<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 23, 1999
UNITED VIDEO SATELLITE GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-22662 73-1290412
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
</TABLE>
7140 South Lewis Avenue, Tulsa, Oklahoma 74136-5422
(Address of Principal Executive Office) (Zip code)
(918) 488-4000
(Registrant's telephone number, including area code)
1
<PAGE>
ITEM 5. OTHER EVENTS
(a) Financial Statements of United Video Satellite Group, Inc. ("UVSG")and
Businesses to be Acquired by UVSG.
The following financial statements of News America Publications Inc.
("Publications"), businesses of Liberty Media Corporation which are engaged in
selling satellite distributed video programming and ancillary services to
wholesale customers in the United States and Canada (the "Netlink Wholesale
Division") and UVSG are attached:
Appendix I: Index to Consolidated Financial Statements
Publications Financial Statements as of December 31, 1998
(unaudited) and June 30, 1998 and 1997 and for the six months
ended December 31, 1998 and 1997 (unaudited) and the years ended
June 30, 1998, 1997 and 1996.
Netlink Wholesale Division Financial Statements as of December
31, 1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996.
UVSG Financial Statements as of December 31, 1998 and 1997 and
for the years ended December 31, 1998, 1997 and 1996.
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Publications, the Netlink Wholesale Division and UVSG are attached
hereto as Appendix II.
(c) Unaudited Pro Forma Combined Financial Statements
Unaudited pro forma combined financial statements which give pro forma
effect to the Acquisition of Publications and the Netlink Wholesale Division by
UVSG are attached hereto as Appendix III.
(d) Exhibits
23.1 Consent of Independent Public Accountants.
23.2 Consent of Independent Auditors.
23.3 Consent of Independent Auditors.
23.4 Consent of Independent Auditors.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED VIDEO SATELLITE GROUP, INC.
DATE: February 23, 1999 By: /s/ Peter C. Boylan, III
-----------------------------
Peter C. Boylan, III
President and
Chief Operating Officer
3
<PAGE>
APPENDIX I
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
News America Publications Inc.
Report of Independent Public Accountants................................. F-2
Combined Balance Sheets as of December 31, 1998 (unaudited), June 30,
1998 and 1997........................................................... F-3
Combined Statements of Operations for the Six Months Ended December 31,
1998 and 1997 (unaudited), and for the Years Ended June 30, 1998, 1997
and 1996................................................................ F-4
Combined Statements of Cash Flows for the Six Months Ended December 31,
1998 and 1997 (unaudited) and for the Years Ended June 30, 1998, 1997
and 1996................................................................ F-5
Notes to Combined Financial Statements................................... F-6
Schedule II--Valuation and Qualifying Accounts for the Years Ended June
30, 1998, 1997 and 1996................................................. F-14
Netlink Wholesale Division
Independent Auditors' Report............................................. F-15
Combined Balance Sheets as of December 31, 1998 and 1997................. F-16
Combined Statements of Operations and Combined Equity for the Years Ended
December 31, 1998 1997 and 1996......................................... F-17
Combined Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-18
Notes to Combined Financial Statements................................... F-19
United Video Satellite Group, Inc.
Independent Auditors' Reports:
KPMG LLP............................................................... F-23
Ernst & Young LLP...................................................... F-24
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-25
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-26
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996.................................. F-27
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996..................................................... F-28
Notes to Consolidated Financial Statements............................... F-29
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1998, 1997 and 1996........................................ F-54
</TABLE>
Separate financial statements of the guarantor subsidiaries have not been
presented herein as such subsidiaries are (or, subsequent to the Acquisitions,
will be) wholly owned and will be joint and several, full and unconditional
guarantors of the notes.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
News America Publications Inc.:
We have audited the accompanying combined balance sheets of the Companies
identified in Note 1 as of June 30, 1998 and 1997 and the related combined
statements of operations and cash flows for each of the three years in the
period ended June 30, 1998. These combined financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these combined financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Companies
identified in Note 1 as of June 30, 1998 and 1997 and the combined results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II--Valuation and
Qualifying Accounts is presented for purposes of additional analysis and is
not a required part of the basic financial statements. This information has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
New York, New York
July 28, 1998
F-2
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
COMBINED BALANCE SHEETS
As of December 31, 1998 (unaudited),
June 30, 1998 and 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------
1998 1998 1997
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................. $ -- $ 3 $ 1
Accounts and notes receivables (net of
allowance of $92,882 (unaudited),
$53,495 and $53,126, respectively)... 162,115 112,674 95,178
Inventories........................... 34,833 37,914 34,265
Prepaid expenses and other current
assets............................... 4,321 1,928 2,076
----------- ----------- -----------
Total current assets................ 201,269 152,519 131,520
PROPERTY, PLANT AND EQUIPMENT, net...... 16,634 21,161 21,627
INTANGIBLES, net........................ 2,358,514 2,407,019 2,396,494
OTHER NONCURRENT ASSETS................. 20,626 21,999 20,448
----------- ----------- -----------
Total assets........................ $ 2,597,043 $ 2,602,698 $ 2,570,089
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
expenses............................. $ 60,090 $ 73,699 $ 65,801
Deferred subscription income.......... 168,971 162,967 178,333
Due to other publishers............... 39,932 39,815 41,280
----------- ----------- -----------
Total current liabilities........... 268,993 276,481 285,414
DUE TO AFFILIATES, net.................. -- 2,669,416 2,537,401
DEFERRED SUBSCRIPTION INCOME............ 54,311 52,711 51,088
DEFERRED INCOME TAXES................... 621,946 635,785 633,065
OTHER NONCURRENT LIABILITIES............ 14,179 14,514 11,918
----------- ----------- -----------
Total liabilities................... 959,429 3,648,907 3,518,886
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $2.50 par value, 3,000
shares authorized, 100 shares issued
and outstanding...................... -- -- --
Additional paid-in capital............ 3,224,299 444,500 369,500
Accumulated deficit................... (1,586,685) (1,490,709) (1,318,297)
----------- ----------- -----------
Total stockholder's equity
(deficit).......................... 1,637,614 (1,046,209) (948,797)
----------- ----------- -----------
Total liabilities and stockholder's
equity (deficit)................... $ 2,597,043 $ 2,602,698 $ 2,570,089
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
COMBINED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1998 and 1997 (unaudited) and For the
Years Ended June 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended December 31, Year Ended June 30,
-------------------- -------------------------------
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 341,230 $ 315,622 $ 616,798 $ 650,176 $ 636,761
OPERATING EXPENSES...... 236,106 211,554 410,691 408,842 403,013
SELLING, GENERAL AND
ADMINISTRATIVE EX-
PENSES................. 30,907 28,799 54,698 56,305 49,649
DEPRECIATION AND AMORTI-
ZATION OF PROPERTY,
PLANT &
EQUIPMENT.............. 3,473 3,092 6,329 7,224 6,513
AMORTIZATION OF INTANGI-
BLE
ASSETS................. 48,461 46,587 93,693 93,693 93,693
--------- --------- --------- --------- ---------
Operating income
before intercompany
interest charge...... 22,283 25,590 51,387 84,112 83,893
INTERCOMPANY INTEREST
CHARGE................. (132,098) (123,888) (250,855) (234,581) (232,986)
--------- --------- --------- --------- ---------
Loss before benefit in
lieu of income
taxes................ (109,815) (98,298) (199,468) (150,469) (149,093)
BENEFIT IN LIEU OF IN-
COME
TAXES.................. 13,840 13,528 27,056 27,056 27,056
--------- --------- --------- --------- ---------
Net loss.............. $ (95,975) $ (84,770) $(172,412) $(123,413) $(122,037)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1998 and 1997 (unaudited) and For the
Years Ended June 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended December 31, Year Ended June 30,
-------------------- -------------------------------
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING
ACTIVITIES:
Net loss............... $ (95,975) $ (84,770) $(172,412) $(123,413) $(122,037)
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Depreciation and
amortization of
intangible assets and
property, plant &
equipment............ 51,934 49,679 100,022 100,917 100,206
Non-cash intercompany
charge for interest.. 132,098 123,888 250,855 234,581 232,986
Benefit in lieu of
income taxes......... (13,840) (13,528) (27,056) (27,056) (27,056)
Changes in assets and
liabilities:
Accounts and notes
receivables.......... (49,441) (32,854) (11,396) (17,468) (19,109)
Inventories........... 3,081 4,794 (449) (3,120) (6,964)
Other non-current
assets............... 523 (254) (492) 546 1,169
Accounts payable and
accrued expenses and
due to other
publishers........... (5,632) (17,170) (5,959) 27,522 2,285
Prepaid expenses and
other current
assets............... (2,393) (26) 549 267 369
Deferred subscription
income............... 7,605 (1,573) (13,743) (15,852) 20,539
Other noncurrent
liabilities.......... (335) (1) 1,496 2,273 7,355
--------- --------- --------- --------- ---------
Net cash (used
in)/provided by
operating
activities......... 27,625 28,185 121,415 179,197 189,743
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVEST-
ING
ACTIVITIES:
Investment in property,
plant and equipment... (1,323) (1,063) (2,364) (3,844) (5,300)
Other.................. (4,558) (384) (209) (552) (14,241)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (5,881) (1,447) (2,573) (4,396) (19,541)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANC-
ING
ACTIVITIES:
Borrowings (repayments)
of advances from
affiliates............ (21,747) (26,735) (118,840) (174,803) (170,199)
--------- --------- --------- --------- ---------
Net cash (used
in)/provided by
financing
activities......... (21,747) (26,735) (118,840) (174,803) (170,199)
--------- --------- --------- --------- ---------
Net
increase/(decrease)
in cash............ (3) 3 2 (2) 3
--------- --------- --------- --------- ---------
CASH BALANCE, beginning
of year/period......... 3 1 1 3 --
--------- --------- --------- --------- ---------
CASH BALANCE, end of
year/period............ $ -- $ 4 $ 3 $ 1 $ 3
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS,
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
News America Publications Inc., a Delaware corporation (together with its
subsidiaries, "Publications"), is a wholly owned indirect subsidiary of The
News Corporation Limited ("News Corp."), an Australian registered company with
American Depositary Receipts traded on the New York Stock Exchange.
On October 31, 1988, News Corp. acquired Triangle Publications, Inc., the
publisher of TV Guide, Seventeen Magazine and The Daily Racing Form for $2.8
billion in cash and changed its name to News America Publications Inc. In June
1991, News Corp. sold Seventeen Magazine, The Daily Racing Form and several
other consumer publications. Publications operates the guide business of TV
Guide, a weekly entertainment magazine. Its wholly owned subsidiary, Murdoch
Magazines Distribution, Inc., provides newsstand distribution for TV Guide as
well as for third-party magazine publishers. In connection with the United
Video Satellite Group ("UVSG") transaction (see below), a subsidiary of News
Corp will transfer certain assets and liabilities of TV Guide Entertainment
Network ("TVGEN"), a division of News America Digital Publishing, Inc., to
Publications. TVGEN commenced operations effective July 1, 1996. In the
accompanying financial statements, TVGEN's financial position and results of
operations have been combined with those of Publications from July 1, 1996
onward.
Publications publishes TV Guide Magazine and other magazine titles and
distributes magazines for other magazine publishers. Over 90% of Publications'
revenues are generated from the advertising included in, and circulation of,
TV Guide Magazine. TVGEN maintains an interactive entertainment site on the
worldwide web.
On June 10, 1998, a subsidiary of News Corp. entered into a letter of
agreement (the "Letter Agreement") to sell all of the outstanding stock of
Publications and all of the outstanding stock of TVSM (see Note 6) (the "TV
Guide Acquisition") for consideration of 60 million shares (as adjusted for
UVSG's 1998 two-for-one stock split) of UVSG common stock, subject to certain
adjustments, and $800 million in cash.
