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 JUNE 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 August 1, 1997:
TITLE OF CLASS NUMBER OF SHARES
Class A Common Stock $.01 Par Value 24,366,520
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)
June 30, December 31,
1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 31,702 $ 42,796
Marketable securities, at market 93,499 58,581
Accounts receivable, net of allowance
for doubtful accounts 49,523 58,813
Prepaid expenses and other 13,819 9,916
Deferred tax asset 2,404 2,210
-------- --------
Total current assets 190,947 172,316
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 52,262 56,381
Goodwill, net of accumulated amortization 30,230 31,459
Other assets, net of accumulated
amortization 2,179 2,427
-------- --------
Total assets $275,618 $262,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,206 $ 6,744
Accrued liabilities 56,570 46,336
Current portion of capital lease
obligations and long-term debt 7,777 10,519
-------- --------
70,553 63,599
Customer prepayments 95,513 108,059
-------- --------
Total current liabilities 166,066 171,658
Deferred compensation 1,153 1,452
Deferred tax liability 525 765
Capital lease obligations and
long-term debt 18,993 20,718
Minority interest 3,352 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 38,221 34,865
Note receivable from stockholder -- (509)
Retained earnings 90,756 70,234
-------- --------
129,231 104,875
Minority interest deficit in Superstar/
Netlink Group LLC (43,702) (40,715)
-------- --------
Total stockholders' equity 85,529 64,160
-------- --------
Total liabilities and stockholders' equity $275,618 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Satellite services $109,081 $ 99,908 $216,108 $159,043
Advertising sales 7,879 5,589 14,151 11,022
Systems integration
services 10,995 9,460 20,574 18,160
Other 146 367 144 540
-------- -------- -------- --------
128,101 115,324 250,977 188,765
Operating expenses:
Programming and
delivery 65,020 62,025 129,448 93,598
Selling, general
and administrative 37,668 34,000 74,140 60,986
Depreciation and
amortization 4,608 3,846 9,164 7,425
-------- -------- -------- --------
107,296 99,871 212,752 162,009
-------- -------- -------- --------
Operating income 20,805 15,453 38,225 26,756
Other income
(expenses), net 1,311 302 1,807 646
-------- -------- -------- --------
Income before income
taxes and minority
interest 22,116 15,755 40,032 27,402
Provision for income
taxes (6,364) (4,788) (11,776) (9,130)
Minority interest
in earnings (4,481) (3,135) (7,578) (3,202)
-------- -------- -------- --------
Net income $ 11,271 $ 7,832 $ 20,678 $ 15,070
======== ======== ======== ========
Common and common
equivalent shares
outstanding 36,980 37,122 36,986 37,045
Earnings per
share $ .30 $ 0.21 $ .56 $ 0.41
See accompanying notes.
3
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Six Months Ended
June 30,
1997 1996
---- ----
Operating activities:
Net income $ 20,678 $15,070
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,164 7,425
Minority interest in earnings 7,578 3,202
Non-cash compensation expense 128 911
Deferred income taxes (296) (249)
Amortization of bond premiums 207 220
Other (5) (40)
Changes in operating assets and
liabilities:
Accounts receivable 9,290 (4,893)
Prepaid expenses and other (3,996) (3,025)
Accounts payable (561) (1,675)
Accrued liabilities 13,536 1,006
Customer prepayments (12,546) 4,248
Other (427) (9)
------- ------
Net cash provided by operating activities 42,750 22,191
Investing activities:
Capital expenditures (3,604) (6,708)
Purchases of marketable securities (49,612) (15,553)
Maturities of marketable securities 14,193 14,211
Other 167 (266)
------- -------
Net cash used in investing activities (38,856) (8,316)
Financing activities:
Repayment of capital lease obligations
and long-term debt (4,467) (1,506)
Debt borrowings -- 3,968
Issuance of stock 2,101 1,522
Repurchase of stock (2,078) --
Distributions to minority interests (11,000) --
Net proceeds from subsidiary stock
transactions (53) --
Decrease in notes receivable
from stockholder 509 --
------- -------
Net cash provided by (used in)
financing activities (14,988) 3,984
------- -------
Net increase (decrease) in cash and
cash equivalents (11,094) 17,859
Cash and cash equivalents at beginning of
period 42,796 28,485
------- -------
Cash and cash equivalents at end of period $31,702 $46,344
======= =======
Supplemental Disclosures of Cash
Flow Information:
Interest paid $ 1,189 $ 887
Income taxes paid $ 9,775 $ 8,330
See accompanying notes.
4
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 September 8, 1997.
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.
