SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE PERIOD ENDED SEPTEMBER 30, 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 November 8, 1999:
TITLE OF CLASS NUMBER OF SHARES
Class A Common Stock $.01 Par Value 77,226,248
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)
September 30, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 93,758 $155,644
Marketable securities, at fair value 9,136 5,804
Accounts receivable, net of allowance
for doubtful accounts 280,157 64,632
Inventory 21,847 1,220
Prepaid expenses and other 33,962 4,948
Deferred tax asset 4,296 1,811
---------- --------
Total current assets 443,156 234,059
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 58,771 45,762
Intangible assets, net of accumulated
amortization 2,801,539 113,523
Other assets, net of accumulated
amortization 28,010 19,162
---------- --------
Total assets $3,331,476 $412,506
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,816 $ 5,655
Accrued liabilities 129,016 57,365
Note payable and current portion of
capital lease obligations 7,366 5,463
Customer prepayments 287,501 109,929
---------- --------
Total current liabilities 494,699 178,412
Deferred tax liability 650,314 17,280
Long-term deferred subscription
revenue 62,315 --
Capital lease obligations and
long-term debt 625,321 13,007
Other long-term liabilities 756 367
Minority interest 7,191 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 1,285,011 22,191
Accumulated other comprehensive
earnings (loss), net of tax 3,577 (54)
Retained earnings 200,771 176,853
---------- --------
Total stockholders' equity 1,490,880 199,844
---------- --------
Total liabilities and stockholders'
equity $3,331,476 $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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Satellite-delivered
programming services $126,959 $139,386 $387,793 $402,016
Magazine subscription
and newsstand sales 104,947 -- 242,372 --
Advertising sales 55,172 9,762 144,426 28,871
Systems integration
services 9,908 10,880 30,224 30,039
Other 5,645 (598) 12,624 (287)
-------- -------- -------- --------
302,631 159,430 817,439 460,639
Operating expenses:
Programming, printing,
distribution and
delivery 173,345 83,129 448,987 247,393
Selling, general
and administrative 76,394 36,800 201,911 110,767
Depreciation and
amortization 34,689 7,300 85,971 20,900
-------- -------- -------- --------
284,428 127,229 736,869 379,060
-------- -------- -------- --------
Operating income 18,203 32,201 80,570 81,579
Gain on issuance of
equity by subsidiary -- -- -- 39,225
Interest expense (12,334) (352) (30,687) (1,286)
Other income, net 1,728 1,418 3,243 4,604
-------- ------- -------- --------
Income before income
taxes and minority
interest 7,597 33,267 53,126 124,122
Provision for income
taxes (3,473) (12,012) (19,119) (46,059)
Minority interest in
earnings (2,806) (195) (10,091) (126)
-------- -------- -------- --------
Net income $ 1,318 $ 21,060 $ 23,916 $ 77,937
======== ======== ======== ========
Net income per share:
Basic $ .01 $ 0.25 $ .17 $ 0.91
Diluted $ .01 $ 0.24 $ .17 $ 0.90
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)
Nine Months Ended
September 30,
1999 1998
---- ----
Operating activities:
Net income $ 23,916 $ 77,937
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on issuance of equity by
subsidiary -- (39,225)
Depreciation and amortization 85,971 20,900
Minority interest in earnings 10,091 126
Deferred income taxes (22,507) 16,977
Other 2,677 (239)
Changes in operating assets and
liabilities, net of the effect
of acquisitions:
Accounts receivable (68,293) 9,118
Inventory 18,681 868
Prepaid expenses and other (10,573) (3,093)
Accounts payable 761 (4,229)
Accrued liabilities 29,161 824
Customer prepayments (26,578) 2,186
--------- --------
Net cash provided by operating activities 43,307 82,150
Investing activities:
Investments and acquisitions, net of
cash acquired (815,876) (38,651)
Capital expenditures (21,328) (6,461)
Purchases of marketable securities (3,548) (73,409)
Sales of marketable securities 4,812 54,551
Maturities of marketable securities 1,104 87,427
Other (1,675) 506
--------- --------
Net cash provided by (used in)
investing activities (836,511) 23,963
Financing activities:
Issuance of senior subordinated notes 400,000 --
Borrowings under bank credit facilities 215,300 --
Debt issuance costs (15,590) --
Repayment of note payable, capital lease
obligations and long-term debt (1,083) (10,326)
Issuance of common stock 132,646 876
Repurchase of common stock -- (15,238)
Contributions from (distributions to)
Liberty-Netlink Wholesale Division 7,971 (8,635)
Distributions to minority interests (7,544) (408)
Other (382) (86)
--------- --------
Net cash provided by (used in) financing
activities 731,318 (33,817)
--------- --------
Net increase (decrease) in cash and cash
equivalents (61,886) 72,296
Cash and cash equivalents at beginning of
period 155,644 32,556
--------- --------
Cash and cash equivalents at end of period $ 93,758 $104,852
========= ========
Supplemental disclosures of cash
flow information:
Interest paid $ 10,607 $ 2,779
Income taxes paid $ 46,216 $ 27,370
1998 amounts have been restated for pooling of interests.
See accompanying notes.
4
<PAGE>
TV GUIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 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 3.
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. Gemstar Merger
On October 4, 1999, the Company and Gemstar International Group
Limited ("Gemstar") announced that they had entered into a definitive
merger agreement under which the Company will become a wholly owned
subsidiary of Gemstar. Under the merger agreement, the Company's
stockholders will receive .6573 shares of Gemstar common stock for each
share of TV Guide Class A and B Common Stock. The exchange ratio is not
subject to adjustment. The transaction, which is expected to close in
the first half of 2000, is subject to stockholder and regulatory
approvals.
