, the "121
Patent"), and claims of its pending patent applications, and
threatening the Company with enforcement litigation. On October 19,
1993, the Company filed an action in the U.S. District Court for the
Northern District of Oklahoma seeking a Declaratory Judgment to the
effect that the services offered by the Company do not infringe the
three United States patents issued to StarSight, including the 121
Patent. On October 22, 1993, StarSight filed a separate action in the
United States District Court for the Northern District of California,
alleging that certain of the Company's interactive services infringe
the 121 Patent. This action was dismissed by StarSight on May 25,
1994. On July 16, 1994, the Company filed an Amended Complaint seeking
Declaratory Judgment that it did not infringe the three StarSight
patents listed in the original complaint as well as five other patents
licensed to StarSight. On July 19, 1994, StarSight refiled its
infringement claim against the Company as a counter-claim to the
Company's Amended Complaint. On February 15, 1995, the Company filed an
Amended and Supplemental Complaint which averred that the 121 Patent is
invalid and not infringed, that the 121 Patent is unenforceable because
of StarSight's inequitable conduct in obtaining the patent and its
misuse of the patent, and that StarSight violated the antitrust laws.
The Company also sought a Declaratory Judgment that the five other
patents licensed to StarSight are not infringed by the Company. The
trial commenced on May 8, 1996 with respect to the validity,
infringement and inequitable conduct issues relative to the 121 Patent.
Discovery and trial of all other issues has been stayed. The trial is
currently in recess and is scheduled to resume on May 4, 1998. There
can be no assurance that this litigation will be resolved without
material adverse effect on the business prospects of the Company's
interactive operations and the future financial position or results of
operations of the Company.
5
<PAGE>
The State of Illinois ("the State") has asserted that certain
uplinking services performed by the Company at its Chicago teleport are
subject to the State's Telecommunications Excise Tax Act. The State
contends that the Company should have collected approximately $1.5
million in excise taxes from its customers during the period August
1985 through June 1994 and remitted such receipts to the State. In
addition to that amount, Illinois has assessed penalties and interest
of approximately $900,000. The Company, after consulting with outside
counsel, strongly disagrees with the State's position. No provision
has been made in the Company's financial statements for this
contingency, nor has the Company collected from its customers and
remitted their tax (which would aggregate approximately $300,000
annually) for periods subsequent to June 1994. However, pursuant to
the State's Protest Money Act which stops further accrual of interest
during the appeals process, the Company has paid into the Illinois
Court $2.4 million, which represents the amount of the State's claim
applicable to the period August 1985 through June 1994. Also pursuant
to the State's Protest Money Act, the Company filed a Verified
Complaint for Injunctive and Other Relief in the Cook County Chancery
Court on February 28, 1995, and an Amended Verified Complaint on
October 6, 1995. The Company filed a motion for summary judgment on
August 29, 1996, asking the Court for summary disposition of the case.
Further, the Company received a refund of $123,000, plus interest, in
February 1997. The Company's motion is still pending. The Company has
been informed that the State intends to file a counter motion for
summary judgement. The parties are currently attempting to reach a
stipulation of agreed facts and law, and a status conference has been
scheduled for December 9, 1997. No trial date for this matter has been
scheduled. In September, the Company received a request from the
Illinois Department of Revenue to perform a Telecommunications Excise
Tax audit for the period subsequent to June 1994 through June 1996.
The Company anticipates entering in to a Waiver agreement, waiving
statute of limitations in exchange for a delay in the audit. While the
Company believes that this matter will not have a material adverse
effect on its business, financial position or results of operations,
the ultimate resolution, which may occur within one year, could result
in a loss of up to $3.5 million.
The Company has been served with a lawsuit from one of its
marketing agents of C-band retail programming packages which claims,
among other matters, additional amounts owed in connection with its
past and current business relationship with the Company. The lawsuit
is in the discovery phase. The Company has evaluated these claims and
believes them to be without merit. The Company believes that this
matter will not have a material adverse effect on its financial
position or results of operations.
The Company is also a party to certain other ordinary routine
claims, actions and proceedings incidental to its business, none of
which is expected to have a material adverse effect on the business,
financial position or results of operations of the Company.