The accompanying combined financial statements include the consolidated
financial statements of Publications, combined with those of TVGEN (since
inception on July 1, 1996) and TVSM (since its acquisition on June 26, 1998)
(collectively the "Companies"), and reflect the results of operations,
financial position and cash flows of the Companies as if the Companies were
separate entities, and were derived from the consolidated financial statements
of News Corp. using historical bases in the assets and liabilities of the
Companies. The financial information for the years ended June 30, 1998, 1997
and 1996, may not necessarily reflect the results of operations, financial
position, changes in shareholders' equity and cash flows of the Companies had
the Companies been separate entities during those periods.
All significant intercompany balances and transactions have been
eliminated.
The accompanying unaudited combined financial statements as of December 31,
1998, and for the six months ended December 31, 1998 and 1997, have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. Operating results for the six-month
periods ended December 31, 1998 and 1997 are not necessarily indicative of the
results that may be expected for the fiscal year.
F-6
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are summarized below.
Revenue Recognition:
Advertising revenues are recorded upon release of magazines for sale to
consumers and are stated net of agency commissions and cash and sales
discounts. Allowances for estimated bad debts, frequency discounts and rebates
are provided based upon historical experience. Actual bad debts, discounts and
rebates may differ from estimates. Management does not expect such differences
to have a material effect on the combined financial statements.
A proportionate share of magazine subscription revenue is recognized as
magazines are delivered to subscribers.
Newsstand revenues are recognized based on the on-sale dates of magazines.
Allowances for estimated returns are recorded based upon historical
experience. Actual returns for the last issues of the year may differ from
estimates. Management does not expect such differences to have a material
effect on the Companies' combined financial statements.
Distribution revenues are recognized as commissions are earned.
TVGEN recognizes advertising revenues based on the number of page/views
(impressions) for its website pursuant to advertiser contracts and sponsorship
revenues are recognized over the period of the sponsorship contract.
Deferred Subscription Income:
Deferred subscription income results from advance orders and payments for
magazine subscriptions received from subscribers. Allowances for estimated
subscription cancellations are provided based upon historical experience.
Publication/Issuance Costs:
Substantially all external direct costs incurred prior to on-sale dates are
deferred and charged to cost of sales upon on-sale dates of magazines. All
internal costs are expensed as incurred.
Inventories:
Inventories consist of paper and are stated at the lower of cost or market.
Cost is determined on an average cost basis for all inventory. Average cost
approximates the first-in, first-out cost method.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over estimated useful lives of
assets. Leasehold improvements are amortized over the shorter of the remaining
lease terms or estimated useful lives of related improvements. The cost and
accumulated depreciation of property sold or retired are removed from the
accounts upon disposition.
F-7
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
Estimated useful lives for major categories are as follows:
<TABLE>
<S> <C>
Leasehold Improvements........ Shorter of lease term or remainder of lease
Machinery and Equipment....... 5 Years
Data Processing Equipment..... 7 Years
</TABLE>
Intangibles:
The excess of costs over the fair value of net tangible assets acquired
represents the portion of the acquisition costs of News Corp.'s purchase of
Triangle Publications, Inc. specifically related to Publications' businesses
and the acquisition of TVSM (see Note 6). Such amounts have been allocated to
publishing rights and acquired subscriber accounts. Publishing rights and
excess of cost over net assets acquired are being amortized on a straight-line
basis over 40 years. Acquired subscriber accounts are being amortized over
various periods through 2001. In evaluating the value of future benefit of
these assets, the recoverability from operating income is measured. Under this
approach, the estimated future undiscounted cash flows associated with these
assets is compared to the assets' carrying values to determine if a reduction
is required. No such reductions in carrying values have been recorded.
As a result of adopting Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), Publications and TVSM
increased the excess of cost over net assets acquired and deferred tax
liabilities to provide for deferred taxes on basis differences related to the
respective acquisitions. Such amounts are being amortized over 40 years using
the straight-line method.
Income Taxes:
SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows the recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. The Companies are included in the consolidated
federal tax returns of their ultimate United States parent, News Publishing
Australia Limited ("NPAL"), a subsidiary of News Corp. The Companies have
provided for income taxes in the accompanying combined financial statements as
if they were separate taxpayers. As discussed above, deferred tax liabilities
were established in connection with the adoption of SFAS No. 109. The benefit
in lieu of income taxes in each of the three years included in the
accompanying combined financial statements results from changes in the basis
differences that have occurred since the acquisitions of Publications and
TVSM.
Due to Other Publishers:
The amounts due to other publishers represent sales from distribution of
other publishers' publications, net of Publications' commission revenue and
reserves for returns.
Use of Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
by management. As a result, reported amounts of assets, liabilities, revenues
and expenses, as well as disclosures of contingent liabilities, may differ
from actual results.
F-8
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
3. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at June 30, 1998 and 1997
was as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Leasehold Improvements................................. $ 5,335 $ 5,169
Machinery and Equipment................................ 40,007 35,462
Data Processing Equipment.............................. 9,988 8,836
-------- --------
55,330 49,467
Accumulated Depreciation and Amortization.............. (34,169) (27,840)
-------- --------
$ 21,161 $ 21,627
======== ========
</TABLE>
4. INTANGIBLE ASSETS
The composition of intangible assets at June 30, 1998 and 1997 was as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Publishing Rights.................................. $2,270,202 $2,195,760
Excess of Costs Over Net Assets Acquired........... 899,263 869,487
Acquired Subscriber Accounts....................... 154,830 154,830
---------- ----------
3,324,295 3,220,077
Accumulated Amortization........................... (917,276) (823,583)
---------- ----------
$2,407,019 $2,396,494
========== ==========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The composition of accounts payable and accrued expenses at June 30, 1998
and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Trade Payables............................................ $38,852 $36,047
Overdraft Payable......................................... 16,388 11,914
Payroll and Employee Benefits............................. 6,505 7,469
Other Accrued Expenses.................................... 11,954 10,371
------- -------
$73,699 $65,801
======= =======
</TABLE>
6. ACQUISITION OF TVSM
On June 26, 1998, a subsidiary of News Corp. acquired all of the
outstanding stock of TVSM, Inc. ("TVSM"), a magazine publisher of monthly and
weekly programming guides designed specifically for and sold through companies
in the cable television industry, for cash of approximately $75 million. The
acquisition has been recorded as a purchase and the Companies have recorded a
capital contribution of $75 million from News Corp. related to this
acquisition. The excess of costs over the fair value of net assets acquired of
approximately $74 million has been allocated to publishing rights and is being
amortized on a straight-line basis over 40 years. In accordance with
F-9
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
SFAS No. 109, Publications increased the excess of cost over net assets
acquired and deferred tax liabilities by approximately $30 million to provide
for deferred taxes on basis differences related to the acquisition. The
allocation of the purchase price is based upon preliminary estimates of useful
lives, expenses and liabilities and may differ from the final purchase price
allocation.
7. COMMITMENTS AND CONTINGENCIES
The Companies utilize office and warehouse space and certain equipment
under operating lease arrangements. The following table summarizes the
Companies' future obligations under these leases at June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999........................................................... $ 2,584
2000........................................................... 2,414
2001........................................................... 2,379
2002........................................................... 2,439
2003........................................................... 2,477
2004 and thereafter............................................ 4,594
-------
Total minimum lease payments................................... $16,887
=======
</TABLE>
Rent expense for operating leases amounted to approximately $5 million in
1998, 1997 and 1996, respectively.
News Corp. has negotiated several contracts with paper manufacturers on
behalf of its subsidiaries. Publications has purchased the paper utilized in
its operations pursuant to such contracts. News Corp. has agreed to continue
such bulk paper procurement for Publications after its sale to UVSG; however,
there can be no assurance that News Corp. will continue to provide such paper
procurement services for Publications in the future.
The Companies are involved in certain litigation and claims arising in the
normal course of business. In the opinion of management, any liabilities
arising from such litigation and claims are not expected to be material to the
financial position and results of operations of the Companies.
F-10
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
8. INCOME TAXES
The Companies are included in a consolidated tax return with other News
Corp. owned companies. The Companies' financial statements are prepared on a
separate return basis. Therefore the income tax accounts are based on what the
Companies' current and deferred tax provision would have been if the Companies
filed a separate tax return.
Significant components of the benefit in lieu of income taxes for the years
ended June 30, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current
Federal......................................... $ 60,231 $ 3,035 $23,505
State........................................... 15,105 5,575 8,376
-------- ------- -------
75,336 8,610 31,881
Deferred
Federal......................................... (48,661) 11,646 (7,754)
State........................................... 381 6,800 2,929
-------- ------- -------
(48,280) 18,446 (4,825)
-------- ------- -------
Total benefit in lieu of income taxes............. $ 27,056 $27,056 $27,056
======== ======= =======
</TABLE>
Net deferred tax liabilities as of June 30, 1998 and 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
NOLs attributed on a stand-alone basis.............. $ 202,460 $ 127,124
Other............................................... 6,763 31,786
Deferred tax liabilities
Basis differences on acquisitions................... (632,087) (629,372)
Other............................................... (7,375) (8,098)
Valuation allowance................................... (205,546) (154,505)
--------- ---------
$(635,785) $(633,065)
========= =========
</TABLE>
The Companies have an NOL of approximately $200 million. The ultimate
utilization of this NOL is subject to review by the Internal Revenue Service
as future tax returns are filed. The Companies have a valuation allowance for
the full amount of all NOLs since, on a stand alone basis, realization is not
more likely than not.
F-11
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
A reconciliation of the benefit in lieu of income taxes included in the
combined statements of operations and the benefit in lieu of income taxes
assuming the Federal statutory income tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Benefit assuming federal income tax rate....... $ 69,815 $ 52,664 $ 52,165
Amortization of intangibles.................... (9,469) (9,469) (9,469)
State income tax, net of federal benefit....... 15,485 12,375 11,304
Other.......................................... 2,266 2,343 (887)
Increase in valuation allowance................ (51,041) (30,857) (26,057)
-------- -------- --------
$ 27,056 $ 27,056 $ 27,056
======== ======== ========
</TABLE>
9. EMPLOYEE BENEFITS
News America Incorporated Defined Benefit Plan
Publications and TVGEN participate in the News America Incorporated
Employee Pension and Retirement Plan (the "NAI Plan"), a defined benefit plan
covering substantially all Publications and TVGEN employees. The NAI Plan
provides retirement benefits to all non-union salaried employees based on
average earnings, length of service, and other considerations. Pension costs
charged to Publications and TVGEN are based upon an actuarial study performed
by an independent actuarial firm. Pension expense was $1.8 million in 1998,
$1.8 million in 1997, and $2.3 million in 1996.
In connection with the UVSG Transaction, Publications and TVGEN will no
longer be participating employers under the NAI Plan and, as a result,
Publications' and TVGEN's employees will no longer accrue benefits in the NAI
Plan.
Other Plans
Publications' and TVGEN's employees participate in the News America
Incorporated Savings Plan (the "Savings Plan"), a defined contribution plan.
Publications and TVGEN match contributions to the Savings Plan up to 3% of
each participant's eligible compensation. Contributions by Publications and
TVGEN under the Savings Plan were $1.1 million in 1998, $1.1 million in 1997,
and $1.0 million in 1996.
In connection with the TV Guide Acquisition, News Corp. will segregate the
assets allocable to accrued benefits of present and former employees of
Publications and TVGEN and transfer such assets to a newly created plan
containing substantially identical provisions.
