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, 1999
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
TV GUIDE, 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 12, 1999:
TITLE OF CLASS NUMBER OF SHARES
Class A Common Stock $.01 Par Value 77,118,612
Class B Common Stock $.01 Par Value 74,993,176
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TV GUIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except per share amounts)
June 30, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 77,737 $155,644
Marketable securities, at fair value 508 5,804
Accounts receivable, net of allowance
for doubtful accounts 268,496 64,632
Inventory 28,750 1,220
Prepaid expenses and other 14,664 4,948
Deferred tax asset 4,296 1,811
---------- --------
Total current assets 394,451 234,059
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 57,311 45,762
Intangible assets, net of accumulated
amortization 3,195,247 113,523
Other assets, net of accumulated
amortization 26,404 19,162
---------- --------
Total assets $3,673,413 $412,506
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 67,744 $ 5,655
Accrued liabilities 135,031 57,365
Note payable and current portion of
capital lease obligations 6,639 5,463
Customer prepayments 279,370 109,929
---------- --------
Total current liabilities 488,784 178,412
Deferred tax liability 1,037,536 17,280
Long-term deferred subscription
revenue 59,953 --
Capital lease obligations and
long-term debt 596,334 13,007
Other long-term liabilities 750 367
Minority interest 6,836 3,596
Stockholders' equity:
Preferred stock, $.01 par value -- --
Class A common stock, $.01 par value 771 479
Class B common stock, $.01 par value 750 375
Additional paid-in capital 1,282,091 22,191
Accumulated other comprehensive
earnings (loss), net of tax 151 (54)
Retained earnings 199,457 176,853
---------- --------
Total stockholders' equity 1,483,220 199,844
---------- --------
Total liabilities and stockholders'
equity $3,673,413 $412,506
========== ========
1998 amounts have been restated for pooling of interests.
See accompanying notes.
2
<PAGE>
TV GUIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Satellite-delivered
programming services $129,836 $135,353 $260,834 $262,630
Magazine subscription
and newsstand sales 103,853 -- 137,425 --
Advertising sales 63,463 9,982 89,254 19,109
Systems integration
services 10,441 9,595 20,316 19,159
Other 5,373 115 6,979 311
-------- -------- -------- --------
312,966 155,045 514,808 301,209
Operating expenses:
Programming, printing,
distribution and
delivery 172,538 85,153 275,642 164,264
Selling, general
and administrative 73,860 35,660 125,517 73,967
Depreciation and
amortization 36,204 6,522 51,282 13,600
-------- -------- -------- --------
282,602 127,335 452,441 251,831
-------- ------- -------- --------
Operating income 30,364 27,710 62,367 49,378
Gain on issuance of
equity by subsidiary -- -- -- 39,225
Interest expense (12,318) (443) (18,353) (934)
Other income, net 1,208 1,635 1,515 3,186
-------- ------- -------- --------
Income before income
taxes and minority
interest 19,254 28,902 45,529 90,855
Provision for income
taxes (5,868) (11,022) (15,646) (34,047)
Minority interest in
(earnings) losses (3,549) 36 (7,285) 69
-------- -------- -------- --------
Net income $ 9,837 $ 17,916 $ 22,598 $ 56,877
======== ======== ======== ========
Net income per share:
Basic $ 0.06 $ 0.21 $ 0.17 $ 0.66
Diluted $ 0.06 $ 0.21 $ 0.17 $ 0.65
1998 amounts have been restated for pooling of interests.
See accompanying notes.
3
<PAGE>
TV GUIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Six Months Ended
June 30,
1999 1998
---- ----
Operating activities:
Net income $ 22,598 $ 56,877
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on issuance of equity by
subsidiary -- (39,225)
Depreciation and amortization 51,282 13,600
Minority interest in earnings (losses) 7,285 (69)
Deferred income taxes (14,784) 14,876
Other 1,741 1,394
Changes in operating assets and
liabilities, net of the effect
of acquisitions:
Accounts receivable (56,583) 13,472
Inventory 11,778 (9)
Prepaid expenses and other (6,240) (3,478)
Accounts payable (2,311) (3,484)
Accrued liabilities 33,684 4,828
Customer prepayments (20,833) 2,530
-------- -------
Net cash provided by operating activities 27,617 61,312
Investing activities:
Investments and acquisitions, net of
cash acquired (799,725) --
Capital expenditures (12,929) (3,432)
Purchases of marketable securities (348) (72,398)
Sales of marketable securities 4,812 39,436
Maturities of marketable securities 1,104 65,629
Other (2,185) (2,826)
-------- -------
Net cash provided by (used in)
investing activities (809,271) 26,409
Financing activities:
Issuance of senior subordinated notes 400,000 --
Borrowings under bank credit facilities 185,300 --
Debt issuance costs (15,464) --
Repayment of note payable, capital lease
obligations and long-term debt (797) (5,767)
Issuance of common stock 131,796 841
Repurchase of common stock -- (6,745)
Contributions from (distributions to)
Liberty-Netlink Wholesale Division 7,971 (11,148)
Distributions to minority interests (4,690) (408)
Other (369) (32)
-------- -------
Net cash provided by (used in) financing
activities 703,747 (23,259)
-------- -------
Net increase (decrease) in cash and cash
equivalents (77,907) 64,462
Cash and cash equivalents at beginning of
period 155,644 32,556
--------- -------
Cash and cash equivalents at end of period $ 77,737 $97,018
========= =======
Supplemental disclosures of cash
flow information:
Interest paid $ 7,363 $ 1,001
Income taxes paid $ 29,559 $ 18,164
1998 amounts have been restated for pooling of interests.
See accompanying notes.
4
<PAGE>
TV GUIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 1999
1. Organization and Basis of Presentation
TV Guide, Inc. ("TVG" or the "Company") is a media and
communications company that provides print and electronic program
listings guides and program promotion services to households via
magazine subscriptions, newsstands, cable television systems, direct-to-
home satellite providers and the Internet; distributes programming to
cable television systems and direct-to-home satellite providers;
markets satellite-delivered programming to C-band satellite dish
owners; provides software development and systems integration services;
and provides satellite transmission services for private networks. The
majority of the Company's operating income is earned through the sale
and distribution of program listings guides and program promotion
services, the sale of home satellite dish services and satellite
distribution of video services.
Liberty Media Corporation, an indirect wholly owned subsidiary of
AT&T Corp. ("Liberty"), and The News Corporation Limited ("News Corp.")
each directly or indirectly own approximately 44% of the issued and
outstanding common stock of TVG representing approximately 98%
(approximately 49% each) of the total voting power of TVG common stock.
The accompanying interim financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial position of the Company and its results of
operations and cash flows for such periods. Operating results for any
interim period are not necessarily indicative of the results that may
be expected for the full year. The financial statements for periods
prior to March 1, 1999 have been restated to reflect a transaction with
Liberty that has been accounted for as a combination of entities under
common control, similar to a pooling of interests. See Note 2.
On March 1, 1999, the Company completed a transaction with a
subsidiary of News Corp. that has been accounted for as a purchase. The
allocation of the purchase price in that transaction is based on
preliminary information. The Company is in the process of obtaining an
independent evaluation of the assets acquired and the results of the
final evaluation could differ significantly from the amounts used in
the June 30, 1999 consolidated financial statements. See Note 2.
Certain financial statement items for prior periods have been
reclassified to conform to the 1999 presentation. The condensed
consolidated financial statements should be read in conjunction with
the historical and supplemental consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
5
<PAGE>
2. Investments and Acquisitions
Liberty and TV Guide Transactions
On March 1, 1999, TVG acquired from Liberty the stock of three of
its subsidiaries that indirectly owned approximately 40% of
Superstar/Netlink Group LLC ("SNG") (bringing TVG's ownership interest
in SNG to approximately 80%) and Liberty's Netlink Wholesale Division,
which includes a business that provides the Denver 6 services and a
separate business that sells programming packages to satellite master
antenna television systems serving hotels and multi-unit dwellings in
exchange for 12,750,000 shares of TVG Class B Common Stock (the
"Liberty Transaction"). This transaction was accounted for as a
combination of entities under common control, similar to a pooling of
interests, from January 25, 1996, the date TVG and the Liberty
businesses were first under common control. Accordingly, the 1998
interim financial statements have been restated to report the combined
financial position, results of operations and cash flows of the Company
and the businesses acquired from Liberty for periods subsequent to
January 25, 1996.
Also on March 1, 1999, immediately after closing the Liberty
Transaction, the Company acquired from a subsidiary of News Corp. the
stock of certain corporations (the "TV Guide Transaction") which
publish TV Guide Magazine and other printed television program listings
guides and distribute, through the Internet, an entertainment service
known as TV Guide Online (formerly TV Guide Entertainment Network or
TVGEN). A subsidiary of News Corp. received 22,503,412 shares of TVG
Class A Common Stock, 37,496,588 shares of TVG Class B Common Stock and
$800 million in cash as consideration. In addition, the subsidiary of
News Corp. acquired 6,534,108 additional shares of TVG Class A Common
Stock for approximately $131 million in cash to equalize the TVG Class
A Common Stock ownership of Liberty and its affiliates and News Corp.
and its affiliates. The $800 million cash consideration portion of the
transaction was funded from existing cash balances, the issuance of
$400 million in 8 1/8% senior subordinated notes due 2009, bank
borrowings of approximately $185 million drawn under a new bank credit
facility and proceeds from the issuance of equity to the subsidiary of
News Corp. The TV Guide Transaction was accounted for as a purchase.
Accordingly, the consolidated financial statements include the results
of operations of the TV Guide businesses from March 1, 1999.
The purchase price for the TV Guide Transaction was $1.9 billion,
consisting of the shares of TVG Class A and Class B Common Stock issued
to a subsidiary of News Corp. at $18.63 per share, the average market
price of the Company's common stock for a few days before and after the
agreement on the TV Guide Transaction was reached and announced, $800
million in cash and certain transaction costs. The purchase price was
allocated to identifiable tangible and intangible assets and
liabilities as follows with the excess of the purchase price over such
identifiable assets and liabilities assigned to goodwill (in
thousands).