3. 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 2,732,074
Other assets 176
----------
2,932,245
Liabilities:
Current liabilities 358,334
Deferred tax liability 650,985
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 $ 108,800 3 years
Trademarks and patents $ 390,600 17-40 years
Publishing rights $1,265,900 40 years
Goodwill $ 966,774 40 years
The above allocation of purchase price is based on an independent
evaluation of the assets acquired. This allocation differs from that
reported in previous quarterly reports, which was based on preliminary
information.
In connection with the TV Guide Transaction, the Company provided
a reserve for approximately $15 million of costs related primarily to
the planned termination of certain employees and the relocation of
certain operations. During the quarter ended September 30, 1999, the
Company charged approximately $1 million of severance costs to such
reserves and $14 million is included in accrued liabilities at
September 30, 1999. The Company is still finalizing its plans with
respect to integrating the operations of the companies and evaluating
the extent to which the remaining purchase reserves will be required.
The final assessment is expected to be completed in the near term.
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 nine months ended September 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 $936,296 $935,010
Net income 23,608 33,486
Net income per share:
Basic $ 0.16 $ 0.22
Diluted 0.15 0.22
7
<PAGE>
4. Long-Term Debt and Credit Arrangements
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 September 30, 1999, the Company had
available borrowing capacity under the six-year revolving credit
facility and 364-day revolving credit facility of approximately $84.7
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.
SSDS, Inc. ("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. The credit facility expires April 30,
2000 and is secured by substantially all of SSDS's assets. 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 September 30, 1999 were $3.4 million and are classified as
current liabilities. SSDS is not in compliance with certain financial
covenants contained in the credit agreement, but has received
appropriate waivers.
8
<PAGE>
5. Contingencies
On October 8, 1993, the Company received correspondence from
StarSight Telecast, Inc. ("StarSight"), now a wholly owned subsidiary
of 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 did not issue 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. On October 4, 1999, the Company and Gemstar
announced that they had entered into a definitive merger agreement
under which TV Guide, Inc. will become a wholly owned subsidiary of
Gemstar, subject to shareholder and regulatory approval. The Company
expects that the litigation with Gemstar and its affiliates will be
dismissed in connection with the closing of the transaction with
Gemstar. Were that transaction not to close, there could be no
assurance that this litigation will 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. As discussed above, the Company expects that this
litigation will be dismissed in connection with the closing of the
merger transaction with Gemstar. Were that transaction not to close,
there could be no assurance that this litigation will 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 and will be heard on December
14, 1999. 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.
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>
6. 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 September 30 Nine Months Ended September 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 $ 1,318 $ 21,060 $ 23,916 $ 77,937
======== ======== ======== ========
Weighted average
number of shares
of common stock
outstanding 152,107 $0.01 85,908 $0.25 137,252 $0.17 86,073 $0.91
===== ===== ===== =====
Effect of dilutive
securities -
stock options 1,655 731 1,681 976
-------- ------- -------- ------
Weighted average
number of shares
of common stock
and dilutive
potential
common shares 153,762 $0.01 86,639 $0.24 138,933 $0.17 87,049 $0.90
======= ===== ====== ===== ======= ===== ====== =====
</TABLE>
12
<PAGE>
7. Segment Information
Segment information has been prepared in accordance with Statement
of Financial Accounting Standards 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 September 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 $ -- $ 10,287 $ 95,586 $ 13,323 $ 7,763 $ -- $ 126,959
Magazine subscription
and newsstand sales 104,947 -- -- -- -- -- 104,947
Advertising sales 42,535 12,637 -- -- -- -- 55,172
Systems integration
services -- -- -- -- 9,908 -- 9,908
Other 5,613 -- -- -- 32 -- 5,645
Intersegment revenues 1,302 -- -- 6,851 -- (8,153) --
---------- -------- -------- -------- --------- ----------- ----------
Total revenues 154,397 22,924 95,586 20,174 17,703 (8,153) 302,631
Operating expenses,
excluding
depreciation
and amortization 118,136 21,693 78,424 11,902 27,737 (8,153) 249,739
---------- -------- -------- -------- --------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ 36,261 $ 1,231 $ 17,162 $ 8,272 $ (10,034) $ -- 52,892
========== ======== ======== ======== ========= ===========
Depreciation and
amortization (34,689)
Interest expense (12,334)
Other income, net 1,728
----------
Income before income
taxes and minority
interest $ 7,597
==========
Segment assets $2,948,180 $ 78,243 $144,472 $ 84,408 $ 129,636 $ (53,463) $3,331,476
========== ======== ======== ======== ========= =========== ==========
1998
Revenues from external
customers:
Satellite-delivered
programming services $ -- $ 10,101 $106,031 $ 15,298 $ 7,956 $ -- $ 139,386
Advertising sales -- 9,762 -- -- -- -- 9,762
Systems integration
services -- -- -- -- 10,880 -- 10,880
Other -- -- -- -- (598) -- (598)
Intersegment revenues -- -- -- 5,923 -- (5,923) --