TVSM's employees participate in a 401(K) retirement plan. TVSM makes
matching contributions at the rate of 8% of employees' qualified contributions
to a maximum of 3% of employees' qualifying wages. TVSM may also make, at its
discretion, contributions allocated based upon each participant's share of
total compensation paid to all employees eligible to participate in the plan.
F-12
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997 (unaudited) and
June 30, 1998, 1997 and 1996
10. RELATED PARTY TRANSACTIONS
Affiliates of News Corp. provide general managerial assistance to
Publications and TVGEN including assistance relating to centralized medical,
dental and pension plans, tax matters, paper purchasing, travel arrangements,
legal matters and insurance and allocate a proportionate share of these costs
and corporate rent expense to Publications and TVGEN. The basis for such
allocation varies depending upon the nature of the cost and includes such
factors as headcount and square footage. Allocated costs totaled approximately
$4.0 million, $4.0 million and $4.8 million in the years ended June 30, 1998,
1997 and 1996, respectively, and $2.6 million (unaudited) and $2.3 million
(unaudited) in the six months ended December 31, 1998 and 1997, respectively.
The Companies' management believes that such allocations are reasonable.
Publications is a guarantor of a number of News Corp.'s affiliates'
financing arrangements. Publications will be released from its obligations
under these guarantees when the TV Guide Acquisition is consummated.
Publications had intercompany debt from affiliates in the amount of
approximately $2.7 billion and $2.5 billion at June 30, 1998 and 1997, and $0
(unaudited) at December 31, 1998. Interest expense with respect to such debt
was charged at the prime rate. The prime rate was 8.50%, 8.50% and 8.25% for
the years ended June 30, 1998, 1997 and 1996, respectively. Amounts due to
affiliates of News Corp. will be contributed to equity in connection with the
TV Guide Acquisition.
Accounts receivable from affiliates of approximately $1.9 million, $0.5
million, and $2.1 million (unaudited) are included in accounts and notes
receivable on the accompanying combined balance sheets as of June 30, 1998 and
1997, and December 31, 1998, respectively.
11. SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Companies extend credit to various companies in the broadcast
television and advertising industry for the purchase of its advertising space,
which results in a concentration of credit risk. This concentration of credit
risk may be affected by changes in economic or other industry conditions and
may, accordingly, impact the Companies' overall credit risk. Although the
Companies generally do not require collateral, the Companies perform ongoing
credit evaluations of their customers and provide for potential losses, if
necessary.
During 1998, 1997 and 1996, the Companies earned approximately 13.2%, 9.9%
and 11.4%, respectively, of their advertising revenues from News Corp.
affiliates.
12. SUBSEQUENT EVENT (unaudited)
Pursuant to the TV Guide Acquisition, in December 1998, Publications
satisfied approximately $2.8 billion of its borrowings due to affiliates.
F-13
<PAGE>
NEWS AMERICA PUBLICATIONS INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance-- Charged to Balance--
Beginning Costs and End of
Description of Year Expenses Deductions Year
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
June 30, 1998..................... $ 2,518 $ 7,323 $ (6,225) $ 3,616
June 30, 1997..................... 3,058 9,866 (10,406) 2,518
June 30, 1996..................... 5,960 8,486 (11,388) 3,058
Reserve for volume rebates:
June 30, 1998..................... 1,427 622 (281) 1,768
June 30, 1997..................... 2,142 960 (1,675) 1,427
June 30, 1996..................... 3,079 627 (1,564) 2,142
Reserve for returns:
June 30, 1998..................... 49,181 490,232 (491,302) 48,111
June 30, 1997..................... 39,676 394,578 (385,073) 49,181
June 30, 1996..................... 29,074 307,484 (296,882) 39,676
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Liberty Media Corporation:
We have audited the accompanying combined balance sheets of the Netlink
Wholesale Division (as defined in Note 1 to the combined financial statements)
as of December 31, 1998 and 1997, and the related combined statements of
operations and combined equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Netlink
Wholesale Division as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
February 15, 1999
F-15
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
COMBINED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(amounts in thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 128 $ 1,804
Accounts receivable, net from affiliates (note
5).............................................. 4,565 1,863
Other............................................ 2,029 2,293
Prepaid expenses................................. 558 560
-------- --------
Total current assets........................... 7,280 6,520
Property and equipment (note 3).................... 1,324 1,320
Less accumulated depreciation.................... (741) (631)
-------- --------
583 689
Deferred income taxes (note 4)..................... 2,823 2,941
Excess cost over acquired net assets, net.......... 2,103 2,193
-------- --------
$ 12,789 $ 12,343
======== ========
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Accounts payable and accrued liabilities......... $ 4,885 $ 1,768
Program rights payable........................... 751 1,125
Deferred revenue from affiliate.................. 669 663
-------- --------
Total current liabilities...................... 6,305 3,556
Combined equity.................................... 6,484 8,787
-------- --------
Commitments (note 6)
$ 12,789 $ 12,343
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-16
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
COMBINED STATEMENTS OF OPERATIONS AND COMBINED EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(amounts in thousands)
<S> <C> <C> <C>
Revenue, including amounts from affiliates (note
5).................................................. $39,777 $33,683 $29,706
Operating costs and expenses:
Operating, including amounts to affiliates
(note 5)......................................... 25,102 16,396 13,357
Selling, general and administrative, including
amounts from affiliates (note 5)................. 1,479 1,021 969
Bad debt expense.................................. 76 285 260
Depreciation and amortization..................... 200 199 198
------- ------- -------
26,857 17,901 14,784
------- ------- -------
Operating income................................ 12,920 15,782 14,922
Other income (expense).............................. -- 30 (3)
------- ------- -------
Earnings before income taxes.................... 12,920 15,812 14,919
Income tax expense (note 4)......................... (4,535) (5,744) (5,042)
------- ------- -------
Net earnings.................................... 8,385 10,068 9,877
Combined equity, beginning of year.................. 8,787 6,699 5,776
Net advances to parent.............................. (10,688) (7,980) (8,954)
------- ------- -------
Combined equity, end of year........................ $ 6,484 $ 8,787 $ 6,699
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-17
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................. $ 8,385 $10,068 $ 9,877
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization............ 200 199 198
Deferred tax expense (benefit)........... 118 8 (1,597)
Changes in operating assets and
liabilities:
Change in accounts receivable........... (2,438) (490) 906
Change in prepaid expenses.............. 2 24 (9)
Change in accounts payable, accrued
liabilities and program rights
payable................................ 2,743 184 (177)
Change in deferred revenue from
affiliate.............................. 6 (313) (71)
-------- ------- -------
Net cash provided by operating
activities............................ 9,016 9,680 9,127
-------- ------- -------
Cash flows used in investing activities:
Capital expended for property and
equipment................................ (4) (12) (61)
Other..................................... -- 2 2
-------- ------- -------
Net cash used in investing activities.. (4) (10) (59)
-------- ------- -------
Cash flows used in financing activities--
net change in advances to parent.......... (10,688) (7,980) (8,954)
-------- ------- -------
Net (decrease) increase in cash........ (1,676) 1,690 114
Cash at beginning of period................ 1,804 114 --
-------- ------- -------
Cash at end of period...................... $ 128 $ 1,804 $ 114
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-18
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(1) BASIS OF PRESENTATION
The combined financial statements include the accounts of Liberty Media
Corporation's ("Liberty") businesses which are engaged in selling satellite
distributed video programming and ancillary services to wholesale customers in
the United States and Canada (the "Netlink Wholesale Division"). Such
businesses are held by Netlink USA, an indirect wholly-owned partnership of
Liberty. Liberty is a subsidiary of Tele-Communications, Inc. ("TCI"). The
partnership interests in Netlink USA are held by three wholly-owned
subsidiaries of Liberty: LMC Netlink Corporation, Telluride Cablevision, Inc.,
and Westlink, Inc. (the "Corporate Owners"). All significant inter-entity
accounts and transactions have been eliminated in combination.
In January 1996, TCI purchased a controlling interest in United Video
Satellite Group, Inc. ("UVSG"). Accordingly, UVSG has been accounted for as a
consolidated subsidiary of TCI. On February 17, 1998, Liberty and UVSG entered
into an agreement pursuant to which UVSG will acquire, among other assets,
Liberty's interest in the Netlink Wholesale Division in a tax-free stock
transaction. Consummation of the transaction is subject to UVSG shareholder
approval and other customary regulatory approvals.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance was $218,000 and $180,000 at December 31, 1998 and 1997,
respectively.
(b) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from 5 to 15 years.
(c) Excess Cost
The excess of cost over net assets acquired is being amortized on a
straight-line basis over 30 years. Accumulated amortization was $584,000 and
$494,000 at December 31, 1998 and 1997, respectively.
(d) Deferred Revenue
The Netlink Wholesale Division receives annual payments in advance from
certain subsidiaries of TCI for distributing programming. Such amounts are
amortized to revenue on a straight-line basis over the period the programming
is provided.
(e) Combined Statement of Cash Flows
Transactions effected through the advances to parent account have been
considered constructive cash receipts and payments for purposes of the
combined statements of cash flows.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Netlink Wholesale Division evaluates the carrying value of its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable as
measured by estimated undiscounted future cash flows. If such assets are
impaired, the impairment to be recognized is measured by the amounts by which
the carrying amount of the assets exceeds the fair value of the assets.
F-19
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(g) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 is summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Distribution and support equipment.......................... $1,174 $1,170
Furniture and fixtures...................................... 150 150
------ ------
$1,324 $1,320
====== ======
</TABLE>
(4) INCOME TAXES
The Netlink Wholesale Division is included in the consolidated federal
income tax return of TCI. Income tax expense for the Netlink Wholesale
Division is based on those items in the consolidated calculation applicable to
the Netlink Wholesale Division. Intercompany tax allocation represents an
apportionment of tax expense or benefit (other than deferred taxes) among
subsidiaries of TCI in relation to their respective amounts of taxable
earnings or losses. The payable or receivable arising from the intercompany
tax allocation is included as a component of combined equity.
Deferred income taxes are based on the financial statement and tax basis
differences of the Corporate Owners' investments in the Netlink USA
partnership and tax loss carryforwards.
F-20
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
Income tax benefit (expense) for the three-year period ended December
31, 1998 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
(amounts in thousands)
<S> <C> <C> <C>
Year ended December 31, 1998:
Intercompany allocation........................ $(4,417) $ -- $(4,417)
Federal........................................ -- (97) (97)
State and local................................ -- (21) (21)
------- ------ -------
$(4,417) $ (118) $(4,535)
======= ====== =======
Year ended December 31, 1997:
Intercompany allocation........................ $(5,736) $ -- $(5,736)
Federal........................................ -- (7) (7)
State and local................................ -- (1) (1)
------- ------ -------
$(5,736) $ (8) $(5,744)
======= ====== =======
Year ended December 31, 1996:
Intercompany allocation........................ $(6,639) $ -- $(6,639)
Federal........................................ -- 1,314 1,314
State and local................................ -- 283 283
------- ------ -------
$(6,639) $1,597 $(5,042)
======= ====== =======
</TABLE>
The tax effect of temporary differences that give rise to the net deferred
tax asset includes net operating loss carryforwards of $3,196,000 at both
December 31, 1998 and 1997, offset by an excess of the financial statement
basis over the tax basis of the Corporate Owners' investments in the Netlink
USA partnership aggregating $373,000 and $255,000, respectively.
(5) RELATED PARTY TRANSACTIONS
The Netlink Wholesale Division distributes programming to subsidiaries of
TCI and others. Charges to subsidiaries of TCI are based upon customary rates
charged to others and aggregated approximately $18,356,000, $12,819,000 and
$12,560,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Accounts receivable at December 31, 1998 and 1997 includes
approximately $4,565,000 and $1,863,000 respectively, due from affiliates for
programming.