Assets:
Current assets $ 189,995
Property, plant and equipment 10,000
Intangible assets 3,113,579
Other assets 176
----------
3,313,750
Liabilities:
Current liabilities 358,334
Deferred tax liability 1,032,490
Other long-term liabilities 395
----------
Net purchase price $1,922,531
==========
Intangible assets are comprised of the following amounts and
lives (in thousands):
Acquired subscriber accounts $ 172,561 1-15 years
Trademarks and patents $ 617,457 17-40 years
Publishing rights $2,007,772 40 years
Goodwill $ 315,789 40 years
The allocation of the purchase price is based on preliminary
information. The Company is in the process of obtaining an independent
evaluation of the assets acquired and the results of the final
evaluation could differ significantly from the amounts used in the June
30, 1999 consolidated financial statements. Accordingly, the
allocation of the purchase price and the lives of the intangible
assets, which are based on preliminary information, may differ from the
final purchase price allocation and the final lives assigned to the
assets.
Upon closing of the above transactions, the Company's name was
changed from United Video Satellite Group, Inc. to TV Guide, Inc.
6
<PAGE>
Turner Vision Acquisition
Effective February 1, 1998, Turner Vision, Inc. ("Turner Vision")
contributed its retail C-band home satellite dish business' assets,
obligations and operations to SNG in return for an approximate 20%
interest in SNG.
The contribution was accounted for as a purchase of Turner
Vision's business by SNG. Assets contributed by Turner Vision to SNG
totaled $4.2 million and consisted primarily of $2.5 million of cash
and $1.7 million of accounts receivable. These assets were subject to
liabilities of $27.9 million, consisting primarily of $21.6 million of
customer prepayments and $6.3 million of accounts payable and accrued
liabilities. The purchase price of Turner Vision's business exceeded
the fair value of the underlying net assets acquired by approximately
$61.6 million, which amount was assigned to goodwill and is being
amortized over ten years. As a result of the transaction, the Company
recognized a gain of $39.2 million in the first quarter of 1998.
ODS Technologies Acquisition
On July 13, 1998, the Company increased its ownership interest in
ODS Technologies, LP ("ODS"), a privately held interactive gaming
company, to 98% by purchasing an 88% interest in ODS for approximately
$28.4 million in cash. The purchase price of the Company's ownership
interest in ODS exceeded the fair value of ODS's net assets acquired by
approximately $28.2 million, which was assigned to patents and is being
amortized over 15 years.
The following pro forma financial information reflects the
Company's results of operations for the six months ended June 30, 1999
and 1998 as though the businesses acquired in the TV Guide Transaction,
the Turner Vision Acquisition and the ODS Technologies Acquisition had
been acquired as of January 1, 1998, excluding the gain recognized by
the Company as a result of the Turner Vision Acquisition (in
thousands):
1999 1998
---- ----
Pro forma:
Revenues $633,665 $610,537
Net income 22,349 20,432
Net income per share:
Basic $ 0.15 $ 0.13
Diluted 0.15 0.13
7
<PAGE>
3. Senior Subordinated Notes and Revolving Credit Facility
On March 1, 1999, the Company issued $400 million in 8 1/8% senior
subordinated notes due 2009 and entered into a $300 million six-year
revolving credit facility and a $300 million 364-day revolving credit
facility with a group of banks. Proceeds from the issuance of the
senior subordinated notes and borrowings of approximately $185 million
under the six-year revolving credit facility were used to fund a
portion of the cash consideration for the TV Guide Transaction.
Borrowings outstanding under the 364-day revolving credit facility
convert to a five-year term loan at maturity. Borrowings under the
credit facilities bear interest either at the bank's prime rate or
LIBOR, both plus a margin based on a sliding scale tied to the
Company's leverage ratio, as defined in the facility. For the first
year of the credit facilities, the LIBOR margin is fixed at a minimum
of 1.25%. The credit facilities are subject to prepayment or reduction
at any time without penalty. As of June 30, 1999, the Company had
available borrowing capacity under the six-year revolving credit
facility and 364-day revolving credit facility of approximately $114.7
million and $300.0 million, respectively.
The indenture for the notes and the Company's bank credit
facilities impose certain operating and financial restrictions on the
Company. These restrictions include the designation of certain of the
Company's subsidiaries as "restricted" for certain financing and
operating matters which may significantly limit the ability of the
Company to execute transactions, including the transfer of cash,
between subsidiaries in the restricted group and subsidiaries in the
unrestricted group. The subsidiaries in the unrestricted group are not
subject to certain covenants in the indenture for the notes and may
incur indebtedness, grant liens on their assets and sell all or a
portion of their assets, among other things, without satisfying the
restrictions in the indenture.
8
<PAGE>
4. Contingencies
On October 8, 1993, the Company received correspondence from
StarSight Telecast, Inc. ("StarSight"), now a wholly owned subsidiary
of Gemstar Development Corporation ("Gemstar"), 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 schedule 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 6, 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 seeking damages and injunctive
relief. 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 other two patents
identified in the original complaint and the five patents licensed to
StarSight are not infringed by the Company. On March 20, 1995,
StarSight filed an Answer to the Amended and Supplemental Complaint,
reasserting its charge of infringement of the 121 Patent. In December
1995, StarSight moved to file an amended answer to assert infringement
of two additional patents. The Court subsequently granted StarSight's
motion, but stayed all proceedings as to those two patents. Trial of
validity and inequitable conduct unenforceability of the 121 Patent,
and alleged infringement by the Prevue Express product of the 121
Patent, commenced May 8, 1996. Proceedings on all issues other than
liability with respect to the 121 Patent had been stayed. Over the
course of the subsequent two and one-half years, the Court heard
approximately 20 days of testimony, which concluded on July 7, 1998.
The trial was continued at various times at the parties' request to
allow the parties to assess the litigation and consider settlement
possibilities. Although the parties announced a settlement as part of a
business deal on January 20, 1998, it was never finalized, and no
settlement was reached. The parties submitted post-trial papers in
September and October 1998, and presented closing arguments to the
Court on November 12, 1998. The case has been submitted to the Court
and the parties are awaiting a decision on the issues of infringement
and validity of the 121 Patent. Shortly before the closing arguments,
on November 9, 1998, StarSight moved to dismiss the case asserting that
the Company had abandoned the Prevue Express product at issue in the
case and that the Court therefore lacked subject matter jurisdiction
over the matter. The Company opposed the motion on November 12, 1998.
The Court has not yet issued a decision on that motion. On February 19,
1999 the District Court entered Partial Findings of Fact and
Conclusions of Law determining that the 121 Patent is not unenforceable
by reason of inequitable conduct. The Court referred the case to a
Magistrate Judge for settlement conference purposes prior to the Court
entering additional findings of fact and conclusions of law with
respect to the remaining issues tried. There can be no assurance that
this litigation can be resolved without material adverse effect on the
business prospects of the Company and its subsidiaries and the future
financial position or results of the Company and its subsidiaries. The
Company has not provided for any potential loss as a result of this
litigation.
9
<PAGE>
On July 24, 1998, Gemstar and StarSight filed an action in the
U.S. District Court for the Northern District of California asserting
infringement by the Company's TV Guide Networks, Inc. subsidiary
(formerly Prevue Networks, Inc.) of the 121 Patent and U.S. Patent No.
4,751,578 (the "578 patent") seeking damages and injunctive relief. The
original Complaint did not specify a product accused of infringement.
On September 30, 1998, Gemstar and StarSight filed an Amended Complaint
adding SuperGuide Corporation ("SuperGuide") as a plaintiff, Tele-
Communications, Inc. ("TCI") as a defendant, and specifying TV Guide
Interactive as the allegedly infringing product. TCI Communications,
Inc. was subsequently substituted for TCI. TV Guide Networks answered
the Amended Complaint on October 15, 1998, asserting the defenses of
non-infringement, invalidity and estoppel with respect to both the 121
and 578 Patents, and inequitable conduct unenforceability with respect
to the 121 Patent. In addition, TV Guide Networks asserted that
StarSight had violated the antitrust laws. On August 7, 1998, TV Guide
Networks moved to transfer this action to the U.S. District Court for
the Northern District of Oklahoma. On February 2, 1999, the California
Court granted TV Guide Networks' motion to transfer. On December 23,
1998, Gemstar, StarSight and SuperGuide filed a motion before the
Judicial Panel on Multidistrict Litigation ("JPML") to consolidate and
transfer for pretrial proceedings, this action and four other patent
infringement lawsuits Gemstar and its affiliated companies have pending
with manufacturers of cable television set-top boxes. In their motion,
Gemstar and its affiliates suggested either the Central or Northern
District of California as the appropriate venue for pretrial
proceedings. TV Guide Networks opposed the motion for consolidation. A
hearing on the motion to consolidate and transfer took place on March
26, 1999. On January 22, 1999, Gemstar, StarSight and SuperGuide filed
a motion requesting a stay of the action against TV Guide Networks and
TCI Communications, Inc. pending a decision by the JPML on their motion
to consolidate and transfer. On February 2, 1999, the Court deemed the
motion to stay to be moot in light of its decision to transfer the
action on TV Guide Networks' motion to the Northern District of
Oklahoma. On March 22, 1999, the transferred case in the Northern
District of Oklahoma was referred to a Magistrate Judge for settlement
conference purposes. On April 26, 1999, the JPML denied the motion to
transfer the action pending in the Northern District of Oklahoma to
another district court for pretrial proceedings. The JPML also ordered
that the cases against the manufacturers of cable set-top boxes be
transferred to the Northern District of Georgia for pretrial
proceedings. There can be no assurance that this litigation can be
resolved without material adverse effect on the business prospects of
the Company and its subsidiaries and the future financial position or
results of the Company and its subsidiaries. The Company has not
provided for any potential loss as a result of this litigation.
10
<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, the State has assessed penalties and interest
of approximately $900,000. The Company, after consulting with outside
counsel, strongly disagrees with the State's position. The Company has
provided a reserve of $275,000 for certain matters associated with the
State's claim. No provision has been made in the Company's financial
statements for the remainder of the State's claim and the Company has
not collected from its customers or 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. If the Company's motion is not
granted, it is anticipated that a trial date may be 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 $4.2 million.