---------- -------- -------- -------- --------- ----------- ----------
Total revenues -- 19,863 106,031 21,221 18,238 (5,923) 159,430
Operating expenses,
excluding
depreciation
and amortization -- 12,311 86,923 9,818 16,800 (5,923) 119,929
---------- -------- -------- -------- --------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ -- $ 7,552 $ 19,108 $ 11,403 $ 1,438 $ -- 39,501
========== ======== ======== ======== ========= ===========
Depreciation and
amortization (7,300)
Interest expense (352)
Other income, net 1,418
----------
Income before income
taxes and minority
interest $ 33,267
==========
</TABLE>
Segment information for each of the nine-month periods ended
September 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 $ -- $ 30,458 $293,411 $ 44,012 $ 19,912 $ -- $ 387,793
Magazine subscription
and newsstand sales 242,372 -- -- -- -- -- 242,372
Advertising sales 108,637 35,789 -- -- -- -- 144,426
Systems integration
services -- -- -- -- 30,224 -- 30,224
Other 12,398 -- -- -- 226 -- 12,624
Intersegment revenues 1,302 -- -- 20,173 -- (21,475) --
---------- -------- -------- -------- -------- ----------- ----------
Total revenues 364,709 66,247 293,411 64,185 50,362 (21,475) 817,439
Operating expenses,
excluding
depreciation
and amortization 276,277 58,269 237,347 33,175 67,305 (21,475) 650,898
---------- -------- -------- -------- -------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ 88,432 $ 7,978 $ 56,064 $ 31,010 $(16,943) $ -- 166,541
========== ======== ======== ======== ======== ===========
Depreciation and
amortization (85,971)
Interest expense (30,687)
Other income, net 3,243
----------
Income before income
taxes and minority
interest $ 53,126
==========
1998
Revenues from external
customers:
Satellite-delivered
programming services $ -- $ 27,150 $306,457 $ 45,540 $ 22,869 $ -- $ 402,016
Advertising sales -- 28,871 -- -- -- -- 28,871
Systems integration
services -- -- -- -- 30,039 -- 30,039
Other -- -- -- -- (287) -- (287)
Intersegment revenues -- -- -- 18,208 -- (18,208) --
---------- -------- -------- -------- -------- ----------- ----------
Total revenues -- 56,021 306,457 63,748 52,621 (18,208) 460,639
Operating expenses,
excluding
depreciation
and amortization -- 36,769 265,152 30,266 44,181 (18,208) 358,160
---------- -------- -------- -------- -------- ----------- ----------
Earnings before
interest, income
taxes,
depreciation and
amortization $ -- $ 19,252 $ 41,305 $ 33,482 $ 8,440 $ -- 102,479
========== ======== ======== ======== ======== ===========
Depreciation and
amortization (20,900)
Gain on issuance of
equity by subsidiary 39,225
Interest expense (1,286)
Other income, net 4,604
----------
Income before income
taxes and minority
interest $ 124,122
==========
</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>
8. 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 September 30,
1999 and 1998 was $4.7 million and $24.9 million, respectively, and for
the nine months ended September 30, 1999 and 1998 was $27.5 million and
$85.6 million, respectively.
9. 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") guaranteed 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 SEPTEMBER 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 $ -- $ 12,578 $ 81,180 $ -- $ 93,758
Marketable securities,
at fair value -- 9,136 -- -- 9,136
Accounts receivable,
net of allowance
for doubtful
accounts -- 241,458 38,699 -- 280,157
Accounts and notes
receivable from
affiliates -- 108,637 4,651 (113,288) --
Other current assets -- 51,206 8,899 -- 60,105
---------- ---------- -------- ----------- ----------
Total current
assets -- 423,015 133,429 (113,288) 443,156
Property, plant and
equipment, at cost,
net of accumulated
depreciation and
amortization -- 45,713 13,058 -- 58,771
Intangible assets, net
of accumulated
amortization -- 2,693,804 107,735 -- 2,801,539
Investment in
subsidiaries, at
equity 2,154,951 -- -- (2,154,951) --
Other assets, net of
accumulated
amortization 14,518 12,973 521 (2) 28,010
---------- ---------- -------- ----------- ----------
Total assets $2,169,469 $3,175,505 $254,743 $(2,268,241) $3,331,476
========== ========== ======== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 66,338 $ 4,478 $ -- $ 70,816
Accounts and notes
payable to
affiliates 59,823 17,608 35,857 (113,288) --
Accrued liabilities 3,466 74,219 51,331 -- 129,016
Note payable and
current portion
of capital lease
obligations -- 3,947 3,421 (2) 7,366
Customer prepayments -- 193,136 94,365 -- 287,501
---------- ---------- -------- ----------- ----------
Total current
liabilities 63,289 355,248 189,452 (113,290) 494,699
Deferred tax
liability and other
long-term
liabilities -- 699,985 13,400 -- 713,385
Capital lease
obligations and
long-term debt 615,300 625,321 -- (615,300) 625,321
Minority interest -- -- 4,031 3,160 7,191
Stockholders' equity:
Common stock 1,521 35,696 211 (35,907) 1,521
Other stockholders'
equity 1,489,359 1,459,255 47,649 (1,506,904) 1,489,359
---------- ---------- -------- ----------- ----------
Total stock-
holders' equity 1,490,880 1,494,951 47,860 (1,542,811) 1,490,880
---------- ---------- -------- ----------- ----------
Total liabilities and
stockholders' equity $2,169,469 $3,175,505 $254,743 $(2,268,241) $3,331,476
========== ========== ======== =========== ==========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
QUARTER ENDED SEPTEMBER 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 28,194 $104,861 $ (6,096) $126,959
Magazine subscription
and newsstand sales -- 106,249 -- (1,302) 104,947
Advertising sales -- 55,172 -- -- 55,172
Systems integration
services -- -- 9,908 -- 9,908
Other -- 5,613 32 -- 5,645
------- -------- -------- -------- --------
-- 195,228 114,801 (7,398) 302,631
Operating expenses:
Programming, printing,
distribution and
delivery -- 103,592 77,151 (7,398) 173,345