During 1991, the Netlink Wholesale Division entered into an agreement to
transfer to UVSG its business of marketing and distributing WGN, a satellite
delivered television "superstation" on a wholesale basis (the "Business"). The
consideration for this transfer is paid in the form of quarterly royalty
payments which are based on cash flows, as defined, from the acquired Business
times a certain consideration percentage. These payments are to continue for
20 years from the effective date of the agreement. Revenue from this agreement
for the years ended December 31, 1998, 1997 and 1996 was approximately
$3,380,000, $3,961,000 and $3,436,000, respectively.
A subsidiary of TCI provides satellite transponder facilities and uplink
services to the Netlink Wholesale Division. Such charges aggregated
approximately $1,258,000, $1,227,000 and $1,363,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, and are included in operating
expenses in the accompanying combined statements of operations.
F-21
<PAGE>
NETLINK WHOLESALE DIVISION
(Defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
During 1998 and 1997, certain services were purchased by the Netlink
Wholesale Division from affiliates of Liberty and TCI. Charges aggregated
approximately $49,000 and $64,000 and are included in selling, general and
administrative expenses in the accompanying combined statements of operations
and combined equity.
Liberty manages certain treasury activities for the Netlink Wholesale
Division on a centralized basis. Cash receipts are remitted to Liberty and
cash disbursements are funded by Liberty on a daily basis. The net amount of
such cash activities are included as a component of combined equity.
In 1996, the Netlink Wholesale Division entered into a management
arrangement whereby Fox Sports Direct, an affiliate of Liberty, would supply
certain management services to Netlink Wholesale Division for a monthly fee
equal to approximately $33,000. Total fees paid to Fox Sports Direct during
1996 were approximately $183,000. During 1997, this fee arrangement was
amended, based on changes in management services provided, to $11,650 per
month. Total fees paid to Fox Sports Direct during 1997 were approximately
$203,850. This arrangement was terminated as of the end of January 1998. Fees
paid to Fox Sports Direct during 1998 were not significant.
(6) COMMITMENTS
The Company leases office facilities, transponders and equipment. These
leases, which are classified as operating leases, expire at various dates
through December 2003.
Future minimum payments under noncancelable operating leases with a term of
one year or more consist of the following:
<TABLE>
<S> <C>
1999............................... 6,914,000
2000............................... 6,807,000
2001............................... --
2002............................... --
2003............................... --
</TABLE>
Total rent expense was $6,783,000, $6,378,000 and $5,911,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, including $48,300 and
$60,800 paid to related parties in 1998 and 1997.
During October 1997, new copyright rates were established for the
retransmission of distant superstation and network signals. The new copyright
rates were set at $.27 per subscriber and go were effective January 1, 1998.
In prior years copyright rates paid on a per subscriber basis in 1997 were
equal to $.06 for the retransmission of distant network signals and $.18 for
superstation signals. Total copyright expenses in 1998, 1997 and 1996 were
approximately $9,797,000, $3,218,000 and $3,212,000, respectively.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United Video Satellite Group, Inc.:
We have audited the accompanying consolidated balance sheets of United
Video Satellite Group, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years then ended. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Video Satellite Group, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Tulsa, Oklahoma
February 5, 1999
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
United Video Satellite Group, Inc.
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity, and cash flows of United Video Satellite Group, Inc.
for the year ended December 31, 1996. Our audit also included the financial
statement schedule included in the Index to Consolidated Financial Statements.
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of United Video Satellite Group, Inc. for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 10, 1997
F-24
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $155,516 $ 30,752
Marketable securities, at fair value..................... 5,804 112,334
Accounts receivable, net of allowance for doubtful
accounts of $2,699 and $2,785 at December 31, 1998 and
1997, respectively...................................... 59,280 55,611
Prepaid expenses and other............................... 5,610 9,842
Deferred tax asset....................................... 1,811 2,123
-------- --------
Total current assets................................... 228,021 210,662
Property, plant and equipment, at cost, net of accumulated
depreciation and amortization............................. 45,179 50,992
Intangible assets, net of accumulated amortization of
$18,347 and $7,823 at December 31, 1998 and 1997,
respectively.............................................. 111,420 30,072
Other assets, net of accumulated amortization of $42 and
$33 at December 31, 1998 and 1997, respectively........... 19,162 2,726
-------- --------
Total assets............................................... $403,782 $294,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 6,146 $ 5,894
Accrued liabilities...................................... 52,480 50,385
Note payable and current portion of capital lease
obligations and long-term debt.......................... 5,463 10,957
Customer prepayments..................................... 109,260 91,266
-------- --------
Total current liabilities.............................. 173,349 158,502
Deferred compensation...................................... 367 871
Deferred tax liability..................................... 11,041 2,737
Capital lease obligations and long-term debt............... 13,007 17,207
Minority interest.......................................... 3,596 3,141
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, no shares outstanding....................... -- --
Class A common stock, $.01 par value; shares authorized:
650,000,000 in 1998 and 60,000,000 in 1997, shares
outstanding: 47,893,688 in 1998 and 24,420,120 in 1997.. 479 244
Class B common stock, $.01 par value; shares authorized:
300,000,000 in 1998 and 30,000,000 in 1997, shares
outstanding: 24,746,588 in 1998 and 12,373,294 in 1997.. 247 124
Additional paid-in capital............................... 22,319 39,112
Accumulated other comprehensive loss, net of tax......... (54) (13)
Retained earnings........................................ 180,610 115,833
-------- --------
203,601 155,300
Minority interest deficit in Superstar/Netlink Group
LLC..................................................... (1,179) (43,306)
-------- --------
Total stockholders' equity................................. 202,422 111,994
-------- --------
Total liabilities and stockholders' equity................. $403,782 $294,452
======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Satellite services............................ $517,112 $435,153 $378,691
Advertising sales............................. 40,349 30,828 22,774
Systems integration services.................. 40,959 41,617 35,703
-------- -------- --------
598,420 507,598 437,168
Operating expenses:
Programming and delivery...................... 322,059 260,584 227,938
Selling, general and administrative........... 152,635 143,019 137,687
Depreciation.................................. 13,851 12,207 9,965
Amortization.................................. 14,176 6,444 6,358
-------- -------- --------
502,721 422,254 381,948
-------- -------- --------
Operating income................................ 95,699 85,344 55,220
Gain on issuance of equity by subsidiary........ 13,373 -- --
Interest income................................. 6,346 5,882 3,401
Interest expense................................ (1,629) (2,122) (2,024)
Other income.................................... 11,607 401 551
Other expense................................... (1,423) (71) (244)
-------- -------- --------
Income before income taxes and minority
interest....................................... 123,973 89,434 56,904
Provision for income taxes...................... (37,507) (25,892) (17,122)
Minority interest in earnings................... (21,689) (17,782) (9,698)
-------- -------- --------
Net income...................................... $ 64,777 $ 45,760 $ 30,084
======== ======== ========
Earnings per share (1):
Basic......................................... $ 0.88 $ 0.62 $ 0.42
Diluted....................................... 0.87 0.62 0.41
</TABLE>
(1)1997 and 1996 amounts adjusted for two-for-one stock split (See Note 11).
See accompanying notes.
F-26
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Notes Other
Class A Class B Additional Receivable Comprehensive Minority
Common Common Paid-In From Income Retained Interest
Stock Stock Capital Stockholders (Loss) Earnings Deficit Total
------- ------- ---------- ------------ ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ 55 $124 $ 29,507 $(472) $(110) $ 39,989 $ -- $ 69,093
Comprehensive income,
net of tax:
Net income.............. -- -- -- -- -- 30,084 -- 30,084
Change in unrealized
appreciation
(depreciation) on
available for sale
securities:
Unrealized holdings
gain net of
reclassification
adjustments (net of
income taxes of
$159)................. -- -- -- -- 271 -- -- 271
--------
Total comprehensive
income.............. 30,355
Conversion of Class B
stock to Class A stock
(6,186,647 shares)..... 62 (62) -- -- -- -- -- --
Two-for-one split
(11,719,465 Class A
shares and 6,186,647
Class B shares)........ 117 62 (179) -- -- -- -- --
Exercise of stock
options, net of stock
tendered (403,356 Class
A shares).............. 4 -- 3,212 -- -- -- -- 3,216
Tax benefit from
exercise of
nonqualified stock
options................ -- -- 1,187 -- -- -- -- 1,187
Stockholder loans....... -- -- -- (37) -- -- -- (37)
Noncash stock
compensation........... -- -- 1,061 -- -- -- -- 1,061
Minority interest
deficit in
Superstar/Netlink Group
LLC at formation....... -- -- -- -- -- -- (49,169) (49,169)
Excess of earnings over
distributions to
minority interest in
Superstar/Netlink Group
LLC.................... -- -- -- -- -- -- 8,454 8,454
---- ---- -------- ----- ----- -------- ------- --------
Balance at December 31,
1996................... 238 124 34,788 (509) 161 70,073 (40,715) 64,160
Comprehensive income,
net of tax:
Net income.............. -- -- -- -- -- 45,760 -- 45,760
Change in unrealized
appreciation
(depreciation) on
available for sale
securities:
Unrealized holding
loss, net of
reclassification
adjustments (net of
income taxes of
$102)................. -- -- -- -- (174) -- -- (174)
--------
Total comprehensive
income.............. 45,586
Exercise of stock
options, net of stock
tendered (701,829 Class
A shares).............. 7 -- 2,601 -- -- -- -- 2,608
Repurchase and
retirement of stock
(123,995 Class A
shares)................ (1) -- (2,076) -- -- -- -- (2,077)
Tax benefit from
exercise of non-
qualified stock
options................ -- -- 3,799 -- -- -- -- 3,799
Payments received on
stockholders' notes.... -- -- -- 509 -- -- -- 509
Excess of distributions
to minority interest in
Superstar/ Netlink
Group LLC over
earnings............... -- -- -- -- -- -- (2,591) (2,591)
---- ---- -------- ----- ----- -------- ------- --------
Balance at December 31,
1997................... 244 124 39,112 -- (13) 115,833 (43,306) 111,994
Comprehensive income,
net of tax:
Net income.............. -- -- -- -- -- 64,777 -- 64,777
Change in unrealized
appreciation
(depreciation) on
available for sale
securities:
Unrealized holdings
loss net of
reclassification
adjustments (net of
income taxes of
$24).................. -- -- -- -- (41) -- -- (41)
--------
Total comprehensive
income.............. 64,736
Two-for-one split
(24,224,833 Class A
shares and 12,373,294
Class B shares)........ 242 123 (365) -- -- -- -- --
Exercise of stock
options (133,220 Class
A Shares).............. 1 -- 1,222 -- -- -- -- 1,223
Repurchase and
retirement of stock
(887,800 Class A
shares)................ (8) -- (18,775) -- -- -- -- (18,783)
Tax benefit from
exercise of non-
qualified stock
options................ -- -- 362 -- -- -- -- 362
Non-cash stock
compensation........... -- -- 763 -- -- -- -- 763
Minority interest
adjustment in
Superstar/Netlink Group
LLC at acquisition of
Turner Vision.......... -- -- -- -- -- -- 24,524 24,524
Excess earnings over
distributions to
minority interest in
Superstar/Netlink Group
LLC.................... -- -- -- -- -- -- 17,603 17,603
---- ---- -------- ----- ----- -------- ------- --------
Balance at December 31,
1998................... $479 $247 $ 22,319 $ -- $ (54) $180,610 $(1,179) $202,422
==== ==== ======== ===== ===== ======== ======= ========
</TABLE>
See accompanying notes.