On June 2, 1997, a lawsuit was filed in the United States District
Court for the District of Connecticut against the Company by one of its
mass marketers who claims, among other matters, additional amounts owed
in connection with its past and current business relationship with the
Company. Discussions to resolve these matters are ongoing. On June 11,
1997, the Court denied the marketer's motion for a temporary
restraining order, and on October 10, 1997, denied the marketer's
motion for a preliminary injunction. The marketer appealed the latter
ruling to the United States Court of Appeals for the Second Circuit,
but later filed a Motion for Voluntary Dismissal, which was granted.
The Company terminated its relationship with that marketer. 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.
On August 3, 1999, Source Media, Inc. ("Source") filed an action
in the District Court, Dallas County, Texas asserting breach of the Non-
Disclosure Agreement dated September 15, 1998 between the Company and
Source, seeking damages and injunctive relief. While the Company prepares
its response, the parties have engaged in settlement discussions. The
Company has not provided for any potential loss as a result of this
litigation.
The Company is also a party to certain other claims, actions and
proceedings incidental to its business, none of which is expected to
have a material adverse effect on the business, financial position or
results of operations of the Company.
11
<PAGE>
5. Earnings Per Share
The following information reconciles the number of shares used to
compute basic earnings per share to those used to compute diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Per Share Per Share Per Share Per Share
Amount Amount Amount Amount
-------- -------- -------- --------
<C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 9,837 $ 17,916 $ 22,598 $ 56,877
======== ======== ======== ========
Weighted average
number of shares
of common stock
outstanding 152,043 $0.06 86,076 $0.21 129,824 $0.17 86,156 $0.66
===== ===== ===== =====
Effect of dilutive
securities -
stock options 2,167 1,143 1,803 1,098
-------- --------- -------- --------
Weighted average
number of shares
of common stock
and dilutive
potential
common shares 154,210 $0.06 87,219 $0.21 131,627 $0.17 87,254 $0.65
======= ===== ====== ===== ======= ===== ====== =====
</TABLE>
12
<PAGE>
6. Segment Information
Segment information has been prepared in accordance with Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The Company categorizes its businesses into three groups
for internal reporting purposes: TV Guide Magazine Group, TV Guide
Entertainment Group and United Video Group. The Company has four
reportable segments as defined by Statement 131: print program listings
guide services (TV Guide Magazine Group); electronic program promotion
and guide services (TV Guide Entertainment Group); and home satellite
dish services (SNG) and satellite distribution of video entertainment
services (UVTV), both of which are included in the United Video Group.
TV Guide Magazine Group distributes TV Guide magazine to households and
newsstands and provides customized monthly program guides for cable and
satellite operators. TV Guide Entertainment Group markets electronic
programming guide and promotion channels and services to cable
television systems and other multi-channel video programming
distributors. United Video Group includes SNG, which markets and
distributes programming to the C-band direct-to-home satellite dish
subscriber market, and UVTV, which markets and distributes to
programming distributors certain video and audio services. United Video
Group also operates businesses that provide software development and
systems integration services and satellite transmission services for
private networks and holds certain other investments.
The Company's reportable segments are strategic business units
that offer different products and services. The reportable segments are
measured based on earnings before interest, income taxes, depreciation
and amortization including allocated corporate expenses (operating
income before depreciation and amortization). The Company accounts for
inter-segment sales as if the sales were to third parties at market
prices.
Segment information for each of the quarters ended June 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
TV TV Guide United United United
Guide Enter- Video Video Video
Magazine tainment Group- Group- Group-
Group Group SNG UVTV Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues from external
customers:
Satellite-delivered
programming services $ -- $ 10,496 $ 96,681 $ 15,474 $ 7,185 $ -- $ 129,836
Magazine subscription
and newsstand sales 103,853 -- -- -- -- -- 103,853
Advertising sales 51,844 11,619 -- -- -- -- 63,463
Systems integration
services -- -- -- -- 10,441 -- 10,441
Other 5,258 -- -- -- 115 -- 5,373
Intersegment revenues -- -- -- 6,761 -- (6,761) --
---------- -------- -------- -------- ---------- ----------- ----------
Total revenues 160,955 22,115 96,681 22,235 17,741 (6,761) 312,966
Operating expenses,
excluding
depreciation
and amortization 123,510 18,246 77,471 11,255 22,677 (6,761) 246,398
---------- -------- -------- -------- ---------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ 37,445 $ 3,869 $ 19,210 $ 10,980 $ (4,936) $ -- 66,568
========== ======== ========= ========= ========== ===========
Depreciation and
amortization (36,204)
Interest expense (12,318)
Other income, net 1,208
----------
Income before income
taxes and minority
interest $ 19,254
==========
Segment assets $3,308,484 $ 66,874 $ 142,654 $ 97,106 $ 109,073 $ (50,778) $3,673,413
========== ======== ========= ========= ========== =========== ==========
1998
Revenues from external
customers:
Satellite-delivered
programming services $ -- $ 8,709 $104,140 $ 15,273 $ 7,231 $ -- $ 135,353
Advertising sales -- 9,982 -- -- -- -- 9,982
Systems integration
services -- -- -- -- 9,595 -- 9,595
Other -- -- -- -- 115 -- 115
Intersegment revenues -- -- -- 6,240 -- (6,240) --
---------- ------- -------- -------- ---------- ----------- ----------
Total revenues -- 18,691 104,140 21,513 16,941 (6,240) 155,045
Operating expenses,
excluding
depreciation
and amortization -- 11,216 92,334 10,336 13,167 (6,240) 120,813
---------- ------- -------- -------- ---------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ -- $ 7,475 $ 11,806 $ 11,177 $ 3,774 $ -- 34,232
========== ======== ========= ========= ========== ===========
Depreciation and
amortization (6,522)
Interest expense (443)
Other income, net 1,635
----------
Income before income
taxes and minority
interest $ 28,902
==========
</TABLE>
Segment information for each of the six-month periods ended June
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
TV TV Guide United United United
Guide Enter- Video Video Video
Magazine tainment Group- Group- Group-
Group Group SNG UVTV Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues from external
customers:
Satellite-delivered
programming services $ -- $ 20,171 $197,825 $ 30,689 $ 12,149 $ -- $ 260,834
Magazine subscription
and newsstand sales 137,425 -- -- -- -- -- 137,425
Advertising sales 66,102 23,152 -- -- -- -- 89,254
Systems integration
services -- -- -- -- 20,316 -- 20,316
Other 6,785 -- -- -- 194 -- 6,979
Intersegment revenues -- -- -- 13,322 -- (13,322) --
---------- -------- -------- -------- ---------- ----------- ----------
Total revenues 210,312 43,323 197,825 44,011 32,659 (13,322) 514,808
Operating expenses,
excluding
depreciation
and amortization 158,141 36,576 158,923 21,273 39,568 (13,322) 401,159
---------- -------- -------- -------- ---------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ 52,171 $ 6,747 $ 38,902 $ 22,738 $ (6,909) $ -- 113,649
========== ======== ========= ========= ========== ===========
Depreciation and
amortization (51,282)
Interest expense (18,353)
Other income, net 1,515
----------
Income before income
taxes and minority
interest $ 45,529
==========
1998
Revenues from external
customers:
Satellite-delivered
programming services $ -- $17,049 $200,426 $ 30,242 $ 14,913 $ -- $ 262,630
Advertising sales -- 19,109 -- -- -- -- 19,109
Systems integration
services -- -- -- -- 19,159 -- 19,159
Other -- -- -- -- 311 -- 311
Intersegment revenues -- -- -- 12,285 -- (12,285) --
---------- ------- -------- -------- ---------- ----------- ----------
Total revenues -- 36,158 200,426 42,527 34,383 (12,285) 301,209
Operating expenses,
excluding
depreciation
and amortization -- 24,458 178,229 20,448 27,381 (12,285) 238,231
---------- ------- -------- -------- ---------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ -- $ 11,700 $ 22,197 $ 22,079 $ 7,002 $ -- 62,978
========== ======== ========= ========= ========== ===========
Depreciation and
amortization (13,600)
Gain on issuance of
equity by subsidiary 39,225
Interest expense (934)
Other income, net 3,186
----------
Income before income
taxes and minority
interest $ 90,855
==========
</TABLE>
Revenue from other non-reportable operating segments primarily
includes revenue derived from system integration and software
development services and from satellite transmission services.
Eliminations include inter-segment revenues and expenses and inter-
segment payables and receivables.
13
<PAGE>
7. Comprehensive Income
Comprehensive income comprises net income plus unrealized holding
gains and losses on available-for-sale securities, net of related tax
effects. Comprehensive income for the three months ended June 30, 1999
and 1998 was $10.0 million and $21.4 million, respectively, and for the
six months ended June 30, 1999 and 1998 was $22.8 million and $60.7
million, respectively.
8. Supplemental Guarantor Information
In connection with the TV Guide Transaction, TVG issued $400
million in aggregate principal amount of its senior subordinated notes
due 2009, which are not callable until 2004. A group of TVG's
subsidiaries (the "Guarantors") guarantees the senior subordinated
indebtedness. Supplemental condensed combining financial information of
TVG, the Guarantors and the remainder of TVG's consolidated group (the
"Non-Guarantors") is presented below.
Investments in the Non-Guarantors by their parent companies that
are part of TVG and the Guarantors are presented under the equity
method of accounting in the combining financial information. The
principal elimination entries eliminate intercompany sales and
purchases of video products, intercompany interest income and expense,
equity in earnings of subsidiaries and investments in and amounts due
to and from subsidiaries.
Because of the factual basis underlying the obligations created
pursuant to a senior secured credit facility and other obligations that
may constitute senior indebtedness of the Guarantors of the senior
subordinated notes, it is not possible to predict how a court in
bankruptcy would accord priorities among the obligations of the Company
and its subsidiaries.