Pursuant to this motion, the Company received a partial refund of
$123,000 on February 10, 1997. The remaining issues raised by the
motion are still pending. The Company has been informed that the State
is considering filing a counter motion for summary judgement. No trial
date has been scheduled. 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
On August 9, 1996, the Company and Liberty Media Corporation
("Liberty") executed an amended and restated 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 six-month period ended June 30,
1996 as though the retail operations had been combined as of January 1,
1996 (in thousands, except per share amounts):
Pro forma:
Revenues $227,096
Net income $ 14,795
Net income per share $ 0.40
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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Basic earnings per
share $0.31 $0.22 $0.57 $0.42
Diluted earnings per
share 0.31 0.21 0.56 0.41
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 six months ended June 30, 1997 and 1996 (in
thousands).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
Amount % Amount % Amount % Amount %
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Prevue Networks (1) $ 16,002 12% $ 12,051 11% $ 29,986 12% $ 23,455 12%
Superstar (2)(3) 88,026 69 81,620 71 174,259 70 122,502 65
UVTV (3) 10,029 8 9,404 8 20,698 8 19,037 10
SSDS 10,995 9 9,460 8 21,092 8 18,160 10
SpaceCom 4,416 3 3,895 3 8,503 3 7,437 4
Other/Eliminations (1,367) (1) (1,106) (1) (3,561) (1) (1,826) (1)
-------- --- -------- --- -------- --- -------- ---
Total $128,101 100% $115,324 100% $250,977 100% $188,765 100%
======== === ======== === ======== === ======== ===
EBITDA (4):
Prevue Networks (1) $ 5,450 21% $ 4,148 21% $ 10,686 23% $ 8,650 25%
Superstar (2)(3) 11,812 47 7,594 39 22,063 47 11,030 32
UVTV (3) 6,625 26 5,966 31 13,991 30 11,863 35
SSDS 480 2 720 4 (635) (1) 1,181 4
SpaceCom 1,292 5 871 5 2,146 5 1,457 4
Other/Eliminations (246) (1) -- -- (862) (4) -- --
-------- --- -------- --- -------- --- -------- ---
Total $ 25,413 100% $ 19,299 100% $ 47,389 100% $ 34,181 100%
======== === ======== === ======== === ======== ===
Operating income:
Prevue Networks (1) $ 3,347 16% $ 2,425 16% $ 6,520 17% $ 5,329 20%
Superstar (2)(3) 11,009 53 7,146 46 20,457 53 10,175 38
UVTV (3) 6,027 29 5,353 35 12,797 33 10,626 40
SSDS (258) (1) 21 -- (2,094) (5) (157) (1)
SpaceCom 926 4 508 3 1,407 4 783 3
Other/Eliminations (246) (1) -- -- (862) (2) -- --
-------- --- -------- --- -------- --- -------- ---
Total $ 20,805 100% $ 15,453 100% $ 38,225 100% $ 26,756 100%
======== === ======== === ======== === ======== ===
Consolidated depreciation
and amortization $ 4,608 $ 3,846 $ 9,164 $ 7,425
Consolidated capital
expenditures $ 1,939 $ 3,908 $ 3,604 $ 6,708
Consolidated cash flows
from operations $ 17,226 $ 1,585 $ 42,750 $ 22,191
</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 six months of 1997, UVTV's
revenue, EBITDA and operating income would have been approximately
$1.2 million lower and Superstar's EBITDA and operating income
would have been approximately $1.2 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 June 30, 1997 were $128.1
million, an increase of $12.8 million, or 11%, over the same period in
1996. For the six months ended June 30, 1997, revenues were $251.0
million, an increase of $62.2 million, or 33%, over the corresponding
1996 period. The increase in revenues for both the quarter and six-
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 six-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
$102.7 million for the three months ended June 30, 1997, an increase of
$6.7 million, or 7%, when compared to $96.0 million for the same period
in 1996. For the six months ended June 30, 1997, operating expenses,
excluding depreciation and amortization, were $203.6 million, an
increase of $49.0 million, or 32%, 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 and Superstar. In addition, operating costs increased
for the six-month period due to increased operating costs of $35.9
million attributable to Netlink.
Depreciation and amortization during the second quarter of 1997
was $4.6 million, an increase of $762,000, or 20%, over the same period
in 1996. For the six months ended June 30, 1997, depreciation and
amortization increased $1.7 million, or 23%, 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's 70% interest in SSDS was acquired in July
1995.