F-27
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income...................................... $ 64,777 $ 45,760 $ 30,084
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on issuance of equity by subsidiary...... (13,373) -- --
Depreciation and amortization................. 28,027 18,651 16,323
Minority interest in earnings................. 21,689 17,782 9,698
Deferred income taxes......................... 8,650 2,161 232
Amortization of bond premiums................. 1,019 937 650
(Gain) loss on asset dispositions............. (10,890) (132) 123
Other......................................... 663 463 945
Changes in operating assets and liabilities:
Accounts receivable......................... 2,786 (10,333) (2,341)
Prepaid expenses and other.................. 2,041 989 (2,929)
Accounts payable............................ (817) (914) 440
Accrued liabilities......................... (5,071) 7,427 8,648
Customer prepayments........................ (4,755) (4,378) (7,971)
Other....................................... (504) (427) (2,791)
-------- -------- --------
Net cash provided by operating activities....... 94,242 77,986 51,111
Investing activities:
Capital expenditures.......................... (11,111) (10,238) (14,427)
Investments and acquisitions.................. (42,102) (130) (106)
Purchases of marketable securities............ (74,360) (91,666) (47,065)
Sales of marketable securities................ 116,347 3,659 --
Maturities of marketable securities........... 73,822 33,041 20,482
Other......................................... (857) (1,590) (1,025)
-------- -------- --------
Net cash provided by (used in)
investing activities............................ 61,739 (66,924) (42,141)
Financing activities:
Repayment of note payable and long-term debt.. (6,201) (7,261) (14)
Note payable borrowings....................... -- 7,446 7,245
Repayment of capital lease obligations........ (3,493) (3,258) (3,039)
Issuance of stock............................. 1,223 2,608 3,216
Repurchase of stock........................... (18,783) (2,077) --
Distributions to minority interests........... (3,705) (21,000) (2,300)
Other......................................... (258) 436 233
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (31,217) (23,106) 5,341
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 124,764 (12,044) 14,311
Cash and cash equivalents at beginning of year.. 30,752 42,796 28,485
-------- -------- --------
Cash and cash equivalents at end of year........ $155,516 $ 30,752 $ 42,796
======== ======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The Company
United Video Satellite Group, Inc. ("UVSG" or the "Company") provides
satellite-delivered video, audio, data and program promotion services to cable
television systems, direct-to-home satellite dish users, radio stations and
private network users primarily throughout North America, and software
development and system integration services to commercial entities, the
federal government and defense related agencies in locations throughout the
United States. The majority of the Company's operating income is earned
through the sale of home satellite dish services and satellite distribution of
video and program promotion services.
Merger
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended (the "Merger Agreement"),
among UVSG, Tele-Communications, Inc. ("TCI") and TCI Merger Sub, Inc.
("Merger Sub"), pursuant to which Merger Sub was merged into UVSG, with UVSG
as the surviving corporation (the "Merger"). The Merger was consummated later
that same day.
Pursuant to the terms of the Merger Agreement, holders of Class A Common
Stock of UVSG (other than the then controlling stockholder) had the right to
elect to have up to half of their shares of Class A Common Stock converted
into "Merger Consideration" consisting of one share of TCI's Redeemable
Convertible TCI Group Preferred Stock, Series G, par value $.01 per share and
one share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock,
Series H, par value $.01 per share. A total of 22,230,784 shares of Class A
Common Stock were held by stockholders who had the right to convert up to half
of their shares into Merger Consideration, and a total of 4,290,932 shares
were so converted.
In connection with the Merger, UVSG's then controlling stockholder
converted 24,746,588 of the shares of Class B Common Stock of UVSG held by him
into shares of UVSG Class A Common Stock. Pursuant to the terms of the Merger
Agreement, the remaining 24,746,588 shares of Class B Common Stock retained by
UVSG's controlling stockholder were converted into Merger Consideration.
As a consequence of the foregoing transactions, TCI acquired 24,746,588
shares of UVSG Class B Common Stock and 4,290,932 shares of UVSG Class A
Common Stock, together representing approximately 40% of the issued and
outstanding common stock of UVSG and approximately 86% of the total voting
power of UVSG common stock immediately after the Merger, resulting in UVSG
becoming a majority-controlled subsidiary of TCI.
On January 12, 1998, TCI acquired the remaining 24,746,588 shares of UVSG
Series A Common Stock held by UVSG's former controlling stockholder,
increasing TCI's equity ownership interest to approximately 73% and its voting
power to approximately 93%. (See Note 15).
2. Significant Accounting Policies
Basis of Presentation
These financial statements present the consolidated financial position,
results of operations and cash flows of UVSG and its subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
F-29
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketable Securities
The Company invests the majority of its cash produced by operating
activities in municipal debt securities and equities which are classified as
cash and cash equivalents or marketable securities, based on maturity dates
when acquired. These investments are diversified among high credit quality
issues in accordance with the Company's investment policy. Management
determines the appropriate classification of its marketable securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Marketable securities which the Company may not hold to maturity are
classified as available-for-sale. Securities available-for-sale are carried at
fair market value with the unrealized gains and losses, net of tax, reported
as accumulated other comprehensive income or loss. At December 31, 1998 and
1997, the Company classified all of its marketable securities as available-
for-sale.
The amortized cost of the Company's municipal debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization or accretion is included in interest income. Realized gains and
losses and declines in value judged to be other-than-temporary are included in
other income. The cost of the municipal debt securities sold is based on the
specific identification method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and
improvements that extend the useful lives of assets are capitalized. Other
expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation and Amortization
Depreciation and amortization of property, plant and equipment is provided
on a straight-line basis over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Leased transponders.............................................. 9-12 years
Building......................................................... 10-32 years
Building improvements............................................ 5-10 years
Electronic equipment............................................. 3-5 years
Equipment and other.............................................. 3-15 years
</TABLE>
Intangible assets are being amortized on a straight-line basis over 5-15
years. (See Notes 3 and 6.)
Revenue Recognition on Satellite Services
The Company recognizes revenue on the accrual basis in the month the
service is provided. Payments received in advance for subscription services
are deferred until the month earned, at which time income is recognized. The
Company's liability is limited to the unearned prepayments in the event that
the Company is unable to provide service.
Revenue Recognition on Advertising
The Company recognizes advertising revenue when the related advertisement
is aired.
Revenue Recognition on Systems Integration Services
Revenues and profits on systems integration services are determined based
on progress to completion measured generally either by incurred billable hours
and costs at contract rates or on the percentage-of-completion method by
comparing actual costs incurred to total estimated costs expected to be
incurred to complete the contract.
F-30
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Any excess of contract revenue recognized (i.e., costs incurred plus gross
profit earned) over billings to date represents unbilled revenues earned and
is included in accounts receivable. Any excess of billings over contract
revenue recognized is deferred as advance billings and is included in accrued
liabilities. At December 31, 1998 and 1997, $4.5 million and $5.5 million,
respectively, of earned revenues not yet billed are included in accounts
receivable. At December 31, 1998 and 1997, there were no excess billings over
contract revenue earned. Estimated losses of contracts are recorded in full
when a loss is anticipated.
Subsidiary Equity Transactions
The Company recognizes as nonoperating income or loss its proportionate
share of increases or decreases in the equity of its affiliates arising from
equity transactions of such affiliates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and intangible assets, including
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of the asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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>
1998 1997 1996
----------------- ----------------- -----------------
Per Share Per Share Per Share
Amount Amount Amount
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income.............. $64,777 $45,760 $30,084
======= ======= =======
Weighted average number
of shares of common
stock outstanding(1)... 73,208 $0.88 73,347 $0.62 72,020 $0.42
===== ===== =====
Effect of dilutive
securities--stock
options(1)............. 927 711 1,502
------- ------- -------
Weighted average number
of shares of common
stock and dilutive
potential common
shares(1).............. 74,135 $0.87 74,058 $0.62 73,522 $0.41
======= ===== ======= ===== ======= =====
</TABLE>
- --------
(1) 1997 and 1996 amounts adjusted for two-for-one stock split (See Note 11).
Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents,
marketable securities and trade receivables. The Company invests its available
cash in high grade municipal securities, equity securities and money market
funds. Concentration of credit risk
F-31
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with respect to satellite services trade receivables are limited since a
substantial number of the Company's customers pay in advance, providing for
receipt of funds prior to service being rendered, or provide letters of credit
as security. For other customers, service is generally terminated in the event
payment is not received within 30 days of service. The Company generally does
not require collateral from its systems integration services customers as
progress billings are rendered to customers as the work is completed. Credit
losses have been within management's expectations.
Stock-based Compensation
The Company follows the guidelines established by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employees' stock options.
Related Party Transactions
TCI and its consolidated affiliates purchase video, program promotion and
guide services and subscriber management services from the Company. During the
years ended December 31, 1998, 1997 and 1996, revenues earned by the Company
from TCI were $9.1 million, $8.1 million and $8.1 million, respectively.
Additionally, TCI purchased system integration services from the Company
totaling $516,000, $1.2 million and $3.1 million during 1998, 1997 and 1996,
respectively. The Company purchases programming and production services from
TCI consolidated affiliates. These purchases totaled $43.7 million, $36.8
million and $34.1 million for the years ended December 31, 1998, 1997 and
1996, respectively. (See Note 15).
At December 31, 1998 and 1997, the Company had outstanding receivables of
$2.4 million and $953,000, respectively, due from TCI consolidated affiliates
and outstanding liabilities of $3.5 million and $3.6 million, respectively,
due to TCI consolidated affiliates.
The Company has included above transactions with TCI and all entities in
which TCI has an interest greater than 50%. In addition, the Company has
significant transactions with entities in which TCI owns, directly or
indirectly, 50% or less, which transactions were conducted at arms-length in
the ordinary course of business.
Research and Development Costs
Research and development costs of $7.9 million, $7.5 million and $5.4
million for the years ended December 31, 1998, 1997 and 1996, respectively,
are included in selling, general and administrative expenses.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("Statement") No. 130, Reporting
Comprehensive Income. The Company has reclassified certain amounts in the
consolidated balance sheet to conform to the requirements of Statement 130.
Statement 130 requires that all items which are components of comprehensive
earnings or losses be reported in a financial statement in the period in which
they are recognized. The Company has included unrealized holding gains and
losses for available-for-sale securities that are recorded directly in
stockholders' equity in other comprehensive earnings. Pursuant to Statement
130, these items are reflected, net of related tax effects, as components of
comprehensive earnings and are included in accumulated other comprehensive
earnings in the Company's consolidated statements of changes in stockholders'
equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-32
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain financial statement items for prior years have been reclassified to
conform to the 1998 presentation.
3. Acquisitions
Effective February 1, 1998, Turner Vision, Inc. ("Turner Vision")
contributed its retail C-band home satellite dish business' assets,
obligations and operations to Superstar/Netlink Group LLC ("SNG") in return
for an approximate 20% interest in SNG, reducing the Company's and Liberty
Media Corporation's ("Liberty") ownership interest in SNG to approximately 40%
each. The Company continues to manage SNG and SNG's operating results continue
to be consolidated with those of the Company. Liberty is wholly owned by TCI.
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 $13.4 million.