Selling, general and
administrative -- 45,306 31,088 -- 76,394
Depreciation and
amortization -- 30,101 4,588 -- 34,689
------- -------- -------- -------- --------
-- 178,999 112,827 (7,398) 284,428
------- -------- -------- -------- --------
Operating income -- 16,229 1,974 -- 18,203
Interest expense (12,032) (12,200) (53) 11,951 (12,334)
Other income, net 13,350 1,201 527 (13,350) 1,728
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 1,318 5,230 2,448 (1,399) 7,597
(Provision) benefit for
income taxes -- 1,081 (4,554) -- (3,473)
Minority interest in
(earnings) losses -- -- (3,414) 608 (2,806)
------- -------- -------- -------- --------
Net income $ 1,318 $ 6,311 $ (5,520) $ (791) $ 1,318
======= ======== ======== ======== ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 86,953 $320,258 $(19,418) $387,793
Magazine subscription
and newsstand sales -- 243,674 -- (1,302) 242,372
Advertising sales -- 144,426 -- -- 144,426
Systems integration
services -- -- 30,224 -- 30,224
Other -- 12,398 226 -- 12,624
-------- -------- -------- -------- --------
-- 487,451 350,708 (20,720) 817,439
Operating expenses:
Programming, printing,
distribution and
delivery -- 244,221 225,486 (20,720) 448,987
Selling, general and
administrative -- 115,814 86,097 -- 201,911
Depreciation and
amortization -- 72,031 13,940 -- 85,971
-------- -------- -------- -------- --------
-- 432,066 325,523 (20,720) 736,869
-------- -------- -------- -------- --------
Operating income -- 55,385 25,185 -- 80,570
Interest expense (29,777) (30,495) (111) 29,696 (30,687)
Other income, net 53,693 1,878 1,365 (53,693) 3,243
-------- -------- -------- -------- --------
Income before income
taxes and minority
interest 23,916 26,768 26,439 (23,997) 53,126
Provision for income
taxes -- (3,400) (15,719) -- (19,119)
Minority interest in
(earnings) losses -- -- (11,225) 1,134 (10,091)
-------- -------- -------- -------- --------
Net income $ 23,916 $ 23,368 $ (505) $(22,863) $ 23,916
======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
QUARTER ENDED SEPTEMBER 30, 1998
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 28,970 $116,339 $ (5,923) $139,386
Advertising sales -- 9,762 -- -- 9,762
Systems integration
services -- -- 10,880 -- 10,880
Other -- -- (598) -- (598)
------- -------- -------- -------- --------
-- 38,732 126,621 (5,923) 159,430
Operating expenses:
Programming, printing,
distribution and
delivery -- 8,792 80,260 (5,923) 83,129
Selling, general and
administrative -- 11,777 25,023 -- 36,800
Depreciation and
amortization -- 2,854 4,446 -- 7,300
------- -------- -------- -------- --------
-- 23,423 109,729 (5,923) 127,229
------- -------- -------- -------- --------
Operating income -- 15,309 16,892 -- 32,201
Interest expense -- (314) (38) -- (352)
Other income, net 21,060 (374) 1,792 (21,060) 1,418
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 21,060 14,621 18,646 (21,060) 33,267
Provision for income
taxes -- (4,231) (7,781) -- (12,012)
Minority interest in
(earnings) losses -- -- -- (195) (195)
------- -------- -------- -------- --------
Net income $21,060 $ 10,390 $ 10,865 $(21,255) $ 21,060
======= ======== ======== ======== ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands)
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite-delivered
programming services $ -- $ 83,935 $336,289 $(18,208) $402,016
Advertising sales -- 28,871 -- -- 28,871
Systems integration
services -- -- 30,039 -- 30,039
Other -- -- (287) -- (287)
------- -------- -------- -------- --------
-- 112,806 366,041 (18,208) 460,639
Operating expenses:
Programming, printing,
distribution and
delivery -- 25,815 239,786 (18,208) 247,393
Selling, general and
administrative -- 37,126 73,641 -- 110,767
Depreciation and
amortization -- 7,848 13,052 -- 20,900
------- -------- -------- -------- --------
-- 70,789 326,479 (18,208) 379,060
------- -------- -------- -------- --------
Operating income -- 42,017 39,562 -- 81,579
Gain on issuance of
equity by
subsidiary -- -- 39,225 -- 39,225
Interest expense -- (988) (298) -- (1,286)
Other income, net 77,937 1,222 3,382 (77,937) 4,604
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 77,937 42,251 81,871 (77,937) 124,122
Provision for income
taxes -- (14,202) (31,857) -- (46,059)
Minority interest in
losses -- -- -- (126) (126)
------- -------- -------- -------- --------
Net income $77,937 $ 28,049 $ 50,014 $(78,063) $ 77,937
======= ======== ======== ======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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 $ -- $ 14,084 $ 29,160 $ 63 $ 43,307
Investing activities:
Investments and
acquisitions, net
of cash acquired (808,046) (16,151) 275 8,046 (815,876)
Capital expenditures -- (16,005) (5,457) 134 (21,328)
Purchases of market-
able securities -- (3,200) (348) -- (3,548)
Sales and maturities
of marketable
securities -- -- 5,916 -- 5,916
Other -- 1,535 (2,978) (232) (1,675)
--------- -------- -------- -------- ---------
Net cash used in
investing
activities (808,046) (33,821) (2,592) 7,948 (836,511)
Financing activities:
Issuance of senior
subordinated notes 400,000 -- -- -- 400,000
Borrowings under
bank credit
facilities 215,300 -- -- -- 215,300
Debt issuance
costs (15,590) -- -- -- (15,590)
Borrowings
(repayments) of
note payable,
capital lease
obligations and
long-term debt -- (2,785) 1,667 35 (1,083)
Capital stock
transactions, net 132,646 -- 8,046 (8,046) 132,646
Contributions from
Liberty/Netlink
Wholesale
Division -- 6,476 1,495 -- 7,971
Distributions to
minority interests -- -- (7,544) -- (7,544)
Intercompany
transfers 75,690 (75,524) (166) -- --
Other -- -- (382) -- (382)
--------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities 808,046 (71,833) 3,116 (8,011) 731,318
--------- -------- -------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents -- (91,570) 29,684 -- (61,886)