6
<PAGE>
3. Retail C-Band Home Satellite Dish Joint Venture
The Company and Liberty Media Corporation ("Liberty") entered into
an agreement (the "Agreement") under which the Company's Superstar
division and Liberty's Netlink division contributed their retail C-band
home satellite dish business' assets, obligations and operations,
effective April 1, 1996, to a new entity owned 50% each by UVSG and
Liberty. Liberty is a wholly-owned subsidiary of TCI and, accordingly,
for financial reporting purposes, the combination was accounted for as
a merger of businesses under common control, whereby the assets and
obligations of both Superstar and Netlink were contributed to the
venture at their historical cost. The operations of the combined
businesses have been consolidated, effective April 1, 1996, with the
operating results of the Company as the Company has voting control over
the venture's operations.
Assets contributed by Liberty to the venture totaled $14.7 million
and consisted primarily of $14.3 million of accounts receivable.
These assets were subject to liabilities of $64.0 million, consisting
of $50.9 million of customer prepayments and $13.1 million of accounts
payable and accrued liabilities and resulted in Liberty contributing
net liabilities to the venture. The Company contributed net liabilities
in the same amount to the venture. The Company has classified the
capital deficit of Liberty in the venture as a reduction to
stockholders' equity. Liberty's minority interest in the earnings of
the venture, net of distributions, will be reported as an adjustment to
Liberty's capital deficit in the venture until such time as the capital
deficit has been satisfied.
The following pro forma financial information reflects the
Company's results of operations for the nine-month period ended
September 30, 1996 as though the retail operations had been combined as
of January 1, 1996 (in thousands, except per share amounts):
Pro forma:
Revenues $344,796
Net income $ 22,304
Net income per share $ 0.60
7
<PAGE>
4. Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock
options. If the Company had reported earnings per share under the
new standard, the reported results would have been:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Basic earnings per
share $0.32 $0.21 $0.89 $0.63
Diluted earnings per
share 0.32 0.20 0.88 0.61
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company operates five businesses: program promotion and guide
services (Prevue Networks), home satellite and business services
(Superstar), satellite distribution of video services (UVTV), software
development and systems integration services (SSDS) and satellite
transmission services for private networks (SpaceCom). Effective
January 1, 1997, the Company established Technology Ventures to hold
the Company's interests in other enterprises unrelated to the five core
businesses.
The following table sets forth certain unaudited financial
information for the Company and each of the businesses operated by it
during the three months and nine months ended September 30, 1997 and
1996 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
Amount % Amount % Amount % Amount %
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Prevue Networks (1) $ 15,607 12% $ 12,481 11% $ 45,593 12% $ 35,936 12%
Superstar (2)(3) 86,849 69 86,214 73 261,108 69 208,716 68
UVTV (3) 10,179 8 9,627 8 30,877 8 28,664 9
SSDS 10,426 8 6,100 5 31,518 8 24,260 8
SpaceCom 4,370 4 4,092 3 12,873 4 11,528 4
Other/Eliminations (1,526) (1) (813) -- (5,087) (1) (2,639) (1)
-------- --- -------- --- -------- --- -------- ---
Total $125,905 100% $117,701 100% $376,882 100% $306,465 100%
======== === ======== === ======== === ======== ===
EBITDA (4):
Prevue Networks (1) $ 5,636 21% $ 2,935 15% $ 16,322 22% $ 11,585 22%
Superstar (2)(3) 12,905 47 9,439 49 34,968 47 20,469 38
UVTV (3) 7,229 27 5,995 31 21,220 28 17,858 33
SSDS 502 2 (95) -- (133) -- 1,085 2
SpaceCom 1,167 4 965 5 3,313 4 2,422 5
Other/Eliminations (183) (1) -- -- (1,045) (1) -- --
-------- --- -------- --- -------- --- -------- ---
Total $ 27,256 100% $ 19,239 100% $ 74,645 100% $ 53,419 100%
======== === ======== === ======== === ======== ===
Operating income:
Prevue Networks (1) $ 3,475 15% $ 761 5% $ 9,995 16% $ 6,090 15%
Superstar (2)(3) 12,107 54 8,822 60 32,564 54 18,997 46
UVTV (3) 6,631 29 5,375 37 19,428 32 16,001 38
SSDS (259) (1) (832) (6) (2,353) (4) (989) (2)
SpaceCom 816 4 601 4 2,223 4 1,384 3
Other/Eliminations (183) (1) -- -- (1,045) (2) -- --
-------- --- -------- --- -------- --- -------- ---
Total $ 22,587 100% $ 14,727 100% $ 60,812 100% $ 41,483 100%
======== === ======== === ======== === ======== ===
Consolidated depreciation
and amortization $ 4,669 $ 4,512 $ 13,833 $ 11,936
Consolidated capital
expenditures $ 2,531 $ 3,292 $ 6,135 $ 10,000
Consolidated cash flows
from operations $ 19,939 $ 15,501 $ 62,689 $ 37,692
</TABLE>
9
<PAGE>
(1) The revenues, EBITDA and operating income for Prevue Networks
include Prevue Channel, Sneak Prevue and other program promotion,
guide and interactive information delivery services under
development or offered both domestically and internationally.