14
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
As of June 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents $ -- $ 2,866 $ 74,871 $ -- $ 77,737
Marketable securities,
at fair value -- 431 77 -- 508
Accounts receivable,
net of allowance
for doubtful
accounts -- 228,855 39,641 -- 268,496
Accounts and notes
receivable from
affiliates -- 72,879 9,250 (82,129) --
Other current assets -- 36,712 10,998 -- 47,710
---------- ---------- -------- ----------- ----------
Total current
assets -- 341,743 134,837 (82,129) 394,451
Property, plant and
equipment, at cost,
net of accumulated
depreciation and
amortization -- 44,239 13,072 -- 57,311
Intangible assets, net
of accumulated
amortization -- 3,084,878 110,369 -- 3,195,247
Investment in
subsidiaries, at
equity 2,095,139 -- -- (2,095,139) --
Other assets, net of
accumulated
amortization 14,893 10,659 856 (4) 26,404
---------- ---------- -------- ----------- ----------
Total assets $2,110,032 $3,481,519 $259,134 $(2,177,272) $3,673,413
========== ========== ======== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 64,179 $ 3,565 $ -- $ 67,744
Accounts and notes
payable to
affiliates 29,917 23,435 28,777 (82,129) --
Accrued liabilities 11,595 71,619 51,817 -- 135,031
Note payable and
current portion
of capital lease
obligations -- 3,878 2,765 (4) 6,639
Customer prepayments -- 184,301 95,069 -- 279,370
---------- ---------- -------- ----------- ----------
Total current
liabilities 41,512 347,412 181,993 (82,133) 488,784
Deferred tax
liability and other
long-term
liabilities -- 1,084,839 13,400 -- 1,098,239
Capital lease
obligations and
long-term debt 585,300 596,334 -- (585,300) 596,334
Minority interest -- -- 3,471 3,365 6,836
Stockholders' equity:
Common stock 1,521 34,695 210 (34,905) 1,521
Other stockholders'
equity 1,481,699 1,418,239 60,060 (1,478,299) 1,481,699
---------- ---------- -------- ----------- ----------
Total stock-
holders' equity 1,483,220 1,452,934 60,270 (1,513,204) 1,483,220
---------- ---------- -------- ----------- ----------
Total liabilities and
stockholders' equity $2,110,032 $3,481,519 $259,134 $(2,177,272) $3,673,413
========== ========== ======== =========== ==========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
QUARTER ENDED JUNE 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 29,898 $106,699 $ (6,761) $129,836
Magazine subscription
and newsstand sales -- 103,853 -- -- 103,853
Advertising sales -- 63,463 -- -- 63,463
Systems integration
services -- -- 10,441 -- 10,441
Other -- 5,258 115 -- 5,373
------- -------- -------- -------- --------
-- 202,472 117,255 (6,761) 312,966
Operating expenses:
Programming, printing,
distribution and
delivery -- 104,819 74,480 (6,761) 172,538
Selling, general and
administrative -- 45,217 28,643 -- 73,860
Depreciation and
amortization -- 31,588 4,616 -- 36,204
------- -------- -------- -------- --------
-- 181,624 107,739 (6,761) 282,602
------- -------- -------- -------- --------
Operating income -- 20,848 9,516 -- 30,364
Interest expense (12,014) (12,281) (37) 12,014 (12,318)
Other income, net 21,851 497 711 (21,851) 1,208
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 9,837 9,064 10,190 (9,837) 19,254
Provision for income
taxes -- (506) (5,362) -- (5,868)
Minority interest in
(earnings) losses -- -- (3,875) 326 (3,549)
------- -------- -------- -------- --------
Net income $ 9,837 $ 8,558 $ 953 $ (9,511) $ 9,837
======= ======== ======== ======== ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 58,759 $215,397 $(13,322) $260,834
Magazine subscription
and newsstand sales -- 137,425 -- -- 137,425
Advertising sales -- 89,254 -- -- 89,254
Systems integration
services -- -- 20,316 -- 20,316
Other -- 6,785 194 -- 6,979
------- -------- -------- -------- --------
-- 292,223 235,907 (13,322) 514,808
Operating expenses:
Programming, printing,
distribution and
delivery -- 140,629 148,335 (13,322) 275,642
Selling, general and
administrative -- 70,508 55,009 -- 125,517
Depreciation and
amortization -- 41,930 9,352 -- 51,282
------- -------- -------- -------- --------
-- 253,067 212,696 (13,322) 452,441
------- -------- -------- -------- --------
Operating income -- 39,156 23,211 -- 62,367
Interest expense (17,745) (18,295) (58) 17,745 (18,353)
Other income, net 40,343 677 838 (40,343) 1,515
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 22,598 21,538 23,991 (22,598) 45,529
Provision for income
taxes -- (4,481) (11,165) -- (15,646)
Minority interest in
(earnings) losses -- -- (7,811) 526 (7,285)
------- -------- -------- -------- --------
Net income $22,598 $ 17,057 $ 5,015 $(22,072) $ 22,598
======= ======== ======== ======== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
QUARTER ENDED JUNE 30, 1998
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 27,833 $113,761 $ (6,241) $135,353
Advertising sales -- 9,982 -- -- 9,982
Systems integration
services -- -- 9,595 -- 9,595
Other -- -- 115 -- 115
------- -------- -------- -------- --------
-- 37,815 123,471 (6,241) 155,045
Operating expenses:
Programming, printing,
distribution and
delivery -- 8,465 82,929 (6,241) 85,153
Selling, general and
administrative -- 11,359 24,301 -- 35,660
Depreciation and
amortization -- 2,473 4,049 -- 6,522
------- -------- -------- -------- --------
-- 22,297 111,279 (6,241) 127,335
------- -------- -------- -------- --------
Operating income -- 15,518 12,192 -- 27,710
Interest expense -- (330) (113) -- (443)
Other income, net 17,916 761 874 (17,916) 1,635
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 17,916 15,949 12,953 (17,916) 28,902
Provision for income
taxes -- (5,915) (5,107) -- (11,022)
Minority interest in
(earnings) losses -- -- -- 36 36
------- -------- -------- -------- --------
Net income $17,916 $ 10,034 $ 7,846 $(17,880) $ 17,916
======= ======== ======== ======== ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 54,965 $219,950 $(12,285) $262,630
Advertising sales -- 19,109 -- -- 19,109
Systems integration
services -- -- 19,159 -- 19,159
Other -- -- 311 -- 311
------- -------- -------- -------- --------
-- 74,074 239,420 (12,285) 301,209
Operating expenses:
Programming, printing,
distribution and
delivery -- 17,023 159,526 (12,285) 164,264
Selling, general and
administrative -- 25,349 48,618 -- 73,967
Depreciation and
amortization -- 4,994 8,606 -- 13,600
------- -------- -------- -------- --------
-- 47,366 216,750 (12,285) 251,831
------- -------- -------- -------- --------
Operating income -- 26,708 22,670 -- 49,378
Gain on issuance of
equity by
subsidiary -- -- 39,225 -- 39,225
Interest expense -- (674) (260) -- (934)
Other income, net 56,877 1,596 1,590 (56,877) 3,186
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 56,877 27,630 63,225 (56,877) 90,855
Provision for income
taxes -- (9,971) (24,076) -- (34,047)
Minority interest in
losses -- -- -- 69 69
------- -------- -------- -------- --------
Net income $56,877 $ 17,659 $ 39,149 $(56,808) $ 56,877
======= ======== ======== ======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ -- $ 7,100 $ 20,554 $ (37) $ 27,617
Investing activities:
Investments and
acquisitions, net
of cash acquired (806,585) -- 275 6,585 (799,725)
Capital expenditures -- (9,567) (3,450) 88 (12,929)
Purchases of market-
able securities -- -- (348) -- (348)
Sales and maturities
of marketable
securities -- -- 5,916 -- 5,916
Other -- 1,337 (3,438) (84) (2,185)
--------- -------- -------- -------- ---------
Net cash used in
investing
activities (806,585) (8,230) (1,045) 6,589 (809,271)
Financing activities:
Issuance of senior
subordinated notes 400,000 -- -- -- 400,000
Borrowings under
bank credit
facilities 185,300 -- -- -- 185,300
Debt issuance
costs (15,464) -- -- -- (15,464)
Borrowings
(repayments) of
note payable,
capital lease
obligations and
long-term debt -- (1,841) 1,011 33 (797)
Capital stock
transactions, net 131,796 -- 6,585 (6,585) 131,796
Contributions from
Liberty/Netlink
Wholesale
Division -- 6,476 1,495 -- 7,971
Distributions to
minority interests (4,690) (4,690)
Intercompany
transfers 104,953 (104,787) (166) -- --
Other -- -- (369) -- (369)
--------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities 806,585 (100,152) 3,866 (6,552) 703,747
--------- -------- -------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents -- (101,282) 23,375 -- (77,907)
Cash and cash
equivalents at
beginning of
period -- 104,148 51,496 -- 155,644
--------- -------- -------- -------- ---------
Cash and cash
equivalents at
end of period $ -- $ 2,866 $ 74,871 -- $ 77,737
========= ======== ======== ======== =========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ -- $ 60,334 $ 928 $ 50 $ 61,312
Investing activities:
Investments and
acquisitions, net
of cash acquired (1,027) -- -- 1,027 --
Capital expenditures -- (2,418) (1,144) 130 (3,432)
Purchases of market-
able securities -- (46,482) (25,916) -- (72,398)
Sales and maturities
of marketable
securities -- 53,688 51,377 -- 105,065
Other -- (1,298) (1,320) (208) (2,826)
--------- -------- -------- ------ ---------
Net cash provided by
investing
activities (1,027) 3,490 22,997 949 26,409
Financing activities:
Repayment of note
payable, capital
lease obligations
and long-term debt -- (1,717) (4,078) 28 (5,767)
Common stock
transactions, net (5,904) 481 546 (1,027) (5,904)
Distributions to
Liberty/Netlink
Wholesale
Division -- (7,852) (3,296) -- (11,148)
Distributions to
minority
interests -- -- (408) -- (408)
Intercompany
transfers 6,931 (6,931) -- -- --
Other -- -- (32) -- (32)
--------- -------- -------- ------ ---------
Net cash used in
financing
activities 1,027 (16,019) (7,268) (999) (23,259)
--------- -------- -------- ------ ---------
Net increase in cash
and cash
equivalents -- 47,805 16,657 -- 64,462
Cash and cash
equivalents
at beginning
of period -- 26,124 6,432 -- 32,556
--------- -------- -------- ------ ---------
Cash and cash
equivalents at
end of period $ -- $ 73,929 $ 23,089 $ -- $ 97,018
========= ======== ======== ====== =========
</TABLE>
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company categorizes its businesses into three groups: TV Guide
Magazine Group, which distributes TV Guide magazine to households and
newsstands and provides customized monthly program guides for cable and
satellite operators; TV Guide Entertainment Group, which markets
electronic programming guide and promotion channels and services to
cable television systems and other multi-channel video programming
distributors; and United Video Group, which markets and distributes
programming to the C-band direct-to-home satellite dish subscriber
market (SNG), markets and distributes to programming distributors
certain video and audio services (UVTV), provides software development
and system integration services and satellite transmission services for