Cash and cash
equivalents at
beginning of
period -- 104,148 51,496 -- 155,644
--------- -------- -------- -------- ---------
Cash and cash
equivalents at
end of period $ -- $ 12,578 $ 81,180 $ -- $ 93,758
========= ======== ======== ======== =========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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 $ -- $ 56,053 $ 26,016 $ 81 $ 82,150
Investing activities:
Investments and
acquisitions, net
of cash acquired (29,455) (9,524) (699) 1,027 (38,651)
Capital expenditures -- (4,680) (1,968) 187 (6,461)
Purchases of market-
able securities -- (46,883) (26,526) -- (73,409)
Sales and maturities
of marketable
securities -- 81,080 60,898 -- 141,978
Other -- (554) 1,481 (421) 506
--------- -------- -------- ------ ---------
Net cash provided by
(used in) investing
activities (29,455) 19,439 33,186 793 23,963
Financing activities:
Repayment of note
payable, capital
lease obligations
and long-term debt -- (2,599) (7,777) 50 (10,326)
Common stock
transactions, net (14,362) 481 546 (1,027) (14,362)
Distributions to
Liberty/Netlink
Wholesale Division -- (5,339) (3,296) -- (8,635)
Distributions to
minority
interests -- -- (408) -- (408)
Intercompany
transfers 43,817 (15,389) (28,428) -- --
Other -- -- (189) 103 (86)
--------- -------- -------- ------ ---------
Net cash provided by
(used in) financing
activities 29,455 (22,846) (39,552) (874) (33,817)
--------- -------- -------- ------ ---------
Net increase in cash
and cash
equivalents -- 52,646 19,650 -- 72,296
Cash and cash
equivalents
at beginning
of period -- 26,124 6,432 -- 32,556
--------- -------- -------- ------ ---------
Cash and cash
equivalents at
end of period $ -- $ 78,770 $ 26,082 $ -- $ 104,852
========= ======== ======== ====== =========
</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
nine months ended September 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 Nine Months Ended Nine Months Ended
September 30 September 30 September 30 September 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 $154,397 $ -- $154,397 $ -- $364,709 $ -- $364,709 $ --
TV Guide Entertainment
Group (1) 22,924 19,863 20,657 17,511 66,247 56,021 58,557 49,058
United Video Group:
SNG (2) 95,586 106,031 -- -- 293,411 306,457 -- --
UVTV 20,174 21,221 20,174 21,221 64,185 63,748 64,185 63,748
Other 17,703 18,238 -- -- 50,362 52,621 -- --
-------- -------- -------- -------- -------- -------- -------- --------
133,463 145,490 20,174 21,221 407,958 422,826 64,185 63,748
-------- -------- -------- -------- -------- -------- -------- --------
Eliminations (8,153) (5,923) -- -- (21,475) (18,208) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $302,631 $159,430 $195,228 $ 38,732 $817,439 $460,639 $487,451 $112,806
======== ======== ======== ======== ======== ======== ======== ========
Operating income (loss):
TV Guide Magazine Group $ 9,627 $ -- $ 9,627 $ -- $ 25,555 $ -- $ 25,555 $ --
TV Guide Entertainment
Group (1) (1,165) 5,226 (61) 4,836 107 12,160 2,451 12,080
United Video Group:
SNG (2) 14,957 16,798 -- -- 49,406 34,079 -- --
UVTV 7,453 10,704 7,453 10,704 28,893 31,494 28,893 31,494
Other (12,669) (527) (790) (231) (23,391) 3,846 (1,514) (1,557)
-------- -------- -------- -------- -------- -------- -------- --------
9,741 26,975 6,663 10,473 54,908 69,419 27,379 29,937
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 18,203 $ 32,201 $ 16,229 $ 15,309 $ 80,570 $ 81,579 $ 55,385 $ 42,017
======== ======== ======== ======== ======== ======== ======== ========
Consolidated depreciation
and amortization $ 34,689 $ 7,300 $ 30,101 $ 2,854 $ 85,971 $ 20,900 $ 72,031 $ 7,848
Consolidated capital
expenditures 8,399 3,029 6,438 2,262 21,328 6,461 16,005 4,680
Net cash provided by
(used in):
Operating activities 15,690 20,838 6,984 (4,281) 43,307 82,150 14,084 56,053
Investing activities (27,240) (2,446) (27,052) (12,479) (836,511) 23,963 (841,867) (10,016)
Financing activities 27,571 (10,558) 29,780 21,601 731,318 (33,817) 736,213 6,609
Other data:
EBITDA (3) $ 52,892 $ 39,501 $ 46,329 $ 18,163 $166,541 $102,479 $127,416 $ 49,865
Ratio of earnings to
fixed charges (4) 1.53 19.39 2.45 23.49
</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 September 30, 1999 were $302.6
million, an increase of $143.2 million, or 90%, over the same period in
1998. For the nine months ended September 30, 1999, revenues were
$817.4 million, an increase of $356.8 million, or 77%, over the
corresponding 1998 period. The increase in revenues for both the
quarter and nine-month period was primarily due to $154.4 million of
additional revenues for the quarter and $364.7 million of additional
revenues for the nine-month period attributable to TV Guide magazine,
which was acquired by the Company on March 1, 1999.
Operating expenses, excluding depreciation and amortization, were
$249.7 million for the quarter ended September 30, 1999, an increase of
$129.8 million, or 108%, when compared to the same period in 1998. For
the nine months ended September 30, 1999, operating expenses, excluding
depreciation and amortization, were $650.9 million, an increase of
$292.7 million, or 82%, 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 $118.1 million for the quarter and $276.3 million
for the nine-month period attributable to TV Guide magazine.
Depreciation and amortization during the third quarter of 1999 was
$34.7 million, an increase of $27.4 million, or 375%, over the same
period in 1998. For the nine months ended September 30, 1999,
depreciation and amortization was $86.0 million, an increase of $65.1
million, or 311%, 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 the first quarter of 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 third quarter of 1999 was $12.3
million, an increase of $12.0 million over the same period in 1998.