(2) The amounts shown in the above tables for Superstar represent
Superstar's revenues, EBITDA and operating income included in the
Company's consolidated results of operations. Beginning April 1,
1996, these operating results include the retail operations of
Liberty Media Corporation's Netlink division which were combined
with those of Superstar's into a new consolidated subsidiary,
Superstar/Netlink Group LLC ("SNG").
(3) Effective January 1, 1997, the Company began reporting the
operating results of Superstar's Wholesale division, which
distributes WGN and other programming to multi-channel video
programming distributors, with those of UVTV as they are in the
same line of business. The operating results for 1996 have been
reclassified to conform to the current period presentation.
Additionally, effective January 1, 1997, the Company increased the
price at which the Superstar Wholesale division (now UVTV) charges
SNG for certain programming, primarily WGN. Had these rates not
been in effect during the first nine months of 1997, UVTV's
revenue, EBITDA and operating income would have been approximately
$1.7 million lower and Superstar's EBITDA and operating income
would have been approximately $1.7 million higher.
(4) EBITDA represents operating income, plus depreciation and
amortization. Financial analysts generally consider EBITDA to be
an appropriate measure of performance in the industries in which
the Company operates. EBITDA does not take into account
substantial costs of doing business, such as income taxes and
interest expense, and should not be considered as a substitute for
net income, cash flow or any other generally accepted accounting
principles measure of performance, liquidity or financial
position.
10
<PAGE>
Results of Operations
Consolidated
Revenues for the three months ended September 30, 1997 were $125.9
million, an increase of $8.2 million, or 7%, over the same period in
1996. For the nine months ended September 30, 1997, revenues were
$376.9 million, an increase of $70.4 million, or 23%, over the
corresponding 1996 period. The increase in revenues for both the
quarter and nine-month period were due to increased commission revenues
from acting as a service agent in the direct broadcast satellite
("DBS") market by Superstar, increased system integration service
revenues by SSDS and increased service fee and advertising revenues by
Prevue Networks.
In addition, the increase in revenues for the nine-month period
was also due to $39.5 million of additional revenues attributable to
Liberty Media Corporation's Netlink division retail operations
("Netlink") which were combined with those of Superstar's retail
operations effective April 1, 1996.
Operating expenses, excluding depreciation and amortization, were
$98.6 million for the three months ended September 30, 1997, an
increase of $187,000, when compared to $98.5 million for the same
period in 1996. For the nine months ended September 30, 1997,
operating expenses, excluding depreciation and amortization, were
$302.2 million, an increase of $49.2 million, or 19%, over the
corresponding 1996 period. Operating expenses, excluding depreciation
and amortization, increased in both periods when compared to the same
periods in 1996 due to increased personnel costs primarily attributable
to the growth in Prevue Networks, Superstar and SSDS. In addition,
operating costs increased for the nine-month period due to increased
operating costs of $35.9 million attributable to Netlink. In the three-
month period ended September 30, 1997, the increased personnel costs
were partially offset by increased efficiencies realized as a result of
the SNG joint venture coupled with a reduction in costs associated with
Superstar's relationship with a program supplier in the DBS market,
which was terminated during the quarter.
Depreciation and amortization during the third quarter of 1997 was
$4.7 million, an increase of $157,000, or 3%, over the same period in
1996. For the nine months ended September 30, 1997, depreciation and
amortization increased $1.9 million, or 16%, over the same period in
1996. The increases in depreciation and amortization in 1997 were
primarily a result of the acquisition of equipment to support the
various Prevue products and growth in Superstar subscribers and
personnel.