private networks and holds certain other investments. The following
table sets forth certain unaudited financial information for the
Company and the businesses operated by it during the three months and
six months ended June 30, 1999 and 1998. Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
this report should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations included
in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
<TABLE>
<CAPTION>
Consolidated Guarantor Group (5) Consolidated Guarantor Group (5)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
Amount Amount Amount Amount Amount Amount Amount Amount
------------------- ------------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
TV Guide Magazine Group $160,955 $ -- $160,955 $ -- $210,312 $ -- $210,312 $ --
TV Guide Entertainment
Group (1) 22,115 18,691 19,282 16,302 43,323 36,158 37,900 31,547
United Video Group:
SNG (2) 96,681 104,140 -- -- 197,825 200,426 -- --
UVTV 22,235 21,513 22,235 21,513 44,011 42,527 44,011 42,527
Other 17,741 16,941 -- -- 32,659 34,383 -- --
-------- -------- -------- -------- -------- -------- -------- --------
136,657 142,594 22,235 21,513 274,495 277,336 44,011 42,527
-------- -------- -------- -------- -------- -------- -------- --------
Eliminations (6,761) (6,240) -- -- (13,322) (12,285) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $312,966 $155,045 $202,472 $ 37,815 $514,808 $301,209 $292,223 $ 74,074
======== ======== ======== ======== ======== ======== ======== ========
Operating income (loss):
TV Guide Magazine Group $ 8,740 $ -- $ 8,740 $ -- $ 15,928 $ -- $ 15,928 $ --
TV Guide Entertainment
Group (1) 1,150 5,141 1,933 5,230 1,272 6,934 2,511 7,244
United Video Group:
SNG (2) 16,985 9,577 -- -- 34,449 17,281 -- --
UVTV 10,316 10,526 10,316 10,526 21,440 20,790 21,440 20,790
Other (6,827) 2,466 (141) (238) (10,722) 4,373 (723) (1,326)
-------- -------- -------- ------- -------- -------- -------- --------
20,474 22,569 10,175 10,288 45,167 42,444 20,717 19,464
-------- -------- -------- ------- -------- -------- -------- --------
Total $ 30,364 $ 27,710 $ 20,848 $ 15,518 $ 62,367 $ 49,378 $ 39,156 $ 26,708
======== ======== ======== ======== ======== ======== ======== ========
Consolidated depreciation
and amortization $ 36,204 $ 6,522 $ 31,588 $ 2,473 $ 51,282 $ 13,600 $ 41,930 $ 4,994
Consolidated capital
expenditures 9,196 2,202 7,110 1,750 12,929 3,432 9,567 2,418
Net cash provided by
(used in):
Operating activities 1,491 16,012 13,571 33,670 27,617 61,312 7,100 60,334
Investing activities (6,799) 26,075 (11,819) 2,029 (809,271) 26,409 (814,815) 2,463
Financing activities (15,063) (5,088) (11,675) (2,310) 703,747 (23,259) 706,433 (14,992)
Other data:
EBITDA (3) $ 66,568 $ 34,232 $ 52,436 $ 17,991 $113,649 $ 62,978 $ 81,086 $ 31,702
Ratio of earnings to
fixed charges (4) 2.33 16.64 3.06 25.48
</TABLE>
22
<PAGE>
(1) The revenues and operating income for TV Guide Entertainment Group
(formerly Prevue Networks) include TV Guide Channel, TV Guide
Interactive, TV Guide International, Sneak Prevue, TV Guide Online
and other electronic guide services offered domestically and
internationally.
(2) Beginning February 1, 1998, SNG's operating results also include
the retail C-band operations of Turner Vision, Inc.
(3) EBITDA means operating income before depreciation and
amortization. EBITDA is presented supplementally as the Company
believes it is a widely used financial indicator of a leveraged
company's ability to service and incur indebtedness. The
Company believes EBITDA is a standard measure commonly reported
and widely used by analysts, investors and others associated
with the media and entertainment industry. However, EBITDA does
not take into account substantial costs of doing business, such
as income taxes and interest expense. While many in the financial
community consider EBITDA to be an important measure of
comparative operating performance, it should be considered in
addition to, but not as a substitute for, operating income, net
income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with GAAP
that are presented in the financial statements. Additionally, the
Company's calculation of EBITDA may be different than the
calculation used by other companies and therefore, comparability
may be affected.
(4) For the ratio of earnings to fixed charges calculations, earnings
available for fixed charges consists of earnings before income
taxes and minority interests in earnings of consolidated
subsidiaries plus fixed charges. Fixed charges consist of interest
on debt and that portion of rental expense the Company believes to
be representative of interest.
(5) Represents the combined results of the Company and its restricted
subsidiaries that guarantee the 8 1/8% senior subordinated notes.
The Company has one partially owned domestic subsidiary and one
partially owned foreign subsidiary that are restricted
subsidiaries under the indenture but are not guarantors of the
notes.
23
<PAGE>
Results of Operations
Consolidated
Revenues for the three months ended June 30, 1999 were $313.0
million, an increase of $157.9 million, or 102%, over the same period
in 1998. For the six months ended June 30, 1999, revenues were $514.8
million, an increase of $213.6 million, or 71%, over the corresponding
1998 period. The increase in revenues for both the quarter and six-
month period was primarily due to $161.0 million of additional revenues
for the quarter and $210.3 million of additional revenues for the six-
month period attributable to TV Guide magazine, which was acquired by
the Company on March 1, 1999.
Operating expenses, excluding depreciation and amortization, were
$246.4 million for the quarter ended June 30, 1999, an increase of
$125.6 million, or 104%, when compared to the same period in 1998. For
the six months ended June 30, 1999, operating expenses, excluding
depreciation and amortization, were $401.2 million, an increase of
$162.9 million, or 68%, over the corresponding 1998 period. Operating
expenses, excluding depreciation and amortization, increased in both
periods when compared to the same periods in 1998 due to increased
operating costs of $123.5 million for the quarter and $158.1 million
for the six-month period attributable to TV Guide magazine.
Depreciation and amortization during the second quarter of 1999
was $36.2 million, an increase of $29.7 million, or 455%, over the same
period in 1998. For the six months ended June 30, 1999, depreciation
and amortization was $51.3 million, an increase of $37.7 million, or
277%, over the corresponding 1998 period. The increase in depreciation
and amortization for both periods was primarily a result of
amortization of intangible assets and other depreciation resulting from
the acquisitions of TV Guide magazine and ODS Technologies coupled with
the acquisition of equipment to support the various TV Guide
Entertainment Group products.
In 1998, the Company recognized a gain of $39.2 million associated
with the acquisition of Turner Vision. (See Note 2 of Notes to
Condensed Consolidated Financial Statements).
Interest expense during the second quarter of 1999 was $12.3
million, an increase of $11.9 million over the same period in 1998.
Interest expense during the six months ended June 30, 1999 was $18.4
million, an increase of $17.4 million over the same period in 1998. The
increase in interest expense for both periods is attributable to
increased debt levels resulting from the issuance of $400 million of
senior subordinated notes and $185 million of bank debt to fund a
portion of the TV Guide Transaction.
The Company's effective tax rate, computed as the provision for
income taxes divided by income before income taxes and minority
interest, less that portion of minority interest in earnings
attributable to entities not subject to income taxes, was 41% for the
six-month period ended June 30, 1999 compared to 38% for the same
period in 1998. The increase in the effective rate is due to the
increase in non-deductible goodwill amortization as a result of the TV
Guide Acquisition.
Minority interest in earnings for the quarter and six-month period
ended June 30, 1999 of $3.5 million and $7.3 million, respectively,
represents that portion of earnings attributable to the minority
ownership in SNG, SSDS, Infomedia S.A. and Sneak Prevue LLC.
24
<PAGE>
TV Guide Magazine Group
The following table sets forth certain financial information for
TV Guide magazine for the three months and six months ended June 30,
1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30.
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $160,955 $146,813 $329,169 $301,176
Operating expenses 123,510 108,742 249,053 225,036
Depreciation 1,902 1,307 3,714 3,237
-------- -------- -------- --------
Operating income
before amortization $ 35,543 $ 36,764 $ 76,402 $ 72,903
======== ======== ======== ========
Operating margin
percentage (before
amortization) 22% 25% 23% 24%
The results of operations of TV Guide magazine have been
consolidated with the results of operations of the Company for
reporting purposes subsequent to March 1, 1999, the date the Company
acquired TV Guide magazine. The above table and following discussion
are based on financial information of the business acquired, both prior
to and subsequent to its March 1, 1999 acquisition date and do not
include the amortization of intangible assets resulting from the
acquisition or that was reflected in its historical financial
statements.
TV Guide magazine's revenues for the three months ended June 30,
1999 were $161.0 million, an increase of $14.1 million, or 10%, over
the same period in 1998. For the six months ended June 30, 1999,
revenues were $329.2 million, an increase of $28.0, or 9%, over the
corresponding 1998 period. The increase in revenues during both
periods of 1999 was primarily due to $10.3 million for the quarter and
$21.3 million for the six-month period of additional revenues
attributable to the monthly cable guide business acquired as part of
the acquisition of TVSM, Inc. on June 26, 1998, increased revenues
attributable to new product offerings, and an increase in newsstand
rates, partially offset by decreased subscription and newsstand sales
volumes. On August 29, 1998, the magazine increased the newsstand
price for the magazine to $1.49 from $1.19. Subscription circulation
for the magazine during both the quarter and six-month period ended
June 30, 1999 was 9.6 million per week, a decrease of 676,000 copies,
or 7%, for the quarter and a decrease of 613,000 copies, or 6%, for the
six-month period, from the same quarter in the prior year. Newsstand
sales for the magazine averaged 2.1 million copies per week during the
quarter ended June 30, 1999 compared to 2.6 million for the same
quarter in the prior year.