Interest expense during the nine months ended September 30, 1999 was
$30.7 million, an increase of $29.4 million over the same period in
1998. The increase in interest expense for both periods is attributable
to increased debt levels primarily resulting from the issuance of $400
million of senior subordinated notes and $185 million of bank debt to
fund a portion of the acquisition of TV Guide magazine.
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 45% for the
nine-month period ended September 30, 1999 compared to 37% for the same
period in 1998. The increase in the effective rate is due primarily to
the increase in non-deductible goodwill amortization resulting from the
TV Guide magazine acquisition.
Minority interest in earnings for the quarter and nine-month
period ended September 30, 1999 of $2.8 million and $10.1 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 nine months ended September
30, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $154,397 $165,043 $483,566 $466,219
Operating expenses 118,136 134,949 367,189 359,985
Depreciation 1,966 1,765 5,680 5,002
-------- -------- -------- --------
Operating income
before amortization $ 34,295 $ 28,329 $110,697 $101,232
======== ======== ======== ========
Operating margin
percentage (before
amortization) 22% 17% 23% 22%
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 September
30, 1999 were $154.4 million, a decrease of $10.6 million, or 6%,
compared to the same period in 1998. For the nine months ended
September 30, 1999, revenues were $483.6 million, an increase of $17.3
million, or 4%, over the corresponding 1998 period. The decrease in
revenues for the quarter was primarily due to a $4.8 million decrease
in advertising revenues and a $4.2 million decrease due to lower
subscription sales. The increase in revenues for the nine-month period
is attributable to the monthly cable guide business acquired as part of
the acquisition of TVSM, Inc. on June 26, 1998. On August 29, 1999, the
magazine increased the newsstand price for the magazine to $1.79 from
$1.49. Subscription circulation for the magazine during the quarter
and nine-month period ended September 30, 1999 was 9.3 million and 9.5
million per week, respectively, a decrease of 1.2 million copies, or
11%, for the quarter and a decrease of 805,000 copies, or 8%, for the
nine-month period, from the prior year. Newsstand sales for the
magazine averaged 2.0 million copies per week during the quarter ended
September 30, 1999 compared to 2.5 million for the same quarter in the
prior year.
Operating expenses, excluding depreciation and amortization, for
the third quarter of 1999 were $118.1 million, a decrease of $16.8
million, or 12%, from the same period in 1998. For the nine months
ended September 30, 1999, operating expenses, excluding depreciation
and amortization, were $367.2 million, an increase of $7.2 million, or
2%, over the same period in 1998. The decrease in operating expenses
for the quarter is mainly attributable to the production savings from
the reduction of the rate base. The increase in expenses for the nine
months is attributable to the acquisition of TVSM, Inc., partially
offset by production savings from the reduction of the rate base.
Depreciation during the third quarter of 1999 was $2.0 million, an
increase of $201,000, or 11%, over the same period in 1998. For the
nine months ended September 30, 1999, depreciation was $5.7 million, an
increase of $678,000, or 14%, 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 nine months
ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $ 22,924 $ 19,863 $ 66,247 $ 56,021
Operating expenses 21,693 12,311 58,269 36,769
Depreciation and
amortization 2,396 2,326 7,871 7,092
-------- -------- -------- --------
Operating income $ (1,165) $ 5,226 $ 107 $ 12,160
======== ======== ======== ========
Operating margin
percentage (5)% 26% 0% 22%
TV Guide Entertainment Group's revenues for the three months ended
September 30, 1999 were $22.9 million, an increase of $3.1 million, or
15%, over the same period in 1998. For the nine months ended September
30, 1999, revenues were $66.2 million, an increase of $10.2 million, or
18% over the same period in 1998. The increase in revenues for both
periods was largely attributable to advertising revenues, which grew
$2.7 million, or 28%, over the third quarter of 1998 and $6.8 million,
or 23%, over the first nine 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 $616,000 for
the quarter when compared to the same period in 1998 and $2.6 million
over the first nine months of 1998. International revenues increased
$273,000, or 47%, and $1.2 million, or 76%, when compared to the third
quarter and first nine 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. These increases were partially offset by a
reduction in TV Guide Channel service fee revenues of $769,000 and
$500,000 for the third quarter and first nine months, respectively, due
to lower rates. Sneak Prevue and TV Guide Online service fee revenues
were relatively unchanged during the third quarter and first nine
months of 1999 when compared to the same periods in 1998. TV Guide
Channel subscriber counts increased by 616,000, or 1%, to 49.8 million
as of September 30, 1999 compared to those as of September 30, 1998.
Sneak Prevue subscribers decreased by 1.2 million, or 4%, to 33.7
million during the same period and TV Guide Interactive subscribers
were 2.5 million at September 30, 1999.
Operating expenses, excluding depreciation and amortization,
increased $9.4 million, or 76%, during the third quarter of 1999 and
$21.5 million, or 58%, for the nine-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 nine-month period to advertise and launch
the rebranded TV Guide Channel compared to approximately $2.3 million
for the nine-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 $865,000, or 97%, for the quarter and
$2.2 million, or 110%, for the nine-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 $2.5 million, or 894%, for the quarter and $4.0
million, or 306%, for the nine-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 third quarter of 1999 was
$2.4 million, an increase of $70,000, or 3%, over the same period in
1998. For the nine months ended September 30, 1999, depreciation and
amortization increased $779,000, or 11%, 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 nine months ended September 30, 1999 and
1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenues $ 95,586 $106,031 $293,411 $306,457
Operating expenses 78,424 86,923 237,347 265,152
Depreciation and
amortization 2,205 2,310 6,658 7,226
-------- -------- -------- --------
Operating income $ 14,957 $ 16,798 $ 49,406 $ 34,079
======== ======== ======== ========
Operating margin
percentage 16% 16% 17% 11%
Revenues generated by SNG for the three months ended September 30,
1999 were $95.6 million, a decrease of $10.4 million, or 10%, compared
to the same period in 1998. For the nine months ended September 30,
1999, revenues were $293.4 million, a decrease of $13.0 million, or 4%,
from the corresponding period in 1998. Revenues decreased for both
periods primarily due to the continued decline in the number of C-band
subscribers. The decrease for the nine months ended September 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 September 30, 1999 totaled approximately 1.0 million, a decrease of
48,000, or 5%, during the quarter and a decrease of 192,000, or 16%,
during the prior twelve months. During the quarter ended September 30,
1999, the C-band industry declined 3%, decreasing by 51,000
subscribers, and for the twelve month period ended September 30, 1999,
the industry decreased by 247,000 subscribers, or 12%.