11
<PAGE>
Prevue Networks
The following table sets forth certain financial information for
Prevue Networks for the three months and six months ended June 30, 1997
and 1996:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands)
Revenues $16,002 $12,051 $29,986 $23,455
Operating expenses,
before depreciation
and amortization 10,552 7,903 19,300 14,805
------- ------- ------- -------
EBITDA 5,450 4,148 10,686 8,650
Depreciation and
amortization 2,103 1,723 4,166 3,321
------- ------- ------- -------
Operating income $ 3,347 $ 2,425 $ 6,520 $ 5,329
======= ======= ======= =======
EBITDA margin
percentage 34% 34% 36% 37%
Operating margin
percentage 21% 20% 22% 23%
Prevue Networks' revenues for the three months ended June 30, 1997
were $16.0 million, an increase of $4.0 million, or 33%, over the same
period in 1996. For the six months ended June 30, 1997, revenues were
$30.0 million, an increase of $6.5 million, or 28%, over the
corresponding 1996 period. The increases in revenues during both
periods were largely attributable to advertising revenues, which grew
$2.3 million, or 41%, over the second quarter of 1996 and $3.1 million,
or 28%, over the first six 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 $803,000, or 19%, and
$557,000, or 34%, respectively, for the quarter and $1.8 million, or
23%, and $1.2 million, or 37%, respectively for the six-month period
when compared to the same periods in 1996. Prevue Channel subscriber
counts increased by 5.3 million, or 13%, to 46.0 million as of June 30,
1997 compared to those as of June 30, 1996. Sneak Prevue increased by
8.7 million subscribers, or 33%, to 35.0 million during the same
period. The increase in Sneak subscribers resulted primarily from the
formation of Sneak Prevue LLC in September 1996, a new consolidated
subsidiary of the Company into which were combined Sneak Prevue and The
Barker, a similar product to Sneak Prevue which was previously offered
by StarNet.
Operating expenses, excluding depreciation and amortization,
increased by $2.6 million, or 34%, during the second quarter of 1997
and by $4.5 million, or 30%, for the first six months of 1997 when
compared to the same periods in 1996. The increased operating expenses,
before depreciation and amortization, in both periods were due
primarily to additional employees added to accommodate Prevue's growth
combined with increased legal expense related to StarSight litigation
costs.
Depreciation and amortization during the second quarter of 1997
was $2.1 million, an increase of $380,000, or 22%, over the same period
in 1996. For the six months ended June 30, 1997, depreciation and
amortization increased $845,000, or 25%, over the same period in 1996.
The increases in depreciation and amortization in both periods were 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 Sneak Prevue LLC
joint venture.
12
<PAGE>
Superstar
The following table sets forth certain financial information for
Superstar for the three months and six months ended June 30, 1997 and
1996:
Three Months Ended Six Months Ended
June 30, June 30,
1997(1) 1996(1) 1997(1) 1996(1)
------- ------- ------- -------
(in thousands)
Revenues $88,026 $81,620 $174,259 $122,502
Operating expenses,
before depreciation
and amortization 76,214 74,026 152,196 111,472
------- ------- -------- -------
EBITDA 11,812 7,594 22,063 11,030
Depreciation and
amortization 803 448 1,606 855
------- ------- -------- -------
Operating income $11,009 $ 7,146 $ 20,457 $ 10,175
======= ======= ======== =======
EBITDA margin
percentage 13% 9% 13% 9%
Operating margin
percentage 13% 9% 12% 8%
(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 six
months of 1997, Superstar's EBITDA and operating income would
have been approximately $1.2 million higher.
Revenues generated by Superstar for the three months ended June
30, 1997 were $88.0 million, an increase of $6.4 million, or 8%, over
the same period in 1996. For the six months ended June 30, 1997,
revenues were $174.3 million, an increase of $51.8 million, or 42%,
over the corresponding period in 1996. Included in the revenue
increase for the six-month period is an increase of approximately $39.5
million of revenues 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 increases for both periods 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
commissions on subscribers serviced through July 2000. 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 directly
from SNG as of June 30, 1997 totaled approximately 902,000, a decrease
of 17,000 during the quarter and a decrease of 39,000 during the prior
twelve months. The reduction in retail subscribers during the last
twelve months is net of approximately 36,000 subscribers purchased from
Jones Satellite Programming, Inc. ("Jones Satellite") on August 1,
1996. During the quarter ended June 30, 1997, the C-band industry
declined 2%, decreasing by 40,000 subscribers and for the twelve month
period ended June 30, 1997, the industry decreased by 152,000
subscribers, or 7%.
13
<PAGE>
Operating expenses, excluding depreciation and amortization, were
$76.2 million in the second quarter of 1997, an increase of $2.2
million, or 3%, compared to the same period in 1996. For the first six
months of 1997, operating expenses, excluding depreciation and
amortization, increased $40.7 million, or 37%, over the same period in
1996. The increase in operating expenses, before depreciation and
amortization, for the first six 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 both periods
increased due to increased programming fees, which vary in relation to
revenues and which were impacted by the rate increase discussed above.