Minority interest in earnings represents that portion of earnings
attributable to the 50% minority ownership in SNG, the 30% minority
ownership in SSDS and the 28% minority ownership in Sneak Prevue LLC.
SNG and Sneak Prevue LLC were formed during April and September 1996,
respectively. The Company increased its ownership interest in SSDS to
70% in July 1995.
11
<PAGE>
Prevue Networks
The following table sets forth certain financial information for
Prevue Networks for the three months and nine months ended September
30, 1997 and 1996:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands)
Revenues $15,607 $12,481 $45,593 $35,936
Operating expenses,
before depreciation
and amortization 9,971 9,546 29,271 24,351
------- ------- ------- -------
EBITDA 5,636 2,935 16,322 11,585
Depreciation and
amortization 2,161 2,174 6,327 5,495
------- ------- ------- -------
Operating income $ 3,475 $ 761 $ 9,995 $ 6,090
======= ======= ======= =======
EBITDA margin
percentage 36% 24% 36% 32%
Operating margin
percentage 22% 6% 22% 17%
Prevue Networks' revenues for the three months ended September 30,
1997 were $15.6 million, an increase of $3.1 million, or 25%, over the
same period in 1996. For the nine months ended September 30, 1997,
revenues were $45.6 million, an increase of $9.7 million, or 27%, over
the corresponding 1996 period. The increases in revenues during both
periods were largely attributable to advertising revenues, which grew
$1.8 million, or 32%, over the third quarter of 1996 and $5.0 million,
or 30%, over the first nine months of 1996 due to increases in
conventional and paid program promotion sales. Revenues also increased
as a result of increased service fee revenues attributable to Prevue
Channel and Sneak Prevue, which increased $772,000, or 19%, and
$516,000, or 30%, respectively, for the quarter and $2.6 million, or
21%, and $1.7 million, or 33%, respectively for the nine-month period
when compared to the same periods in 1996. Prevue Channel subscriber
counts increased by 5.9 million, or 14%, to 46.7 million as of
September 30, 1997 compared to those as of September 30, 1996. Sneak
Prevue increased by 385,000 subscribers, or 1%, to 35.2 million during
the same period.
Operating expenses, excluding depreciation and amortization,
increased by $425,000, or 4%, during the third quarter of 1997 and by
$4.9 million, or 20%, for the first nine months of 1997 when compared
to the same periods in 1996. The increased operating expenses, before
depreciation and amortization, for the nine-month period were due
primarily to additional employees added to accommodate Prevue's growth
and associated facilities costs.
Depreciation and amortization during the third quarter of 1997 was
$2.2 million, relatively unchanged from the same period in 1996. For
the nine months ended September 30, 1997, depreciation and amortization
increased $832,000, or 15%, over the same period in 1996. The increase
in depreciation and amortization for the nine-month period was a result
of the acquisition of additional customer control units and video
production equipment necessary to support the various Prevue products
combined with the assets acquired in the formation of the Sneak Prevue
LLC joint venture. In September 1996, Sneak Prevue LLC was formed as a
consolidated subsidiary of the Company into which was combined Sneak
Prevue and The Barker, a product similar to Sneak Prevue that was
previously offered by StarNet, Inc.
12
<PAGE>
Superstar
The following table sets forth certain financial information for
Superstar for the three months and nine months ended September 30, 1997
and 1996:
Three Months Ended Nine Months Ended
September 30, September 30,
1997(1) 1996(1) 1997(1) 1996(1)
------- ------- ------- -------
(in thousands)
Revenues $86,849 $86,214 $261,108 $208,716
Operating expenses,
before depreciation
and amortization 73,944 76,775 226,140 188,247
------- ------- -------- -------
EBITDA 12,905 9,439 34,968 20,469
Depreciation and
amortization 798 617 2,404 1,472
------- ------- -------- --------
Operating income $12,107 $ 8,822 $ 32,564 $ 18,997
======= ======= ======== ========
EBITDA margin
percentage 15% 11% 13% 10%
Operating margin
percentage 14% 10% 12% 9%
(1) Effective January 1, 1997, the Company began reporting the
operating results of Superstar's Wholesale division, which
distributes WGN and other programming to multi-channel video
programming distributors, with those of UVTV as they are in
the same line of business. The operating results in the
above table for 1996 have been restated to conform to the
current period presentation.