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 years ended December 31, 1998 and 1997 as though
the retail operations of Turner Vision and ODS had been acquired as of January
1, 1997, excluding the gain recognized by the Company as a result of the
Turner Vision transaction (in thousands, unaudited):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues................................................... $606,598 $596,854
Net income................................................. 50,252 34,504
Net income per share:
Basic.................................................... $ 0.69 $ 0.47
Diluted.................................................. 0.68 0.47
</TABLE>
F-33
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Marketable Securities
The Company's marketable securities, which are all classified as available-
for-sale, as of December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998
--------------------------------
Gross
Unrealized Estimated
Unamortized Gains Fair
Cost (Losses) Value
----------- ---------- ---------
<S> <C> <C> <C>
Municipal debt securities:
Due after three months
through one year....... $1,664 $ 1 $1,665
Due after one year
through three years.... 3,908 19 3,927
------ ----- ------
5,572 20 5,592
Equity securities......... 318 (106) 212
------ ----- ------
$5,890 $ (86) $5,804
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------
Gross
Unrealized Estimated
Unamortized Gains Fair
Cost (Losses) Value
----------- ---------- ---------
<S> <C> <C> <C>
Municipal debt securities:
Due after three months
through one year....... $ 14,661 $ (7) $ 14,654
Due after one year
through three years.... 97,378 (32) 97,346
-------- ---- --------
112,039 (39) 112,000
Equity securities......... 315 19 334
-------- ---- --------
$112,354 $(20) $112,334
======== ==== ========
</TABLE>
Fair values for available-for-sale securities are based on quoted market
prices. The carrying amounts reported in the consolidated balance sheet for
all other financial instruments approximate those instruments' fair values.
In 1998 and 1997, realized gains from the sale of marketable securities
were $10.4 million and $17,000, respectively which is included in "Other
Income".
5. Property, Plant and Equipment
Property, plant and equipment as of December 31 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Leased transponders.......................................... $ 37,959 $ 37,959
Land......................................................... 172 172
Building..................................................... 2,103 1,595
Building improvements........................................ 4,274 4,267
Electronic equipment......................................... 33,708 31,952
Equipment and other.......................................... 48,129 41,009
-------- --------
126,345 116,954
Accumulated depreciation and amortization.................... 81,166 65,962
-------- --------
$ 45,179 $ 50,992
======== ========
</TABLE>
F-34
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the above amounts are two transponders leased under long-term
agreements that are accounted for as capital leases. Accumulated amortization
of such assets was $23.3 million and $19.6 million at December 31, 1998 and
1997, respectively.
6. Intangible Assets
Intangible assets as of December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Goodwill.................................................. $ 99,494 $35,860
Patents................................................... 28,238 --
Other..................................................... 2,035 2,035
-------- -------
129,767 37,895
Accumulated amortization.................................. (18,347) (7,823)
-------- -------
$111,420 $30,072
======== =======
</TABLE>
7. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Deferred tax assets:
Bad debt expense............................................. $ 729 $ 821
Deferred compensation........................................ 377 616
Compensated absences......................................... 282 401
Capital lease obligations.................................... 822 770
Other........................................................ 632 950
------ -----
Total deferred tax assets.................................. 2,842 3,558
------ -----
Deferred tax liabilities:
Book/tax depreciation........................................ 4,482 4,172
Investment in Superstar/Netlink Group LLC.................... 7,590 --
------ -----
Total deferred tax liabilities............................. 12,072 4,172
------ -----
Net deferred tax liabilities................................... $9,230 $ 614
====== =====
</TABLE>
Significant components of the provision for income taxes for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $26,478 $21,772 $15,476
State.............................................. 2,379 1,959 1,414
------- ------- -------
28,857 23,731 16,890
Deferred:
Federal............................................ 7,901 1,985 192
State.............................................. 749 176 40
------- ------- -------
8,650 2,161 232
------- ------- -------
$37,507 $25,892 $17,122
======= ======= =======
</TABLE>
F-35
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to income tax expense is (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Tax at statutory rate (35%)..................... $43,391 $31,302 $19,916
Minority interest in consolidated entities not
subject to income taxes........................ (7,490) (6,294) (3,650)
State taxes, net of federal benefit............. 2,033 1,388 945
Effect of municipal interest earned and exempt
from federal tax............................... (1,215) (1,411) (791)
Non-deductible goodwill amortization............ 748 748 804
Other........................................... 40 159 (102)
------- ------- -------
$37,507 $25,892 $17,122
======= ======= =======
</TABLE>
Income taxes paid were approximately $28.5 million, $21.9 million and $15.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
8. Credit Arrangements
SSDS, Inc. ("SSDS") has a revolving credit facility with a bank that
provides for borrowings up to the lesser of 80% of the billed trade accounts
receivable outstanding less than 90 days, subject to certain conditions, or
$5.0 million. Borrowings under this credit facility bear interest at the
bank's stated prime rate plus a margin (8.25% at December 31, 1998). SSDS pays
a commitment fee of 0.375% on the average daily unused portion of this credit
facility. Outstanding borrowings under the credit facility were $1.7 million
as of December 31, 1998 and are classified as current liabilities. The credit
facility expires on April 30, 1999 and is secured by substantially all of
SSDS's assets. This credit facility replaced the revolving credit agreement
which existed at December 31, 1997. Borrowings under the previous credit
facility were $7.4 million as of December 31, 1997.
Interest paid by the Company, primarily on capital lease obligations, was
$1.7 million, $2.0 million and $1.9 million for the years ended December 31,
1998, 1997 and 1996, respectively.
F-36
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Leases
The Company leases operating and office premises and satellite
transponders. The terms of certain of the agreements provide for an option to
cancel the agreements after a period of time, subject to cancellation charges
and/or meeting certain conditions. Two satellite transponders are under long-
term lease arrangements that are accounted for as capital leases. The
remainder of the satellite transponder leases are accounted for as operating
leases.
Future minimum lease payments under capital and noncancellable operating
leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
1999..................................................... $ 4,740 $11,044
2000..................................................... 4,740 8,272
2001..................................................... 3,400 7,504
2002..................................................... 2,400 6,923
2003..................................................... 2,400 6,979
Thereafter............................................... 2,400 7,315
------- -------
Total future minimum lease payments.................... 20,080 48,037
Less amount representing interest at 7%.................... 3,328 --
Less sublease revenues..................................... -- 2,030
------- -------
Net future minimum lease payments.......................... 16,752 $46,007
=======
Less current portion....................................... 3,745
-------
$13,007
=======
</TABLE>
Rental expense under noncancellable operating leases amounted to $10.7
million (net of $1.7 million in sublease revenues), $9.6 million (net of $1.8
million in sublease revenues) and $8.6 million (net of $1.7 million in
sublease revenues) for the years ended December 31, 1998, 1997 and 1996,
respectively.
10. Stock Options and Other Employee Incentive Plans and Agreements
The Company sponsors the United Video Satellite Group, Inc. Equity
Incentive Plan under which 8 million shares of UVSG's Class A Common Stock are
authorized to be issued in connection with the exercise of awards of stock
options, stock appreciation rights and restricted stock granted under the
plan. The Equity Incentive Plan provides that the price at which each share of
stock covered by an option may be acquired shall in no event be less than 100%
of the fair market value of the stock on the date the option is granted,
except in certain limited circumstances. Additionally, the Company sponsors
the United Video Satellite Group, Inc. Stock Option Plan for Non-Employee
Directors under which 500,000 shares of UVSG's Class A Common Stock are
authorized to be issued in connection with the exercise of stock options
granted thereunder.
F-37
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, 6.3 million shares of Class A Common Stock of the
Company were reserved for issuance under the stock option plans. The options
granted under the stock option plans expire ten years from the date of grant.
Options outstanding, including options issued under stock option agreements
previous to the existing stock option plans, are as follows (in thousands,
except exercise prices):
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Options(1) Price(1) Exercisable(1)
---------- --------- --------------
<S> <C> <C> <C>
At January 1, 1996....................... 4,121 $ 4.25 1,230
Granted................................ 1,276 11.11
Exercised.............................. (815) 4.04
Cancelled.............................. (805) 9.21
------
At December 31, 1996..................... 3,777 5.56 2,478
Granted................................ 916 8.54
Exercised.............................. (2,089) 4.04
Cancelled.............................. (252) 5.88
------
At December 31, 1997..................... 2,352 8.03 708
Granted................................ 709 16.61
Exercised.............................. (254) 6.84
Cancelled.............................. (36) 9.41
------
At December 31, 1998..................... 2,771 10.32 1,155
======
</TABLE>
- --------
(1) Adjusted for two-for-one stock split. (See Note 11).
Exercise prices for options outstanding as of December 31, 1998 ranged from
$4 to $17. The weighted-average remaining contractual life of those options is
7.8 years.
The Company applies APB No. 25 and related Interpretations in accounting
for its employee stock options, and not the fair-value accounting provided for
under Statement No. 123, "Accounting for Stock-based Compensation". Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996 respectively: risk-free interest rates of
4.7%, 5.7% and 6.0%; a dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .41, .41 and .38; and a
weighted-average expected life of the options of 5 years. The weighted average
estimated fair value of stock options granted during 1998, 1997 and 1996 was
$7.15, $7.64 and $10.16, respectively.
F-38
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pro forma net income............................ $63,408 $45,060 $29,620
Pro forma earnings per share:
Basic......................................... 0.87 0.61 0.41
Diluted....................................... 0.86 0.61 0.40
</TABLE>
Pro forma net income reflects only options granted subsequent to December
31, 1994. Therefore, the full impact of calculating compensation cost for
stock options under Statement No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over the
options' vesting period, which is generally five years, and compensation cost
for options granted prior to January 1, 1995 is not considered.
The Company has entered into incentive compensation agreements with key
management personnel. These agreements require payments upon termination or
retirement based on various valuation formulas contained in the agreements.
Cash payments to settle certain incentive compensation agreements aggregated
$464,000, $427,000 and $2.8 million during the years ended December 31, 1998,
1997 and 1996, respectively.
SSDS sponsors a stock option plan which authorizes the issuance of up to
700,000 shares of SSDS's common stock to key employees and directors of SSDS.
At December 31, 1998, 75,922 options with an exercise price of approximately
$12 and vesting over one to five year periods had been granted under the plan.
If all of the outstanding SSDS options were exercised, the Company's ownership
interest in SSDS would decrease to 69%. There was no compensation expense
under this plan during 1998, 1997 or 1996.
SSDS also sponsors a qualified stock purchase investment plan through which
eligible participating employees may purchase shares of SSDS's common stock
through payroll deduction. The plan has authorized 100,000 shares of SSDS's
common stock for purchase pursuant to the plan. At December 31, 1998, 38,000
shares of SSDS's common stock had been acquired by SSDS's employees at prices
approximating 85% of the fair market value of the stock. There was no
compensation expense under this plan during 1998, 1997 or 1996.
11. Common Stock
The Class A Common Stock entitles the holder to one vote per share and the
Class B Common Stock entitles the holder to ten votes per share. Each share of
Class B Common Stock is convertible, at the option of the holder, into one
share of Class A Common Stock. Class A Common Stock is not convertible into
Class B Common Stock.
On July 28, 1998, the stockholders of the Company approved a proposal to
amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of Class A Common Stock and Class B Common Stock
to 650,000,000 shares and 300,000,000 shares, respectively.
On August 20, 1998, the Company effected a two-for-one split of its Class A
Common Stock and Class B Common Stock in the form of a stock dividend of one
additional share of Class A Common Stock for each share of Class A Common
Stock outstanding and one additional share of Class B Common Stock for each
share of Class B Common Stock outstanding to holders of record on August 10,
1998.
F-39
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Employee Benefit Plans
The Company sponsors defined contribution plans (collectively, "the Plans")
which provide most of its employees with the ability to defer a percentage of
their annual compensation subject to certain limitations. The Company matches
100% of the employee's deferrals up to a fixed percentage, determined
annually, of the employee's annual compensation. Vesting of the Company's
matching contributions begins at 20% after one full year of service and from
the second through the fifth years, vesting increases by 20% each year until
full vesting occurs. The Company's contributions to the Plans for the years
ended December 31, 1998, 1997 and 1996 were $1.3 million, $1.3 million and
$1.0 million, respectively. The Company does not provide any postretirement or
postemployment benefits.