Depreciation and amortization for the second quarter of 1997 was
$803,000, an increase of $355,000, or 79%, over the second quarter of
1996. Depreciation and amortization for the first six months of 1997
was $1.6 million, an increase of $751,000, or 88%, 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, respectively, as well as amortization
related to the purchase of Jones Satellite 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 June 30, 1997 were $47.6 million,
$7.1 million and $6.6 million, respectively, increases of 10%, 60% and
59%, respectively, over the prior year and resulting in EBITDA and
operating margin percentages of 15% and 14%, respectively. For the six
months ended June 30, 1997, revenues, EBITDA and operating income
attributable to the Company's ownership interest in Superstar were
$94.3 million, $13.6 million and $12.7 million, respectively, increases
of 12%, 74% and 77%, respectively, over the same period in the prior
year and resulting in EBITDA and operating margin percentages of 14%
and 13%, respectively.
14
<PAGE>
UVTV
The following table sets forth certain financial information for
UVTV for the three months and six months ended June 30, 1997 and 1996:
Three Months Ended Six Months Ended
June 30, June 30,
1997(1) 1996(1) 1997(1) 1996(1)
------- ------- ------- -------
(in thousands)
Revenues $10,029 $9,404 $20,698 $19,037
Operating expenses,
before depreciation
and amortization 3,404 3,438 6,707 7,174
------- ------ ------- -------
EBITDA 6,625 5,966 13,991 11,863
Depreciation and
amortization 598 613 1,194 1,237
------- ------ ------- -------
Operating income $ 6,027 $5,353 $12,797 $10,626
======= ====== ======= =======
EBITDA margin
percentage 66% 63% 68% 62%
Operating margin
percentage 60% 57% 62% 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 six
months of 1997, UVTV's revenue, EBITDA and operating income
would have been approximately $1.2 million lower.
UVTV's revenues for the three months ended June 30, 1997 were
$10.0 million, an increase of $625,000, or 7%, from the same period in
1996. For the six months ended June 30, 1997, revenues were $20.7
million, an increase of $1.7 million, or 9%, from the corresponding
1996 period. The increase in revenues is primarily the result of the
wholesale price increase described above, which increased revenues
$440,000 and $1.2 million in the three and six-month periods ended June
30, 1997, respectively, when compared to the same periods in 1996,
coupled with increases in programming services revenues for both
periods of $185,000 and $506,000, respectively, primarily from
subscriber growth for both WPIX and KTLA in Canada. Domestically,
UVTV/WGN cable subscribers decreased 3.5 million, or 10%, to 32.9
million from June 1996 to June 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 3.3 million, or 173%, primarily due to DBS
providers adding WGN programming.
Operating expenses, excluding depreciation and amortization, were
$3.4 million during the second quarter of 1997, remaining flat compared
to the second quarter of 1996. For the six months ended June 30, 1997,
operating expenses, excluding depreciation and amortization, were $6.7
million, $467,000, or 7%, lower than for the same period in 1996. The
decrease in operating expenses for the six months ended June 30, 1997
results primarily from a reduction in personnel compared to the prior
year.
Depreciation and amortization in the second quarter of 1997 was
$598,000, relatively unchanged compared to the same period in 1996.
For the six months ended June 30, 1997, depreciation and amortization
was $1.2 million, $43,000, or 3%, lower than for the same period in
1996.
15
<PAGE>
SSDS
SSDS' revenues for the second quarter of 1997 were $11.0 million,
an increase of $1.5 million, or 16%, compared to the second quarter of
1996. Revenues for the first six months of 1997 were $21.1 million, an
increase of $2.9 million, or 16%, over the same period in 1996. The
increases in revenues in both periods over those of 1996 were primarily
due to an increase in work in both the commercial and public sectors.
The six months ended June 30, 1996 was also negatively impacted by
severe weather conditions on the East coast that virtually shut down
the defense sector for most of one week.
Operating expenses, before depreciation and amortization,
increased during the second quarter of 1997 by $1.8 million, or 20%,
from the same period in 1996 to $10.5 million. For the six months ended
June 30, 1997, operating expenses, excluding depreciation and
amortization, were $21.7 million, an increase of $4.7 million, or 28%.
The increase 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 second quarter of
1997 was $738,000, an increase of $39,000, or 6%, over the second
quarter of 1996. Depreciation expense during the six months ended June
30, 1997 increased by $121,000, or 9%, 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 second quarter and six-month periods is approximately $500,000 and
$1.0 million, respectively, of amortization of goodwill resulting from
the Company's acquisition of SSDS in July 1995.