Additionally, effective January 1, 1997, the Company
increased the price at which the Superstar Wholesale division
(now UVTV) charges SNG for certain programming, primarily
WGN. Had these rates not been in effect during the first
nine months of 1997, Superstar's EBITDA and operating income
would have been approximately $1.7 million higher.
Revenues generated by Superstar for the three months ended
September 30, 1997 were $86.8 million, an increase of $635,000, or 1%,
over the same period in 1996. For the nine months ended September 30,
1997, revenues were $261.1 million, an increase of $52.4 million, or
25%, over the corresponding period in 1996. The increase in revenues
for the three-month period is primarily attributable to increased
subscriber revenue from SNG's customers. Included in the revenue
increase for the nine-month period is an increase of approximately
$39.5 million attributable to Netlink's operations which were combined
with those of Superstar's retail operations into a new consolidated
subsidiary, SNG, effective April 1, 1996. Also contributing to the
increase for the nine-month period was growth in commission income
earned as a service agent for a program supplier to the DBS market and
increased subscriber revenue from SNG's customers. The contract
governing the commissions earned as a service agent in the DBS market
expired July 31, 1997; however, Superstar will continue to earn a
declining level of commissions through July 2000 on subscribers
previously interfaced through Superstar. Subscriber revenue from both
programming packages and pay-per-view increased as subscribers migrated
to higher priced packages and purchased pay-per-view events, the
impacts of which were partially offset by a reduction in subscribers.
Retail subscribers purchasing programming from SNG as of September 30,
1997 totaled approximately 904,000, a decrease of 2,000 during the
quarter and a decrease of 88,000, or 9%, during the prior twelve
months. During the quarter ended September 30, 1997, the C-band
industry declined 1%, decreasing by 29,000 subscribers and for the
twelve month period ended September 30, 1997, the industry decreased by
165,000 subscribers, or 7%.
13
<PAGE>
Operating expenses, excluding depreciation and amortization, were
$73.9 million in the third quarter of 1997, a decrease of $2.8 million,
or 4%, compared to the same period in 1996. The reduction in operating
expenses for the quarter is due to increased efficiencies realized as a
result of the SNG joint venture coupled with a reduction in costs
associated with Superstar's relationship with a program supplier to the
DBS market, which was terminated during the quarter. For the first
nine months of 1997, operating expenses, excluding depreciation and
amortization, increased $37.9 million, or 20%, over the same period in
1996. The increase in operating expenses, before depreciation and
amortization, for the first nine months of 1997 as compared to the
previous year's results was due primarily to expenses attributable to
Netlink of $35.9 million. In addition, expenses for the nine-month
period increased due to increased programming fees, which were impacted
by the increase in rates charged by UVTV to SNG discussed in Note 1
above.
Depreciation and amortization for the third quarter of 1997 was
$798,000, an increase of $181,000, or 29%, over the third quarter of
1996. Depreciation and amortization for the first nine months of 1997
was $2.4 million, an increase of $932,000, or 63%, compared to the same
period in 1996. The increases in depreciation and amortization for
both periods were a result of the acquisition of additional data
processing equipment and office furniture necessitated by the increase
in subscribers and employees. In addition, amortization for the first
nine months of 1997 increased due to the purchase of Jones Satellite
Programming, Inc. in 1996.
Excluding Liberty's minority interest in SNG, the revenues, EBITDA
and operating income attributable to the Company's ownership interest
in Superstar for the quarter ended September 30, 1997 were $46.3
million, $7.9 million and $7.4 million, respectively, increases of 1%,
36% and 36%, respectively, over the prior year and resulting in EBITDA
and operating margin percentages of 17% and 16%, respectively. For the
nine months ended September 30, 1997, revenues, EBITDA and operating
income attributable to the Company's ownership interest in Superstar
were $140.6 million, $21.6 million and $20.1 million, respectively,
increases of 8%, 58% and 59%, respectively, over the same period in the
prior year and resulting in EBITDA and operating margin percentages of
15% and 14%, respectively.