Operating expenses, excluding depreciation and amortization, for
the second quarter of 1999 were $123.5 million, an increase of $14.8
million, or 14%, over the same period in 1998. For the six months
ended June 30, 1999, operating expenses excluding depreciation and
amortization were $249.1 million, an increase of $24.0 million, or 11%,
over the same period in 1998. The increase in operating expenses for
both periods is primarily due to $8.6 million for the quarter and $18.6
million for the six-month period of additional expenses attributable to
the TVSM, Inc. acquisition and $8.3 million for the quarter and $16.6
million for the six-month period attributable to new product offerings,
partially offset by a reduction in printing costs.
Depreciation during the second quarter of 1999 was $1.9 million,
an increase of $595,000, or 46%, over the same period in 1998. For the
six months ended June 30, 1999, depreciation was $3.7 million, an
increase of $477,000, or 15%, over the corresponding 1998 period. The
increase in depreciation was a result of the acquisition of data
processing equipment.
25
<PAGE>
TV Guide Entertainment Group
The following table sets forth certain financial information for
the TV Guide Entertainment Group for the three months and six months
ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30.
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $22,115 $18,691 $43,323 $36,158
Operating expenses 18,246 11,216 36,576 24,458
Depreciation and
amortization 2,719 2,334 5,475 4,766
------- ------- ------- -------
Operating income $ 1,150 $ 5,141 $ 1,272 $ 6,934
======= ======= ======= =======
Operating margin
percentage (before
amortization) 5% 28% 3% 19%
TV Guide Entertainment Group's revenues for the three months ended
June 30, 1999 were $22.1 million, an increase of $3.4 million, or 18%,
over the same period in 1998. For the six months ended June 30, 1999,
revenues were $43.3 million, an increase of $7.2 million, or 20% over
the same period in 1998. The increase in revenues for both periods was
largely attributable to advertising revenues, which grew $1.5 million,
or 15%, over the second quarter of 1998 and $4.0 million, or 21%, over
the first six months of 1998 due to higher rates on TV Guide Channel
and increased ad sales on TV Guide Online. Service fee revenues
attributable to TV Guide Interactive increased $1.5 million for the
quarter when compared to the same period in 1998 and $2.0 million over
the first six months of 1998. International revenues increased
$621,000, or 139%, and $920,000, or 93%, when compared to the second
quarter and first six months of 1998. This increase is primarily a
result of the acquisition of 75% of Infomedia S.A., a Luxembourg data
services business, in 1999. TV Guide Channel, Sneak Prevue and TV
Guide Online service fee revenues were relatively unchanged during the
second quarter and first six months of 1999 when compared to the same
periods in 1998. TV Guide Channel subscriber counts decreased by
474,000, or 1%, to 49.4 million as of June 30, 1999 compared to those
as of June 30, 1998. Sneak Prevue subscribers decreased by 1.9
million, or 5%, to 33.3 million during the same period and TV Guide
Interactive subscribers were 2.3 million at June 30, 1999.
Operating expenses, excluding depreciation and amortization,
increased $7.0 million, or 63%, during the second quarter of 1999 and
$12.1 million, or 50%, for the six-month period when compared to the
same periods in 1998. The increase in operating expenses for both
periods was due primarily to additional employees added to accommodate
the TV Guide Entertainment Group's growth coupled with approximately
$3.5 million expended for the six-month period to advertise and launch
the rebranded TV Guide Channel compared to approximately $2.3 million
for the six-month period in the prior year to develop and launch a new
look for the Prevue Channel, the predecessor to the TV Guide Channel.
Programming expense increased $1.1 million, or 186%, for the quarter
and $1.4 million, or 116%, for the six-month period when compared to
the same periods in 1998. The increase is a result of new segments on
the TV Guide Channel and redevelopment of Sneak Prevue. In addition,
legal expense increased $650,000, or 127%, for the quarter and $1.5
million, or 150%, for the six-month period when compared to the same
periods in 1998. The increase is the result of increased litigation and
patent prosecution expense.
Depreciation and amortization during the second quarter of 1999
was $2.7 million, an increase of $385,000, or 16%, over the same period
in 1998. For the six months ended June 30, 1999, depreciation and
amortization increased $709,000, or 15%, over the same period in 1998.
The increase in depreciation and amortization was a result of the
acquisition of additional customer control units and video production
equipment necessary to support the various TV Guide Entertainment Group
products.
26
<PAGE>
United Video Group
Superstar/Netlink Group, LLC
The following table sets forth certain financial information for
SNG for the three months and six months ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30.
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $96,681 $104,140 $197,825 $200,426
Operating expenses 77,471 92,334 158,923 178,229
Depreciation and
amortization 2,225 2,229 4,453 4,916
------- -------- -------- --------
Operating income $16,985 $ 9,577 $ 34,449 $ 17,281
======= ======== ======== ========
Operating margin
percentage (before
depreciation and
amortization) 18% 9% 17% 9%
Revenues generated by SNG for the three months ended June 30, 1999
were $96.7 million, a decrease of $7.5 million, or 7%, over the same
period in 1998. For the six months ended June 30, 1999, revenues were
$197.8 million, a decrease of $2.6 million, or 1%, over the
corresponding period in 1998. Revenue decreased for both periods
primarily due to the continued decline in the number of C-band
subscribers. The decrease for the six months ended June 30, 1999 was
partially offset by increased revenue attributable to Turner Vision's
retail C-band operations which were acquired by SNG effective February
1, 1998. Retail subscribers purchasing programming from SNG as of June
30, 1999 totaled approximately 1.1 million, a decrease of 50,000, or
5%, during the quarter and a decrease of 167,000, or 14%, during the
prior twelve months. During the quarter ended June 30, 1999, the C-band
industry declined 3%, decreasing by 55,000 subscribers, and for the
twelve month period ended June 30, 1999, the industry decreased by
245,000 subscribers, or 12%.
Operating expenses, excluding depreciation and amortization, were
$77.5 million in the second quarter of 1999, a decrease of $14.9
million, or 16%, compared to the same period in 1998. For the first
six months of 1999, operating expenses, excluding depreciation and
amortization, decreased $19.3 million, or 11%, over the same period in
1998. The decrease in operating expenses in both periods of 1999 as
compared to the previous year's results was due primarily to an overall
reduction of expenses related to general subscriber decline and
programming fee reductions, partially offset for the six-month period
by increased expenses attributable to Turner Vision.
Depreciation and amortization for the second quarter and first six
months of 1999 was $2.2 million and $4.5 million, respectively,
relatively unchanged for the quarter and a decrease of $463,000 for
the six-month period when compared to the same period in 1998.
27
<PAGE>
UVTV
The following table sets forth certain financial information for
UVTV for the three months and six months ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30.
1999 1998(1) 1999 1998(1)
---- ------ ---- ------
(in thousands)
Revenues $22,235 $21,513 $44,011 $42,527
Operating expenses 11,255 10,336 21,273 20,448
Depreciation and
amortization 664 651 1,298 1,289
------- ------- ------- -------
Operating income $10,316 $10,526 $21,440 $20,790
======= ======= ======= =======
Operating margin
percentage (before
amortization) 46% 49% 49% 49%
(1) The operating results of UVTV have been restated from those
presented in previous reports to include the results of operations
of the Netlink Wholesale Division, which was acquired on March 1,
1999. The acquisition of the Netlink Wholesale Division was
accounted for as a combination of entities under common control,
similar to a pooling of interests.
UVTV's revenues for the three months ended June 30, 1999 were
$22.2 million, an increase of $721,000, or 3%, when compared to the
same period in 1998. For the six months ended June 30, 1999, revenues
were $44.0 million, an increase of $1.5 million, or 3%, from the
corresponding 1998 period. As of June 30, 1999, UVTV/WGN subscribers
were 46.5 million, an increase of 2.4 million, or 6%, from June 1998.
Operating expenses, excluding depreciation and amortization, were
$11.3 million during the second quarter of 1999, an increase of
$918,000, or 9%, from the second quarter of 1998. For the six months
ended June 30, 1999, operating expenses, excluding depreciation and
amortization were $21.3 million, an increase of $825,000, or 4%, from
the corresponding 1998 period.
Depreciation and amortization in the second quarter and six months
ended June 30, 1999 was $664,000 and $1.3 million, respectively, both
relatively unchanged compared to the same period in 1998.
28
<PAGE>
Other
The remaining operations of the United Video Group consist
primarily of those of SSDS, TV Guide Enterprise Solutions, SpaceCom
Systems and the Television Games Network.
Revenues for this group of businesses in the second quarter of
1999 were $17.7 million, an increase of $800,000, or 5%, compared to
the second quarter of 1998. For the six months ended June 30, 1999,
revenues were $32.7 million, a decrease of $1.7 million, or 5%,
compared to the corresponding 1998 periods. The increase in revenues
for the quarter is primarily attributable to higher SSDS revenues
relating to recruiting and integration services. The decrease in
revenues for the six-month period is primarily attributable to the
termination of TV Guide Enterprise Solutions service agent agreements
with program suppliers in the direct broadcast satellite market.
Operating expenses, excluding depreciation and amortization,
increased by $9.5 million, or 72%, during the second quarter of 1999 to
$22.7 million from the same period in 1998. Operating expenses,
excluding depreciation and amortization, increased by $12.2 million, or
45%, during the first six months of 1999 to $39.6 million from the same
period in 1998. The increase in operating expenses for both periods is
primarily attributable to funds expended to develop the Television
Games Network, which launched in July of 1999. The Company increased
its ownership interest in ODS Technologies, a privately held
interactive gaming company developing the Television Games Network, in
July 1998.
Depreciation and amortization for the second quarter and first six
months of 1999 increased by $584,000, or 45%, and $1.2 million, or 45%,
respectively, reflecting amortization of intangible assets acquired in
the ODS Technologies acquisition.