16
<PAGE>
SpaceCom
SpaceCom's revenues for the three months ended June 30, 1997 were
$4.4 million, an increase of $521,000, or 13%, over the same period in
1996. For the six months ended June 30, 1997, revenues were $8.5
million, an increase of $1.1 million, or 14%, 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 June 30,
1997, compared to 68% as of June 30, 1996.
Operating expenses, excluding depreciation and amortization, were
$3.1 million during the second quarter of 1997, an increase of
$100,000, or 3%, compared to the same period in 1996. During the six
months ended June 30, 1997, operating expenses, excluding depreciation
and amortization, increased $377,000, or 6%, 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 first quarter of 1997 was
$366,000, relatively unchanged from the same period in 1996. During
the six months ended June 30, 1997, depreciation and amortization
increased $65,000, or 10%, over the corresponding 1996 period. The
increase in depreciation and amortization for the six-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 six months of 1997, net cash flows from
operating activities were $42.8 million ($31.8 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 $2.1 million from the exercise of stock
options were used to fund the Company's additional net investment in
marketable securities of $35.4 million, debt payments by SSDS of $2.9
million, stock repurchases of $2.1 million, capital expenditures of
$3.6 million and the reduction in the Company's capitalized lease
obligations of $1.6 million during the six-month period.
At June 30, 1997, the Company's cash, cash equivalents and
marketable securities aggregated $125.2 million, an increase of $23.8
million over that as of December 31, 1996. The above total includes
$4.6 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 June 30, 1997,
approximately $93.5 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 June 30, 1997 were $4.4 million on a borrowing
base of $5.2 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 June 30, 1997, the unearned portion of all
prepayments totaled $95.5 million, of which approximately $81.6
million, or 85%, 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 $21.9 million as of June 30, 1997, a
reduction of $1.6 million, or 7%, 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 $3.1 million in operating expenses, net of sublease
revenue, during the six months ended June 30, 1997.
Capital expenditures during the six months ended June 30, 1997 of
$3.6 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 six
months ended June 30, 1997, cash distributions to minority interests in
SNG aggregated $11.0 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
June 30, 1997, the Company had repurchased 124,000 shares of stock for
a total of $2.1 million.
The Company continues to explore opportunities to expand its
existing businesses, develop new products and acquire interests in new
businesses.
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 September 8, 1997.
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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's annual meeting of
stockholders held on May 14, 1997, the Company submitted for
vote of the stockholders the following matters; 148,084,260
votes of the Company's Class A Common Stock and Class B
Common Stock were entitled to be voted at the meeting and
133,420,970 votes of the shares were present in person or by
proxy:
a) the election of directors to serve until the annual
meeting of stockholders in 1998. The nominees
recommended by management and the board of directors were
all elected.
Votes for the directors were as follows:
For Against
--- -------
Lawrence Flinn, Jr. 133,293,829 127,141
David P. Beddow 133,293,929 127,041
Peter C. Boylan III 133,293,929 127,041
William J. Bresnan 133,293,929 127,041
Donne F. Fisher 133,293,929 127,041
Paul A. Gould 133,293,929 127,041
Camille K. Jayne 133,293,929 127,041
Larry E. Romrell 133,293,929 127,041
J.C. Sparkman 133,293,929 127,041
J. David Wargo 133,293,929 127,041
On May 28, 1997, Gary S. Howard was appointed as
Chairman of the Board of Directors, Chief Executive
Officer and President of the Company. On July 18,
1997, Camille K. Jayne resigned as a director of the
Company.
b) the ratification and approval of the United Video
Satellite Group, Inc. Equity Incentive Plan, as amended
(the "Plan"). The Plan was so ratified and approved with
132,341,383 votes for, 212,946 votes against and 9,014
votes abstaining.
c) the ratification of the selection by the Board of
Directors of KPMG Peat Marwick LLP as the Company's
independent auditors for the year ending December 31,
1997. The selection was so ratified with 125,878,406
votes for, no votes against and no votes abstaining.
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
On May 8, 1997, the Company filed a report on Form 8-K
reporting a change in its independent auditors from Ernst
& Young LLP to KPMG Peat Marwick LLP which occurred on
May 1, 1997.
No other reports on Form 8-K were filed during the second
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: August 12, 1997 By: /s/ Peter C. Boylan III
-------------------------------
Peter C. Boylan III
Executive Vice President and
Chief Operating Officer
22
<PAGE>
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<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 JUNE 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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