14
<PAGE>
UVTV
The following table sets forth certain financial information for
UVTV for the three months and nine months ended September 30, 1997 and
1996:
Three Months Ended Nine Months Ended
September 30, September 30,
1997(1) 1996(1) 1997(1) 1996(1)
------- ------- ------- -------
(in thousands)
Revenues $10,179 $9,627 $30,877 $28,664
Operating expenses,
before depreciation
and amortization 2,950 3,632 9,657 10,806
------- ------ ------- -------
EBITDA 7,229 5,995 21,220 17,858
Depreciation and
amortization 598 620 1,792 1,857
------- ------ ------- -------
Operating income $ 6,631 $5,375 $19,428 $16,001
======= ====== ======= =======
EBITDA margin
percentage 71% 62% 69% 62%
Operating margin
percentage 65% 56% 63% 56%
(1) Effective January 1, 1997, the Company began reporting the
operating results of Superstar's Wholesale division, which
distributes WGN and other programming to multi-channel video
programming distributors, with those of UVTV as they are in
the same line of business. The operating results in the
above table for 1996 have been restated to conform to the
current period presentation.
Additionally, effective January 1, 1997, the Company
increased the price at which the Superstar Wholesale division
(now UVTV) charges SNG for certain programming, primarily
WGN. Had these rates not been in effect during the first
nine months of 1997, UVTV's revenue, EBITDA and operating
income would have been approximately $1.7 million lower.
UVTV's revenues for the three months ended September 30, 1997 were
$10.2 million, an increase of $552,000, or 6%, from the same period in
1996. For the nine months ended September 30, 1997, revenues were
$30.9 million, an increase of $2.2 million, or 8%, from the
corresponding 1996 period. The increases in revenues for both periods
were primarily the result of the wholesale price increase described
above, which increased revenues $590,000 and $1.7 million in the three
and nine-month periods ended September 30, 1997, respectively, when
compared to the same periods in 1996. Additionally, for the nine
months ended September 30, 1997, programming services revenue increased
$413,000 from the corresponding 1996 period, primarily from subscriber
growth for both WPIX and KTLA in Canada. Domestically, UVTV/WGN cable
subscribers decreased 2.7 million, or 7%, to 34.0 million from
September 1996 to September 1997, primarily due to the impact of TCI
discontinuing UVTV/WGN from certain of its wholly-owned systems.
During the same time period, UVTV/WGN direct-to-home wholesale
subscribers increased 3.8 million, or 201%, primarily due to DBS
providers adding WGN programming.
Operating expenses, excluding depreciation and amortization, were
$3.0 million during the third quarter of 1997, a decrease of $682,000,
or 19%, compared to the third quarter of 1996. For the nine months
ended September 30, 1997, operating expenses, excluding depreciation
and amortization, were $9.7 million, $1.1 million, or 11%, lower than
for the same period in 1996. The decrease in operating expenses for
both the three-month and nine-month periods was primarily due to a
reduction in personnel compared to the prior year, coupled with
decreases in programming fees for both periods of $118,000 and
$485,000, respectively, due to the decline in C-Band subscribers.
Depreciation and amortization in the third quarter and first nine-
months of 1997 was $598,000 and $1.8 million, respectively, both
relatively unchanged compared to the same periods in 1996.
15
<PAGE>
SSDS
SSDS' revenues for the third quarter of 1997 were $10.4 million,
an increase of $4.3 million, or 71%, compared to the third quarter of
1996. Revenues for the first nine months of 1997 were $31.5 million, an
increase of $7.3 million, or 30%, over the same period in 1996. The
increases in revenues for both periods over those of 1996 were
primarily due to an increase in work in the defense sector coupled
with, for the nine-month period, an increase in work performed in the
commercial sector.
Operating expenses, excluding depreciation and amortization,
increased during the third quarter of 1997 by $3.7 million, or 60%,
from the same period in 1996 to $9.9 million. For the nine months ended
September 30, 1997, operating expenses, excluding depreciation and
amortization, were $31.7 million, an increase of $8.5 million, or 37%.
The increases in operating expenses during both periods were primarily
due to the cost of additional technical personnel commensurate with the
increase in revenues coupled with additional personnel which were added
throughout the later part of 1996 to facilitate new business growth
which did not occur. SSDS implemented several cost reduction measures
late in the first quarter of 1997 with the goal of returning operations
to profitability.