Liquidity and Capital Resources
For the six months ended June 30, 1999, net cash flows from
operating activities were $27.6 million ($22.9 million after
distributions to minority interests). This cash flow, plus existing
cash resources, proceeds from the issuance of $400.0 million in senior
subordinated notes, borrowings of $185.3 million under a revolving bank
credit facility, proceeds of approximately $131.8 million from the
issuance of common shares and from the exercise of stock options, cash
received in conjunction with the Liberty Transaction of $8.0 million
and net sales and maturities of marketable securities of $5.6 million,
were used to fund the Company's investments and acquisitions of $803.5
million, debt issuance costs of $15.5 million, capital expenditures of
$12.9 million and net reduction in the Company's capitalized lease
obligations and note payable of $797,000.
At June 30, 1999, the Company's cash, cash equivalents and
marketable securities aggregated $78.2 million, a decrease of $83.2
million from that as of December 31, 1998. The above total includes
$74.4 million of cash and cash equivalents and marketable securities
held by SNG, in which the Company had an approximate 80% ownership
interest as of June 30, 1999. As of June 30, 1999, approximately
$508,000 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 exposure to interest rate
fluctuations for periods in excess of 18 months.
On March 1, 1999, TVG acquired from Liberty the stock of three of
its subsidiaries that indirectly owned approximately 40% of SNG
(bringing TVG's ownership interest in SNG to approximately 80%) and
Liberty's Netlink Wholesale Division, which includes a business that
provides the Denver 6 services and a separate business that sells
programming packages to satellite master antenna television systems
serving hotels and multi-unit dwellings in exchange for 12,750,000
shares of TVG Class B Common Stock (the "Liberty Transaction").
Also on March 1, 1999, immediately after closing the Liberty
Transaction, the Company acquired from a subsidiary of News Corp. the
stock of certain corporations (the "TV Guide Transaction") which
publish TV Guide Magazine and other printed television program listings
guides and distribute, through the Internet, an entertainment service
known as TV Guide Online (formerly TV Guide Entertainment Network or
TVGEN). A subsidiary of News Corp. received 22,503,412 shares of TVG
Class A Common Stock, 37,496,588 shares of TVG Class B Common Stock and
$800 million in cash as consideration. In addition, the subsidiary of
News Corp. acquired 6,534,108 additional shares of TVG Class A Common
Stock for approximately $131 million in cash to equalize the TVG Class
A Common Stock ownership of Liberty and its affiliates and News Corp.
and its affiliates.
29
<PAGE>
On March 1, 1999, the Company issued $400 million in 8 1/8% senior
subordinated notes due 2009 and entered into a $300 million six-year
revolving credit facility and a $300 million 364-day revolving credit
facility with a group of banks. Proceeds from the issuance of the
senior subordinated notes and borrowings of approximately $185 million
under the six-year revolving credit facility were used to fund a
portion of the TV Guide Transaction cash consideration. Borrowings
outstanding under the 364-day revolving credit facility convert to a
five-year term loan at maturity. Borrowings under the credit facilities
bear interest either at the bank's prime rate or LIBOR, both plus a
margin based on a sliding scale tied to the Company's leverage ratio,
as defined in the facility. For the first year of the credit
facilities, the LIBOR margin is fixed at a minimum of 1.25%. The credit
facilities are subject to prepayment or reduction at any time without
penalty. As of June 30, 1999, the Company had available borrowing
capacity under the six-year revolving credit facility and 364-day
revolving credit facility of approximately $115 million and $300
million, respectively.
The Company believes that, based on the Company's current level of
operations, cash and cash equivalents, marketable securities and cash
generated from operations, together with expected availability under
the bank credit facilities, subject to the covenants therein, will be
sufficient to enable the Company to service indebtedness, make capital
expenditures and meet operating costs and expenses for the foreseeable
future. If and when appropriate, the Company or its affiliates may
elect to incur additional indebtedness or to raise equity in the public
or private markets; however, there can be no assurances that the
Company will be able to do so.
The bank credit facilities and the indenture governing the notes
impose significant operating and financial restrictions on the Company.
These restrictions may significantly limit or prohibit the Company from
engaging in certain transactions, including the following: borrowing
additional money, paying dividends or other distributions to
stockholders, allowing restricted subsidiaries to guarantee other debt,
limiting the ability of restricted subsidiaries to make payments to the
Company and other restricted subsidiaries, creating liens on assets,
selling assets, entering into transactions with affiliates, and
engaging in certain mergers or consolidations. In addition, the
indenture limits the Company's ability and the ability of restricted
subsidiaries to make investments, but only if the credit ratings on the
notes fall below certain levels. These restrictions could limit the
Company's ability to obtain financing for working capital, capital
expenditures, acquisitions, debt service requirements and other
purposes. The restrictions may also affect the Company's ability to
actively manage its businesses, including entering into joint ventures
that advance the Company's strategy.
As of June 30, 1999, the Company had approximately $603.0 million
of long-term debt outstanding (including current portions) and unused
borrowing capacity under bank credit facilities of approximately $414.7
million (subject to customary borrowing conditions). In addition,
subject to restrictions contained in the bank credit facilities and the
indenture governing the notes, the Company may borrow more money for
working capital, capital expenditures, acquisitions and other purposes.
The Company's significant indebtedness could have important
consequences. For example, the Company's ability to obtain any
necessary financing in the future for working capital, capital
expenditures, acquisitions, debt service requirements and other
purposes may be limited; a large portion of the cash flow of the
Company's subsidiaries must be dedicated to the payment of interest on
debt and will not be available for financing operations and other
business activities; the level of debt and the covenants governing such
debt could limit the Company's flexibility in planning for, or reacting
to, changes in the Company's business because certain financing options
may be limited or prohibited; the Company's degree of leverage may be
more than that of competitors, which may place the Company at a
competitive disadvantage; and the Company's level of debt may make the
Company more vulnerable in the event of a downturn in the Company's
business or the economy in general.
The Company's ability to meet debt service obligations and
specified financial ratios and tests will depend on future performance.
The Company's future performance, in turn, will be subject to general
economic conditions and to financial, business and other factors
affecting operations, many of which are beyond its control. In the
event of a default under the bank credit facilities, the lenders could
terminate their commitments and declare all amounts borrowed, together
with accrued interest and other fees, to be due and payable. Borrowings
under other debt instruments that contain cross-acceleration or cross-
default provisions, including the senior subordinated notes, may also
be accelerated and become due and payable. If any of these events
should occur, the Company may not be able to pay such amounts.
30
<PAGE>
SSDS has a revolving credit facility with a bank which provides
for borrowings up to the lesser of 80% of billed trade receivables of
SSDS outstanding less than 90 days, subject to certain conditions, or
$5.0 million which expires April 30, 2000. Borrowings under this credit
facility bear interest at the bank's stated prime rate plus a margin.
Outstanding borrowings under the credit facility as of June 30, 1999
were $2.7 million.
The Company collects in advance a majority of its TV Guide
magazine subscription fees, SNG subscription fees and certain of its
UVTV superstation and TV Guide Networks' revenues. As of June 30,
1999, the unearned portion of all prepayments totaled $339.3 million,
of which approximately $240.2 million, or 71%, was attributable to TV
Guide magazine and approximately $92.8 million, or 27%, was
attributable to SNG. The Company's liability for prepaid magazine
subscriptions is limited to the unearned prepayments in the event
customers cancel their subscriptions. The Company's liability for other
prepayments is limited to a refund of unearned prepayments in the event
that the Company is unable to provide service. No material refunds
have been paid to date.
Under the terms of the capital leases for two satellite
transponders placed in service by UVTV and TV Guide Networks in 1992,
the Company was obligated for net minimum lease payments aggregating
$14.9 million as of June 30, 1999, a reduction of $1.8 million, or 11%,
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 $3.7 million. The Company also leases various
other satellite transponders accounted for as operating leases. These
operating leases accounted for approximately $6.3 million in operating
expenses, net of sublease revenue, during the six months ended June 30,
1999.
Capital expenditures during the six months ended June 30, 1999,
of $12.9 million were principally attributable to the expansion of the
Company's teleport facilities, purchase of control units provided to TV
Guide Network's cable television customers, data processing equipment
and systems and furniture, fixtures and facilities used by the Company.
The Company is currently reassessing its business initiatives and
associated capital expenditure requirements for the remainder of 1999.
At the discretion of its management committee and in keeping with
certain TVG debt covenants, SNG makes periodic cash distributions to
its members. During the six months ended June 30, 1999, cash
distributions to minority interests in SNG aggregated $4.7 million.
The Board of Directors has authorized the Company to repurchase
from time to time up to an aggregate of 7.0 million shares of the
Company's Class A Common Stock using existing cash resources. No
repurchases have been made under this plan during 1999. To date,
approximately 1.4 million shares have been repurchased by the Company.
The Company has evaluated and continues to evaluate possible
strategies, acquisitions and dispositions of related businesses and
assets, some of which may be significant, on an ongoing basis and at
any given time it may be engaged in discussions or negotiations or
enter into agreements with respect to potential transactions and
continues to explore opportunities to expand the market shares of its
existing businesses, develop new products and acquire interests in new
businesses.
On July 29, 1999, the Company announced that it had received
notification from Source Media, Inc. of their intent not to pursue the
previously announced transaction to form a joint venture to pursue
development of local content and interactive services for the cable
television and satellite markets. See Note 4 to the financial
statements included herein.
31
<PAGE>
Year 2000 Matters
The Company and the businesses acquired in the TV Guide
Transaction and the Liberty Transaction are continuing to address the
year 2000 issue as described in detail below.
In 1997, the Company began the process of identifying, evaluating
and implementing changes to its computer systems, applications and
certain equipment with embedded technology necessary to address the
year 2000 issue. The Company has established an enterprise-wide
program to prepare for the year 2000 and is utilizing both internal and
external resources to identify, correct and test the systems for year
2000 compliance. The historical and estimated future costs related to
the year 2000 issues have not been and are not expected to be a
material cost to the Company.