Operating expenses, excluding depreciation and amortization, were
$78.4 million in the third quarter of 1999, a decrease of $8.5 million,
or 10%, compared to the same period in 1998. For the first nine months
of 1999, operating expenses, excluding depreciation and amortization,
decreased $27.8 million, or 10%, from 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 nine-month period by increased
expenses attributable to Turner Vision.
Depreciation and amortization for the third quarter and first nine
months of 1999 was $2.2 million and $6.7 million, respectively,
relatively unchanged for the quarter and a decrease of $568,000 for
the nine-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 nine months ended September 30, 1999 and
1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998(1) 1999 1998(1)
---- ------ ---- ------
(in thousands)
Revenues $20,174 $21,221 $64,185 $63,748
Operating expenses 11,902 9,818 33,175 30,266
Depreciation and
amortization 819 699 2,117 1,988
------- ------- ------- -------
Operating income $ 7,453 $10,704 $28,893 $31,494
======= ======= ======= =======
Operating margin
percentage 37% 50% 45% 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 September 30, 1999 were
$20.2 million, a decrease of $1.0 million, or 5%, when compared to the
same period in 1998. For the nine months ended September 30, 1999,
revenues were $64.2 million, an increase of $437,000, or 1%, from the
corresponding 1998 period. As of September 30, 1999, UVTV/WGN
subscribers were 46.7 million, an increase of 2.4 million, or 5%, from
September 1998.
Operating expenses, excluding depreciation and amortization, were
$11.9 million during the third quarter of 1999, an increase of $2.1
million, or 21%, from the third quarter of 1998. For the nine months
ended September 30, 1999, operating expenses, excluding depreciation
and amortization were $33.2 million, an increase of $2.9 million, or
10%, from the corresponding 1998 period. The increases were due to
increased programming costs primarily related to the SMATV business and
increased marketing expenses.
Depreciation and amortization for the third quarter and nine
months ended September 30, 1999 was $819,000 and $2.1 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 third quarter of 1999
were $17.7 million, a decrease of $535,000, or 3%, compared to the
third quarter of 1998. For the nine months ended September 30, 1999,
revenues were $50.4 million, a decrease of $2.3 million, or 4%,
compared to the corresponding 1998 period. The decrease in revenues
for the quarter is primarily attributable to lower SSDS revenues
relating to commercial services and the termination of TV Guide
Enterprise Solutions service agent agreements with program suppliers in
the direct broadcast satellite market. The decrease in revenues for
the nine-month period is primarily attributable to the termination of
the service agent agreements.
Operating expenses, excluding depreciation and amortization,
increased by $10.9 million, or 65%, during the third quarter of 1999 to
$27.7 million from the same period in 1998. Operating expenses,
excluding depreciation and amortization, increased by $23.1 million, or
52%, during the first nine months of 1999 to $67.3 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 third quarter and first nine
months of 1999 increased by $670,000, or 34%, and $1.9 million, or 40%,
respectively, reflecting amortization of intangible assets acquired in
the ODS Technologies acquisition.
Liquidity and Capital Resources
For the nine months ended September 30, 1999, net cash flows from
operating activities were $43.3 million ($35.8 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 $215.3 million under a revolving bank
credit facility, proceeds of approximately $132.6 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 $2.4 million,
were used to fund the Company's investments and acquisitions of $815.9
million, debt issuance costs of $15.6 million, capital expenditures of
$21.3 million and net reduction in the Company's capitalized lease
obligations and note payable of $1.1 million.
At September 30, 1999, the Company's cash, cash equivalents and
marketable securities aggregated $102.9 million, a decrease of $58.6
million from that as of December 31, 1998. The above total includes
$80.5 million of cash and cash equivalents held by SNG, in which the
Company had an approximate 80% ownership interest as of September 30,
1999. As of September 30, 1999, approximately $9.1 million of such
securities had maturities greater than 90 days and were classified as
available-for-sale marketable securities. The Company's policy
pertaining to the temporary investment of cash available for operations
currently prohibits 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 September 30, 1999, the Company had available borrowing
capacity under the six-year revolving credit facility and 364-day
revolving credit facility of approximately $85 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 would 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 September 30, 1999, the Company had approximately $632.7
million of long-term debt outstanding (including current portions) and
unused borrowing capacity under bank credit facilities of approximately
$384.7 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. The credit facility expires April 30, 2000 and is
secured by substantially all of SSDS's assets. 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
September 30, 1999 were $3.4 million and are classified as current
liabilities. SSDS is not in compliance with certain financial
covenants contained in the credit agreement, but has received
appropriate waivers.
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 September 30,
1999, the unearned portion of all prepayments totaled $349.8 million,
of which approximately $250.9 million, or 72%, was attributable to TV
Guide magazine and approximately $92.2 million, or 26%, 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
$14.0 million as of September 30, 1999, a reduction of $2.8 million, or
17%, 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 $3.9 million. The Company also leases various
other satellite transponders accounted for as operating leases. These
operating leases accounted for approximately $8.8 million in operating
expenses, net of sublease revenue, during the nine months ended
September 30, 1999.