Depreciation and amortization expense during the third quarter of
1997 was $761,000, an increase of $24,000, or 3%, over the third
quarter of 1996. Depreciation expense during the nine months ended
September 30, 1997 increased by $146,000, or 7%, over the same period
in 1996. The increases in 1997 were the result of ongoing
infrastructure equipment upgrades and new equipment to support the
increase in employees. Included in depreciation and amortization
expense in both the three-month and nine-month periods is approximately
$500,000 and $1.5 million, respectively, of amortization of goodwill
resulting from the Company's acquisition of its additional interest in
SSDS in July 1995.
16
<PAGE>
SpaceCom
SpaceCom's revenues for the three months ended September 30, 1997
were $4.4 million, an increase of $278,000, or 7%, over the same period
in 1996. For the nine months ended September 30, 1997, revenues were
12.9 million, an increase of $1.3 million, or 12%, over the
corresponding 1996 period. The increases in revenues in both periods
were attributable principally to increased demand for channel space
from SpaceCom's existing paging customers. SpaceCom's transponders had
an average occupancy, based on revenue dollars, of 71% as of September
30, 1997, compared to 69% as of September 30, 1996.
Operating expenses, excluding depreciation and amortization, were
$3.2 million during the third quarter of 1997, an increase of $76,000,
or 2%, compared to the same period in 1996. During the nine months
ended September 30, 1997, operating expenses, excluding depreciation
and amortization, increased $454,000, or 5%, over the corresponding
1996 period. The increases in operating expenses, before depreciation
and amortization, for both periods resulted primarily from increased
transmission expenses.
Depreciation and amortization in the third quarter of 1997 was
$351,000, a decrease of $13,000, or 4%, from the same period in 1996.
During the nine months ended September 30, 1997, depreciation and
amortization increased $52,000, or 5%, over the corresponding 1996
period. The increase in depreciation and amortization for the nine-
month period was the result of acquiring new assets to provide a wider
range of services.
17
<PAGE>
Liquidity and Capital Resources
Cash provided by operations continues to be the Company's primary
source of funds to finance operating needs, capital expenditures and
investments. During the first nine months of 1997, net cash flows from
operating activities were $62.7 million ($47.7 million after
distributions to minority interests), reflecting the continued growth
of the Company's after-tax earnings. This cash, plus existing cash
resources, and proceeds of $2.6 million from the exercise of stock
options were used to fund the Company's additional net investment in
marketable securities of $55.5 million, debt payments by SSDS of $2.7
million, stock repurchases of $2.1 million, capital expenditures of
$6.1 million and the reduction in the Company's capitalized lease
obligations of $2.4 million during the nine-month period.
At September 30, 1997, the Company's cash, cash equivalents and
marketable securities aggregated $137.3 million, an increase of $35.9
million over that as of December 31, 1996. The above total includes
$7.2 million of cash and cash equivalents held by SNG, in which the
Company has a 50% ownership interest. The Company has invested the
majority of its cash available for current operations in investment
grade municipal governmental obligations. As of September 30, 1997,
approximately $113.1 million of such securities had maturities greater
than 90 days and were classified as available-for-sale marketable
securities. The Company's policy pertaining to the temporary investment
of cash available for operations currently prohibits investments in
fixed rate securities with maturities in excess of eighteen months from
the date of investment.
SSDS entered into a new revolving credit facility on June 24, 1997
with a bank which provides for borrowings up to 80% of billed trade
receivables of SSDS less than 60 days past due, subject to certain
conditions. The facility replaced a previously existing revolving
credit facility at a different bank. Outstanding borrowings under the
credit facility as of September 30, 1997 were $4.5 million on a
borrowing base of $5.7 million. Borrowings under this credit facility
bear interest at the bank's designated prime rate plus a margin.
18
<PAGE>
The Company collects annually, in advance, a majority of its SNG
subscription fees and certain of its UVTV superstation and Prevue
Networks' revenues. As of September 30, 1997, the unearned portion of
all prepayments totaled $95.7 million, of which approximately $81.9
million, or 86%, was attributable to SNG. SNG generally offers a refund
of unearned prepayments at the customer's option if service is
discontinued for any reason. In the case of UVTV and Prevue Networks,
the Company's liability is limited to a refund of unearned prepayments
in the event that the Company is unable to provide service. No
material refunds have been paid to date.
Under the terms of the capital leases for two satellite
transponders placed in service by UVTV and Prevue Networks in 1992, the
Company was obligated for net minimum lease payments through
approximately 2004 aggregating $21.1 million as of September 30, 1997,
a reduction of $2.4 million, or 10%, from the obligation existing at
the prior year's end. The Company expects to further reduce the lease
obligation during the next twelve months by approximately $3.4 million.