The objective of the Company's year 2000 efforts is to determine
and assess the risks of the year 2000 issue and to plan and institute
mitigating actions to reduce those risks to acceptable levels. The
Company's standard for compliance requires that a computer system or
business process be designed to be used prior to, on and after January
1, 2000 without error in dates and date related data, including without
limitation, calculating, comparing, indexing and sequencing prior to,
on and after January 1, 2000.
The year 2000 project involves a four-phase approach to
determining year 2000 readiness of the Company's systems, software and
equipment. Phase 1, Assessment, involves the inventory of all systems,
software and equipment and the identification of any year 2000 issues.
Phase 1 was completed in May 1999. Phase 2, Remediation, involves
repairing, upgrading and/or replacing any non-compliant equipment and
systems. Presently, Phase 2 is 97% complete. Phase 3, Testing, involves
testing the Company's systems, software and equipment for year 2000
readiness, or in certain cases, relying on test results provided to the
Company. Phase 3 is 95% complete with the balance scheduled for
completion by September 1999. Phase 4, Implementation, involves placing
compliant systems, software and equipment into production or service.
Phase 4 is 89% complete with the balance due for completion by
September 1999. The completion dates set forth above are based on the
Company's current expectations. However, due to the uncertainties
inherent in year 2000 remediation, there can be no assurance that the
projects will be completed on such dates.
32
<PAGE>
The Company's year 2000 project team is focusing on the following
major areas:
Core Computer Systems. Information technology systems account for
much of the year 2000 work and include all computer systems and
technology managed by the Company. The Company's core computer systems
relate to editorial, fulfillment, subscriber management, billing and
production functions. All core systems have been assessed, plans are in
place and work is being undertaken to test and implement changes where
required.
Equipment and Facilities. An inventory of all critical office
equipment and infrastructure has been completed and the Company has
completed minor modifications to these systems.
As part of the year 2000 project, the Company has contacted its
significant suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate
their year 2000 compliance issues. To date, no significant customers or
vendors have informed the Company that a material year 2000 issue
exists which could have a material effect on the Company. There can be
no assurance that the systems of other companies on which the Company's
business relies will be timely converted or that failure to convert by
another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the
Company and its operations.
The Company's failure to resolve year 2000 issues on or before
December 31, 1999 could result in system failures causing disruption in
routine business activities. Also, if critical systems related to the
Company's services are not successfully remediated, the Company could
face claims of breach of contract from customers, certain programming
providers and from other businesses that rely on the Company's
programming services. Additionally, failure of third parties upon whom
the Company relies to timely remediate their year 2000 issues could
result in disruption in the Company's daily operations and core
services. While the Company believes the year 2000 project will
adequately address the internal year 2000 issues, the overall risks
associated with the year 2000 issue remain difficult to accurately
describe and quantify until the Company obtains additional information
regarding the remediation activities of its third party suppliers and
customers. There can be no assurance that the year 2000 issue will not
have a material adverse effect on the Company and its operations.
The Company is in the process of developing contingency plans on
all critical processes to minimize the impact of any year 2000 related
interruption. These plans are near completion and completion is
expected during August 1999.
The Company's capital spending plan provides for technology
investments in the periods prior to December 31, 1999, for systems
which would be operational after December 31, 1999. As a result of its
assessment and capital planning, no acceleration of material planned
system replacements were made due to year 2000 issues.
33
<PAGE>
Cautionary Statement
This report contains certain "forward-looking statements" within
the meaning of federal securities laws about the Company's financial
condition, results of operations and business. Such forward-looking
statements may include, among other things, statements concerning:
future acquisitions, changes in net revenues from the Company's
businesses, the impact of governmental regulations, competitive
conditions in industries in which the Company does business, liquidity
and future capital expenditures, year 2000 matters, the outcome of
certain litigation, alternative sources of supplies and services needed
by the Company and developments in the Company's interactive guide
businesses. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause the Company's
actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by the Company in those statements. The important factors that
could prevent the Company from achieving its stated goals include, but
are not limited to, the following:
-- continued declines in circulation and operating profits for TV
Guide Magazine,
-- changes in the regulation of the cable television and/or
satellite industries adverse to the Company's services,
-- loss of the cable and/or satellite compulsory licenses provided
by federal law,
-- the willingness of cable and satellite 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 to protect the Company's intellectual property
rights, and defend against claims by others asserting
infringement of their intellectual property rights,
-- a reduction in demand for advertising and competition from other
media companies for audience and advertising revenues,
-- changes in paper prices or postal rates,
-- operating and financial risks related to integrating the TV
Guide businesses and other acquired businesses and
-- adequacy of capital resources to allow the Company to execute
its business plans.
Because forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those
expressed or implied by such statements. The cautionary statements
contained or referred to in this section should be considered in
connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on the Company's behalf
may issue. The Company undertakes no obligation to review or confirm
analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate changes is primarily
related to variable rate debt issued under its $300 million six-year
revolving credit facility and $300 million 364-day revolving credit
facility, both of which were entered into in conjunction with the TV
Guide Transaction. Borrowings under the 364-day revolving credit
facility convert to a five-year term loan at maturity. Because the
interest rates on these facilities are variable, based upon the bank's
prime rate or LIBOR, the Company's interest expense and cash flow are
affected by interest rate fluctuations. At June 30, 1999, the Company
had $185 million outstanding under the six-year revolving credit
facility and no borrowings outstanding under the 364-day revolving
credit facility. If interest rates were to increase or decrease by 100
basis points, the result, based upon the existing outstanding debt,
would be an annual increase or decrease of $1.9 million in interest
expense and a corresponding decrease or increase of $1.9 million in the
Company's cash flow before income taxes.
34
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits, including lawsuits
charging infringement of patents owned by or licensed to Gemstar
Development Corporation ("Gemstar") and its affiliates relating to
interactive television guides. These lawsuits relate to the Company's
digital and analog interactive guide products. If the Company is not
successful in its lawsuits, the Company may be required to obtain a
license to develop and market one or more of its services, to cease
developing or marketing such services or to redesign such services.
There can be no assurances that the Company will be able to obtain such
licenses or that it will be able to obtain them at commercially
reasonable rates, or if unable to obtain licenses that it will be able
to redesign its services to avoid infringement. The Company's material
litigation, including the lawsuit with Gemstar, is described in note 4
to the financial statements included herein, which is incorporated by
reference in this Item 1.
On August 3, 1999, Source Media, Inc. ("Source") filed an action
in the District Court, Dallas County, Texas asserting breach of the Non-
Disclosure Agreement dated September 15, 1998 between the Company and
Source, seeking damages and injunctive relief. While the Company prepares
its response, the parties have engaged in settlement discussions. The
Company has not provided for any potential loss as a result of this
litigation.
35
<PAGE>
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 July 29, 1999, the Company submitted for vote of the
stockholders the following matters; 827,006,384 votes of the Company's
Class A Common Stock and Class B Common Stock were entitled to be voted
at the meeting and 820,975,722 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 2000. The nominees recommended by
management and the board of directors were all elected.
Votes for the directors were as follows:
For Withheld
--- --------
Joachim Kiener 820,604,097 371,625
Peter C. Boylan III 820,604,097 371,625
Robert R. Bennett 820,604,097 371,625
Chase Carey 820,604,097 371,625
Peter Chernin 820,604,097 371,625
Nicholas Donatiello, Jr. 820,604,097 371,625
Gary S. Howard 820,604,097 371,625
Larry E. Romrell 820,604,097 371,625
J. David Wargo 820,604,097 371,625
b. the ratification and selection by the Board of Directors of
KPMG LLP as the Company's independent auditors for the year
ending December 31, 1999. The selection was ratified with
820,972,947 votes for, 2,425 votes against and 350 votes
abstaining.
ITEM 5. OTHER INFORMATION
None
36
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
No. Exhibit Description
12.1 ** Computation of Ratio of Earnings to Fixed Charges
27.1 ** Financial Data Schedule - Six months ended June 30, 1999
- -----------
** Filed herewith
b. Reports on Form 8-K
On June 11, 1999, the Company filed a report on Form 8-K
which included certain pro forma financial information for
the quarter ended March 31, 1999.
No other reports were filed on Form 8-K during the second
quarter of 1999.
37
<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.
TV Guide, Inc.
(Registrant)
Date: August 13, 1999 By: /s/ Peter C. Boylan III
-------------------------------
Peter C. Boylan III
President and
Chief Operating Officer
By: /s/ Craig M. Waggy
------------------------------
Craig M. Waggy
Senior Vice President and
Chief Financial Officer
38
<PAGE>
Exhibit 12.1
TV GUIDE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SIX MONTHS ENDED JUNE 30,
(amounts in thousands, except for ratios)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Earnings Available for
Fixed Charges:
Income before income
taxes and minority
interest $19,254 $28,902 $45,529 $90,855
Interest and expense
on indebtedness 12,318 443 18,353 934
One-third of rental
expense, net of
sub-leasing income
for operating
leases 2,180 1,405 3,727 2,777
------- ------- ------- -------
$33,752 $30,750 $67,609 $94,566
======= ======= ======= =======
Fixed Charges:
Interest and expense
on indebtedness $12,318 $ 443 $18,353 $ 934
One-third of rental
expense, net of
sub-leasing income
for operating
leases 2,180 1,405 3,727 2,777
------- ------- ------- -------
$14,498 $ 1,848 $22,080 $ 3,711
======= ======= ======= =======
Ratio of earning to
fixed charges 2.33 16.64 3.06 25.48
<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 JUNE 30, 1999 OF TV
GUIDE, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000913061
<NAME> TV GUIDE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 77,737
<SECURITIES> 508
<RECEIVABLES> 280,143
<ALLOWANCES> 11,647
<INVENTORY> 28,750
<CURRENT-ASSETS> 394,451
<PP&E> 149,767
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<CURRENT-LIABILITIES> 488,784
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0
0
<COMMON> 1,521
<OTHER-SE> 1,481,699
<TOTAL-LIABILITY-AND-EQUITY> 3,673,413
<SALES> 0
<TOTAL-REVENUES> 514,808
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<INCOME-PRETAX> 45,529
<INCOME-TAX> 15,646
<INCOME-CONTINUING> 22,598
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