13. Legal Proceedings
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 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 argument, on November 9, 1998,
StarSight moved to dismiss the case asserting that the Company had abandoned
the Prevue Express product at issue in the case and that the Court therefore
lacked subject matter jurisdiction over the matter. The Company opposed the
motion on November 12, 1998. The Court has not yet issued a decision on that
motion. On February 19, 1999 the District Court entered Partial Findings of
Fact and Conclusions of Law determining that the 121
F-40
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Patent is not unenforceable by reason of inequitable conduct. The Court
referred the case to a Magistrate Judge to schedule a settlement conference
prior to the Court entering additional findings of fact and conclusions of law
with respect to the remaining issues tried. There can be no assurance that
this litigation can be resolved without material adverse effect on the
business prospects of the Company and its subsidiaries and the future
financial position or results of the Company and its subsidiaries. The Company
has not provided for any potential loss as a result of this litigation.
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 Prevue Networks, Inc. subsidiary ("Prevue", Prevue's name is
being changed to TV Guide Networks, Inc. as of the closing of the
Acquisitions) 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, TCI as a defendant, and specifying Prevue
Interactive as the allegedly infringing product. TCI Communications, Inc. was
subsequently substituted for TCI. Prevue 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, Prevue asserted
that StarSight had violated the antitrust laws. On August 7, 1998, Prevue
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
Prevue's 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. Prevue opposed the motion for consolidation. The JPML has not
ruled on Gemstar's motion. On January 22, 1999, Gemstar, StarSight and
SuperGuide filed a motion requesting a stay of the action against Prevue 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 Prevue's
motion to the Northern District of Oklahoma. There can be no assurance that
this litigation can be resolved without material adverse effect on the
business prospects of the Company and its subsidiaries and the future
financial position or results of the Company and its subsidiaries. The Company
has not provided for any potential loss as a result of this litigation.
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.
No provision has been made in the Company's financial statements for this
contingency, nor has the Company collected from its customers and remitted
their tax (which would aggregate approximately $300,000 annually) for periods
subsequent to June 1994. However, pursuant to the State's Protest Money Act
which stops further accrual of interest during the appeals process, the
Company has paid into the Illinois Court $2.4 million, which represents the
amount of the State's claim applicable to the period August 1985 through June
1994. Also pursuant to the State's Protest Money Act, the Company filed a
Verified Complaint for Injunctive and Other Relief in the Cook County Chancery
Court on February 28, 1995, and an Amended Verified Complaint on October 6,
1995. The Company filed a motion for summary judgment on August 29, 1996,
asking the Court for summary disposition of the case. Pursuant to this motion,
the Company received a partial refund of $123,000 on February 10, 1997. The
remaining issues raised by the motion are still pending. If the Company's
motion is not granted, it is anticipated that a trial date may be scheduled.
While the
F-41
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
$4.1 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 on going. 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.
14. Segment Information
Segment information has been prepared in accordance with Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has three reportable segments: home satellite dish services
(Superstar), program promotion and guide services (Prevue), and satellite
distribution of video entertainment services (UVTV). Superstar markets and
distributes programming to the C-band direct-to-home satellite dish subscriber
market as well as other telemarketing services. Prevue has developed non-
interactive analog programming guide channels as well as interactive program
guide services and software applications and markets them to cable television
systems and other multi-channel video programming distributors. Prevue derives
revenues from the sales of the program guide and promotion services and from
the sale of advertising space within the guides. UVTV markets and distributes
to programming distributors certain video and audio services.
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 accounting policies of the segments are the same as
those described in the summary of significant accounting policies (See Note
2). The Company accounts for inter-segment sales as if the sales were to third
parties at market prices.
F-42
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment information as of December 31, 1998, 1997 and 1996 and for each of
the years then ended is as follows:
<TABLE>
<CAPTION>
Other Corporate
Prevue Superstar UVTV Segments Unallocated Eliminations Consolidated
------- --------- ------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Revenues from external
customers:
Satellite services.... $36,473 $426,586 $37,205 $16,848 $ -- $ -- $517,112
Advertising revenues.. 40,349 -- -- -- -- -- 40,349
Systems integration
services............. -- -- -- 40,959 -- -- 40,959
Intersegment
revenues............. -- -- 7,759 -- -- (7,759) --
------- -------- ------- ------- ------- -------- --------
Total revenues........ 76,822 426,586 44,964 57,807 -- (7,759) 598,420
Operating expenses,
excluding depreciation
and amortization...... 53,562 358,317 13,803 55,391 1,380 (7,759) 474,694
------- -------- ------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization.......... $23,260 $ 68,269 $31,161 $ 2,416 $(1,380) $ -- 123,726
======= ======== ======= ======= ======= ========
Depreciation and
amortization.......... (28,027)
Gain on issuance of
equity by subsidiary.. 13,373
Interest income........ 6,346
Interest expense....... (1,629)
Other income........... 11,607
Other expense.......... (1,423)
--------
Income before income
taxes and
minority interest..... $123,973
========
Segment assets......... $62,333 $204,439 $87,965 $79,001 $18,994 $(48,950) $403,782
======= ======== ======= ======= ======= ======== ========
1997
Revenues from external
customers:
Satellite services..... $32,128 $350,490 $34,854 $17,681 $ -- $ -- $435,153
Advertising revenues... 30,828 -- -- -- -- -- 30,828
Systems integration
services.............. -- -- -- 41,617 -- -- 41,617
Intersegment revenues.. -- -- 6,077 518 -- (6,595) --
------- -------- ------- ------- ------- -------- --------
Total revenues........ 62,956 350,490 40,931 59,816 -- (6,595) 507,598
Operating expenses,
excluding depreciation
and amortization...... 40,548 301,209 13,123 54,148 1,170 (6,595) 403,603
------- -------- ------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization.......... $22,408 $ 49,281 $27,808 $ 5,668 $(1,170) $ -- 103,995
======= ======== ======= ======= ======= ========
Depreciation and
amortization.......... (18,651)
Interest income........ 5,882
Interest expense....... (2,122)
Other income........... 401
Other expense.......... (71)
--------
Income before income
taxes and
minority interest..... $ 89,434
========
Segment assets......... $46,060 $ 98,589 $75,424 $58,479 $43,681 $(27,781) $294,452
======= ======== ======= ======= ======= ======== ========
1996
Revenues from external
customers:
Satellite services..... $26,862 $301,640 $34,553 $15,636 $ -- $ -- $378,691
Advertising revenues... 22,774 -- -- -- -- -- 22,774
Systems integration
services.............. -- -- -- 35,703 -- -- 35,703
Intersegment revenues.. -- -- 3,635 458 -- (4,093) --
------- -------- ------- ------- ------- -------- --------
Total revenues........ 49,636 301,640 38,188 51,797 -- (4,093) 437,168
Operating expenses,
excluding depreciation
and amortization...... 33,676 269,115 14,727 51,742 458 (4,093) 365,625
------- -------- ------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization.......... $15,960 $ 32,525 $23,461 $ 55 $ (458) $ -- 71,543
======= ======== ======= ======= ======= ========
Depreciation and
amortization.......... (16,323)
Interest income........ 3,401
Interest expense....... (2,024)
Other income........... 551
Other expense.......... (244)
--------
Income before income
taxes and
minority interest..... $ 56,904
========
Segment assets......... $57,317 $ 87,157 $51,892 $60,177 $44,028 $(50,467) $250,104
======= ======== ======= ======= ======= ======== ========
</TABLE>
F-43
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue from other non-reportable operating segments primarily includes
revenue derived from information technology consulting, integration and
software development services and from satellite transmission services.
Unallocated corporate profit and loss amounts are primarily unallocated
corporate overhead and corporate development costs. Unallocated segment assets
include corporate property and equipment and miscellaneous investments and other
assets not allocated to segments. Eliminations include inter-segment revenues
and expenses and inter-segment payables and receivables.
15. Pending Transactions
On June 10, 1998, UVSG and News America Incorporated, a subsidiary of News
Corporation Limited ("News Corp."), entered into an agreement to purchase News
America Publications, Inc. and TVSM, Inc. in exchange for 22,503,412 shares of
UVSG Class A common stock, 37,496,588 shares of UVSG Class B common stock and
$800 million in cash for total consideration of approximately $1.9 billion
(the "TV Guide Transaction"). These entities publish TV Guide Magazine and
other printed television program listings guides and distribute, through the
Internet, an entertainment service known as TV Guide Online. In connection
with this transaction, the Company expects to issue $400 million of senior
subordinated notes due 2009 and obtain bank borrowings of approximately $200
million. In addition, News Corp. will purchase from UVSG, at $20 per share,
6,534,108 shares of the Company's Class A common stock to equalize News
Corp.'s ownership in UVSG with that of TCI.
On November 30, 1998, UVSG and Liberty entered into an Amended and Restated
Stock Purchase Agreement, effective as of May 18, 1998, pursuant to which UVSG
agreed to issue to Liberty 12,750,000 shares of Class B common stock in
exchange for all outstanding shares of each of three subsidiaries of Liberty
that together own approximately 40% of SNG (bringing the Company's ownership
to 80%), the Denver 6 business that provides satellite-transmitted programming
services known as the "Denver 6" and a business that sells programming
packages to SMATV systems that serve hotels and multi-unit dwellings (the
"Liberty Transaction").
Both the TV Guide and Liberty Transactions are expected to close in March
1999 subject to completion of financing arrangements. The TV Guide Transaction
will be accounted for as a purchase and the Liberty Transaction will be
accounted for as a combination of entities under common control, similar to a
pooling of interests.
16. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1998
Revenues........................... $140,317 $149,228 $153,632 $155,243
Operating expenses................. 121,968 124,625 124,582 131,546
Operating income................... 18,349 24,603 29,050 23,697
Net income......................... 18,914 13,745 14,466 17,652
Earnings per share:
Basic............................ 0.26 0.19 0.20 0.24
Diluted.......................... 0.25 0.18 0.20 0.24
1997
Revenues........................... $122,876 $128,101 $125,905 $130,716
Operating expenses................. 105,456 107,296 103,318 106,184
Operating income................... 17,420 20,805 22,587 24,532
Net income......................... 9,407 11,271 11,902 13,180
Earnings per share:
Basic............................ 0.13 0.15 0.16 0.18
Diluted.......................... 0.13 0.15 0.16 0.18
</TABLE>
F-44
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Supplemental Guarantor Information
On June 11, 1998, the Company and News Corp. announced the signing of an
agreement whereby News Corp.'s TV Guide properties (including TV Guide
magazine, the TVGEN entertainment web site and the then soon to be acquired
cable guide publisher TVSM, Inc.) are to be combined with the Company to
create a platform for offering television guide services to consumers and
advertisers. As part of this combination, a unit of News Corp. will receive
consideration consisting of $800 million in cash and 60 million shares of the
Company's stock to be composed of, assuming the transaction with Liberty is
completed at the same time (see Note 15), 22,503,412 shares of Class A Common
Stock and 37,496,588 shares of Class B Common Stock. As a result of the
transaction, assuming the pending Liberty transaction is also completed, News
Corp. will have an approximate 44% economic interest in the Company, with TCI
Ventures Group and Liberty having an approximate 44% economic interest, and
the other stockholders of the Company having approximately 13%. Following the
transaction, News Corp. and the combination of TCI Ventures Group/Liberty will
each have approximately 49% of the voting power of the Company's outstanding
stock.