Capital expenditures during the nine months ended September 30,
1999, of $21.3 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 Company debt covenants, SNG makes periodic cash distributions
to its members. During the nine months ended September 30, 1999, cash
distributions to minority interests in SNG aggregated $7.5 million.
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. At any
given time, it may be engaged in discussions or negotiations or enter
into agreements with respect to potential transactions. It continues
to explore opportunities to expand the market shares of its existing
businesses, develop new products and acquire interests in new
businesses. See "Current Developments".
31
<PAGE>
Current Developments
On October 4, 1999, the Company and Gemstar International Group
Limited ("Gemstar") announced that they had entered into a definitive
merger agreement under which the Company will become a wholly owned
subsidiary of Gemstar. Under the merger agreement, the Company's
stockholders will receive .6573 shares of Gemstar common stock for each
share of TV Guide Class A and B Common Stock. The exchange ratio is
not subject to adjustment. The transaction, which is expected to close
in the first half of 2000, is subject to stockholder and regulatory
approvals.
The agreements governing the Company's bank credit facilities and
8 1/8% senior subordinated notes due 2009 contain provisions which,
absent modification or waiver of such provisions, will result in the
Company being required to repay outstanding borrowings under the bank
credit facilities and to repurchase the outstanding 8 1/8% senior
subordinated notes, at the option of the holders, following closing of
the transaction with Gemstar. The Company is currently assessing its
options with respect to financing the repayment of any borrowings
ultimately retired or seeking modifications to the agreements to allow
the transaction to occur without resulting in the repayment or
repurchase of the outstanding debt.
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. Such systems or processes must be able to operate 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. Phase 2 is 100% 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 100% complete. Phase 4, Implementation, involves placing
compliant systems, software and equipment into production or service.
Phase 4 is 97% complete with the balance due for completion by November
1999.
32
<PAGE>
The Company's year 2000 project team has focused 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, remediated
where necessary and tested. The Company is now finishing the remaining
implementation activities.
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 has completed contingency plans on all critical
processes to minimize the impact of any year 2000 related interruption.
Testing and refinements to these plans is ongoing.
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: the
pending merger of the Company into a subsidiary of Gemstar, 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:
-- required regulatory and shareholder approvals to complete
certain transactions,
-- 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 September 30, 1999, the
Company had $215 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 $2.2
million in interest expense and a corresponding decrease or increase of
$2.2 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
International Group Limited ("Gemstar") and its affiliates relating to
interactive television guides. These lawsuits relate to the Company's
digital and analog interactive guide products. On October 4, 1999, the
Company and Gemstar announced that they had entered into a definitive
merger agreement under which the Company will become a wholly owned
subsidiary of Gemstar, subject to shareholder and regulatory approval.
The Company expects that the litigation with Gemstar and its affiliates
will be dismissed in connection with the closing of the transaction
with Gemstar. Were that transaction not to close and 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. If
the transaction with Gemstar does not close, the Company has the right
to obtain a license at the Company's option to certain Gemstar patents
under defined terms and conditions and for defined uses. There can be
no assurance that the Company will elect to take the license or that,
if taken, the license will resolve all patent disputes that may arise
with Gemstar. In addition, there can be no assurance that if the
Company elects not to take the license, or there is a dispute that is
not resolved by the license, that the Company will be able to redesign
its services to avoid infringement. The Company's material litigation,
including the lawsuits with Gemstar, is described in Note 5 to the
financial statements included herein, which is incorporated by
reference in this Item 1.
On September 13, 1999, the Company announced that it had entered
into a settlement agreement with Source Media, Inc. ("Source") that
resolved all disputes between the two companies, including a lawsuit
filed on August 3, 1999 by Source in the District Court, Dallas County,
Texas.
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
None
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 - Nine months ended September 30,
1999
- -----------
** Filed herewith
b. Reports on Form 8-K
No reports were filed on Form 8-K during the third quarter
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: November 12, 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
NINE MONTHS ENDED SEPTEMBER 30,
(amounts in thousands, except for ratios)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Earnings Available for
Fixed Charges:
Income before income
taxes and minority
interest $ 7,597 $ 33,267 $53,126 $124,122
Interest and expense
on indebtedness 12,334 352 30,687 1,286
One-third of rental
expense, net of
sub-leasing income
for operating
leases 2,121 1,457 5,848 4,234
------- -------- ------- --------
$22,052 $ 35,076 $89,661 $129,642
======= ======== ======= ========
Fixed Charges:
Interest and expense
on indebtedness $12,334 $ 352 $30,687 $ 1,286
One-third of rental
expense, net of
sub-leasing income
for operating
leases 2,121 1,457 5,848 4,234
------- -------- ------- --------
$14,455 $ 1,809 $36,535 $ 5,520
======= ======== ======= ========
Ratio of earning to
fixed charges 1.53 19.39 2.45 23.49
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME INCLUDED IN
THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 93,758
<SECURITIES> 9,136
<RECEIVABLES> 291,979
<ALLOWANCES> 11,822
<INVENTORY> 21,847
<CURRENT-ASSETS> 443,156
<PP&E> 156,601
<DEPRECIATION> 97,830
<TOTAL-ASSETS> 3,331,476
<CURRENT-LIABILITIES> 494,699
<BONDS> 0
0
0
<COMMON> 1,521
<OTHER-SE> 1,489,359
<TOTAL-LIABILITY-AND-EQUITY> 3,331,476
<SALES> 0
<TOTAL-REVENUES> 817,439
<CGS> 0
<TOTAL-COSTS> 534,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,687
<INCOME-PRETAX> 53,126
<INCOME-TAX> 19,119
<INCOME-CONTINUING> 23,916
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<EXTRAORDINARY> 0
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<NET-INCOME> 23,916
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<EPS-DILUTED> 0.17
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