The Company also leases various other satellite transponders accounted
for as operating leases. These operating leases accounted for
approximately $4.6 million in operating expenses, net of sublease
revenue, during the nine months ended September 30, 1997.
Capital expenditures during the nine months ended September 30,
1997 of $6.1 million were principally attributable to the purchase of
control units provided to the Company's cable television customers and
to data processing equipment and furniture, fixtures and facilities
used by the Company.
SNG makes monthly distributions to members of the venture of all
cash in excess of reasonable cash reserves established for anticipated
working capital requirements and capital expenditures. During the nine
months ended September 30, 1997, cash distributions to minority
interests in SNG aggregated $15.0 million.
19
<PAGE>
The Company believes that currently available cash and cash
equivalents, marketable securities and cash flow generated from
operations will provide the resources necessary to meet its working
capital and related financing needs for the foreseeable future and to
pursue opportunities to expand its businesses. The Company is
considering entering into a revolving credit facility during 1997 to
provide an additional source of funds.
The Board of Directors has authorized the Company to repurchase
from time to time up to an aggregate of 1,000,000 shares of the
Company's Class A Common Stock using existing cash resources. Through
September 30, 1997, the Company had repurchased 124,000 shares of stock
for a total of $2.1 million.
The Company continues to explore corporate development
opportunities to expand its existing businesses, develop new businesses
and products and acquire interests in new businesses, some of which
might require significant capital commitments.
Regulatory Matters
On October 27, 1997, the Librarian of Congress ("Librarian")
finalized his decision to accept the Copyright Arbitration Rate Panel's
("CARP") recommendation that copyright fees for direct-to-home
satellite carriage of superstations and distant network television
broadcast signals be raised to $0.27 per subscriber, per month. The
CARP also recommended that these increases be retroactive to July 1,
1997, however, the Librarian ruled to effect the change January 1,
1998. Superstation copyright fees previously ranged from $0.14 to
$0.175 per subscriber, per month while network copyright fees were
$0.06 per subscriber, per month. Several programming packagers of home
satellite services and distributors of programming to C-band direct-to-
home programming packagers have announced price increases to cover the
increase in the copyright fee. Accordingly, the Company anticipates
that it may also be able to pass the increases on to both SNG's retail
and UVTV's wholesale customers via price increases and, therefore, the
copyright fee increases are not expected to have a material adverse
effect on the Company's financial position or results of operations.
However, the increased overall cost of a Superstation resulting from
the increased copyright could impact the purchasing decisions made by
program packagers and marketers of programs to the direct-to-home
industry.
Cautionary Statement
This report contains "forward looking statements" within the
meaning of the federal securities laws, including the Company's plans
for the development of interactive and information services, the
availability of resources to fund operations and capital expenditures,
the Company's pursuit of certain business activities and other
statements of expectations, beliefs, plans and similar expressions
concerning matters that are not historical facts. These statements are
subject to risks and uncertainties that could cause results to differ
materially from those expressed in the statements. Important factors
that could cause such differences include, but are not limited to,
changes in the regulation of the cable television industry adverse to
the Company's services, loss of the cable compulsory license provided
by federal law, the willingness of cable television systems to acquire
and install new equipment that will allow the Company to effectively
market its interactive technology, increased price and service
competition within the industry, the Company's ability to keep pace
with technological developments and the Company's dependence upon
intellectual property rights, including the Company's ability to defend
itself against claims by StarSight and others asserting infringement of
their intellectual property.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The trial with respect to the validity, infringement and
inequitable conduct issues relative to StarSight Telecast,
Inc.'s U.S. Patent No. 4,706,121 and pending Reexamination
Certificate B1 4,706,121 is currently in recess. The trial
is scheduled to resume on May 4, 1998.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the third
quarter of 1997.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
United Video Satellite Group, Inc.
(Registrant)
Date: November 14, 1997 By: /s/ Peter C. Boylan III
-------------------------------
Peter C. Boylan III
President and
Chief Operating Officer
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME INCLUDED IN
THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 OF
UNITED VIDEO SATELLITE GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> UNITED VIDEO SATELLITE GROUP, INC.
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