In connection with the acquisition, UVSG intends to issue $400,000,000 in
aggregate principal amount of its senior subordinated notes due 2009, which
shall not be callable until 2004. A group of UVSG's subsidiaries (the
"Guarantors") will guarantee the senior subordinated indebtedness.
Supplemental condensed combining financial information of UVSG, the Guarantors
and the remainder of UVSG's consolidated group (the "Non-Guarantors") is
presented below.
Investments in the Non-Guarantors by their parent companies that are part
of UVSG 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.
F-45
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
As of December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 98,428 $ 57,088 $ -- $155,516
Marketable securities,
at fair value........ -- 5,804 -- -- 5,804
Accounts receivable,
net of allowance for
doubtful accounts.... -- 19,441 39,839 -- 59,280
Accounts and notes
receivable from
affiliates........... -- 18,237 62,911 (81,148) --
Other current assets.. -- 1,959 5,462 -- 7,421
-------- -------- -------- --------- --------
Total current
assets............. -- 143,869 165,300 (81,148) 228,021
Property, plant and
equipment, at cost, net
of accumulated
depreciation and
amortization........... -- 32,722 12,457 -- 45,179
Intangible assets, net
of accumulated
amortization........... -- 2,973 108,447 -- 111,420
Investment in
subsidiaries, at
equity................. 202,422 -- -- (202,422) --
Other assets, net of
accumulated
amortization........... -- 14,028 5,171 (37) 19,162
-------- -------- -------- --------- --------
Total assets............ $202,422 $193,592 $291,375 $(283,607) $403,782
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable...... $ -- $ 3,860 $ 2,286 $ -- $ 6,146
Accounts and notes
payable to
affiliates........... -- 62,911 18,237 (81,148) --
Accrued liabilities... -- 10,825 41,655 -- 52,480
Note payable and
current portion of
capital lease
obligations and long-
term debt............ -- 3,746 1,754 (37) 5,463
Customer prepayments.. -- 6,392 102,868 -- 109,260
-------- -------- -------- --------- --------
Total current
liabilities........ -- 87,734 166,800 (81,185) 173,349
Deferred liabilities.... -- 7,116 4,292 -- 11,408
Capital lease
obligations and long-
term debt.............. -- 13,007 -- -- 13,007
Minority interest....... -- -- 349 3,247 3,596
Stockholders' equity:
Common stock.......... 726 678 48 (726) 726
Other stockholders'
equity............... 201,696 85,057 119,886 (204,943) 201,696
-------- -------- -------- --------- --------
Total stockholders'
equity............. 202,422 85,735 119,934 (205,669) 202,422
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity... $202,422 $193,592 $291,375 $(283,607) $403,782
======== ======== ======== ========= ========
</TABLE>
F-46
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
As of December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 24,320 $ 6,432 $ -- $ 30,752
Marketable securities,
at fair value........ -- 112,334 -- -- 112,334
Accounts receivable,
net of allowance for
doubtful accounts.... -- 11,248 44,363 -- 55,611
Accounts and notes
receivable from
affiliates........... -- 10,288 60,256 (70,544) --
Other current assets.. -- 3,560 8,405 -- 11,965
-------- -------- -------- --------- --------
Total current
assets............. -- 161,750 119,456 (70,544) 210,662
Property, plant and
equipment, at cost, net
of accumulated
depreciation and
amortization........... -- 35,956 15,036 -- 50,992
Intangible assets, net
of accumulated
amortization........... -- 3,495 26,577 -- 30,072
Investment in
subsidiaries, at
equity................. 111,994 -- -- (111,994) --
Other assets, net of
accumulated
amortization........... -- 2,600 230 (104) 2,726
-------- -------- -------- --------- --------
Total assets............ $111,994 $203,801 $161,299 $(182,642) $294,452
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable...... $ -- $ 405 $ 5,489 -- $ 5,894
Accounts and notes
payable to
affiliates........... -- 60,256 10,288 (70,544) --
Accrued liabilities... -- 12,049 38,336 -- 50,385
Note payable and
current portion of
capital lease
obligations and long-
term debt............ -- 3,495 7,566 (104) 10,957
Customer prepayments.. -- 6,752 84,514 -- 91,266
-------- -------- -------- --------- --------
Total current
liabilities........ -- 82,957 146,193 (70,648) 158,502
Deferred liabilities.... -- 3,095 513 -- 3,608
Capital lease
obligations and long-
term debt.............. -- 16,752 455 -- 17,207
Minority interest....... -- -- 31 3,110 3,141
Stockholders' equity:
Common stock.......... 368 320 48 (368) 368
Other stockholders'
equity............... 111,626 100,677 14,059 (114,736) 111,626
-------- -------- -------- --------- --------
Total stockholders'
equity............. 111,994 100,997 14,107 (115,104) 111,994
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity... $111,994 $203,801 $161,299 $(182,642) $294,452
======== ======== ======== ========= ========
</TABLE>
F-47
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services..... $ -- $ 72,054 $452,817 $ (7,759) $517,112
Advertising sales...... -- 40,349 -- -- 40,349
Systems integration
services.............. -- -- 40,959 -- 40,959
------- -------- -------- -------- --------
-- 112,403 493,776 (7,759) 598,420
Operating expenses:
Programming and
delivery.............. -- 8,870 320,948 (7,759) 322,059
Selling, general and
administrative........ -- 52,188 100,447 -- 152,635
Depreciation and
amortization.......... -- 10,388 17,639 -- 28,027
------- -------- -------- -------- --------
-- 71,446 439,034 (7,759) 502,721
------- -------- -------- -------- --------
Operating income........ -- 40,957 54,742 -- 95,699
Equity in earnings of
subsidiaries........... 64,777 -- -- (64,777) --
Other income (expense),
net.................... -- 10,966 17,308 -- 28,274
------- -------- -------- -------- --------
Income before income
taxes and minority
interest............... 64,777 51,923 72,050 (64,777) 123,973
Provision for income
taxes.................. -- (17,303) (20,204) -- (37,507)
Minority interest in
earnings............... -- -- (21,623) (66) (21,689)
------- -------- -------- -------- --------
Net income.............. $64,777 $ 34,620 $ 30,223 $(64,843) $ 64,777
======= ======== ======== ======== ========
</TABLE>
F-48
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services.... $ -- $ 64,649 $377,099 $ (6,595) $435,153
Advertising sales..... -- 30,828 -- -- 30,828
Systems integration
services............. -- -- 41,617 -- 41,617
------- -------- -------- -------- --------
-- 95,477 418,716 (6,595) 507,598
Operating expenses:
Programming and
delivery............. -- 8,580 258,599 (6,595) 260,584
Selling, general and
administrative....... -- 39,491 103,528 -- 143,019
Depreciation and
amortization......... -- 9,072 9,579 -- 18,651
------- -------- -------- -------- --------
-- 57,143 371,706 (6,595) 422,254
------- -------- -------- -------- --------
Operating income........ -- 38,334 47,010 -- 85,344
Equity in earnings of
subsidiaries........... 45,760 -- -- (45,760) --
Other income, net....... -- 1,734 2,356 -- 4,090
------- -------- -------- -------- --------
Income before income
taxes and minority
interest............... 45,760 40,068 49,366 (45,760) 89,434
Provision for income
taxes.................. -- (14,303) (11,589) -- (25,892)
Minority interest in
earnings............... -- -- (18,418) 636 (17,782)
------- -------- -------- -------- --------
Net income.............. $45,760 $ 25,765 $ 19,359 $(45,124) $ 45,760
======= ======== ======== ======== ========
</TABLE>
F-49
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services.... $ -- $54,334 $328,450 $ (4,093) $378,691
Advertising sales..... -- 22,774 -- -- 22,774
Systems integration
services............. -- -- 35,703 -- 35,703
------- ------- -------- -------- --------
-- 77,108 364,153 (4,093) 437,168
Operating expenses:
Programming and
delivery............. -- 7,852 224,179 (4,093) 227,938
Selling, general and
administrative....... -- 35,978 101,709 -- 137,687
Depreciation and
amortization......... -- 9,808 6,515 -- 16,323
------- ------- -------- -------- --------
-- 53,638 332,403 (4,093) 381,948
------- ------- -------- -------- --------
Operating income........ -- 23,470 31,750 -- 55,220
Equity in earnings of
subsidiaries........... 30,084 -- -- (30,084) --
Other income, net....... -- 361 1,323 -- 1,684
------- ------- -------- -------- --------
Income before income
taxes and minority
interest............... 30,084 23,831 33,073 (30,084) 56,904
Provision for income
taxes.................. -- (8,812) (8,310) -- (17,122)
Minority interest in
earnings............... -- -- (10,754) 1,056 (9,698)
------- ------- -------- -------- --------
Net income.............. $30,084 $15,019 $ 14,009 $(29,028) $ 30,084
======= ======= ======== ======== ========
</TABLE>
F-50
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $ -- $ 31,410 $62,592 $ 240 $ 94,242
Investing activities:
Capital expenditures... -- (7,993) (3,838) 720 (11,111)
Investments and
acquisitions.......... (31,848) (9,555) (699) -- (42,102)
Purchases of marketable
securities............ -- (74,360) -- -- (74,360)
Sales and maturities of
marketable
securities............ -- 190,169 -- -- 190,169
Other.................. -- (1,105) 1,034 (786) (857)
-------- -------- ------- ----- --------
Net cash provided by
(used in) investing
activities............. (31,848) 97,156 (3,503) (66) 61,739
Financing activities:
Repayment of note
payable, capital lease
obligations and long-
term debt............. -- (3,493) (6,267) 66 (9,694)
Common stock
transactions, net..... (17,560) -- -- -- (17,560)
Distributions to
minority interests.... -- -- (3,705) -- (3,705)
Intercompany
transfers............. 49,408 (50,965) 1,907 (350) --
Other.................. -- -- (368) 110 (258)
-------- -------- ------- ----- --------
Net cash provided by
(used in) financing
activities............. 31,848 (54,458) (8,433) (174) (31,217)
-------- -------- ------- ----- --------
Net increase
in cash and cash
equivalents............ -- 74,108 50,656 -- 124,764
Cash and cash
equivalents at
beginning of year...... -- 24,320 6,432 -- 30,752
-------- -------- ------- ----- --------
Cash and cash
equivalents at end of
year................... $ -- $ 98,428 $57,088 $ -- $155,516
======== ======== ======= ===== ========
</TABLE>
F-51
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ -- $ 55,383 $ 22,626 $ (23) $ 77,986
Investing activities:
Capital expenditures... -- (6,368) (4,117) 247 (10,238)
Purchases of marketable
securities............ -- (91,666) -- -- (91,666)
Sales and maturities of
marketable
securities............ -- 36,700 -- -- 36,700
Other.................. -- (1,534) (67) (119) (1,720)
----- -------- -------- ----- --------
Net cash provided by
(used in) investing
activities............. -- (62,868) (4,184) 128 (66,924)
Financing activities:
Repayment of note
payable, capital lease
obligations and long-
term debt............. -- (3,258) (7,156) (105) (10,519)
Note payable
borrowings............ -- -- 7,446 -- 7,446
Common stock
transactions, net..... 531 -- -- -- 531
Distributions to
minority interests.... -- -- (21,000) -- (21,000)
Intercompany
transfers............. (531) 1,708 (1,177) -- --
Other.................. -- 509 (73) -- 436
----- -------- -------- ----- --------
Net cash used in
financing activities... -- (1,041) (21,960) (105) (23,106)
----- -------- -------- ----- --------
Net decrease in cash and
cash equivalents....... -- (8,526) (3,518) -- (12,044)
Cash and cash
equivalents at
beginning of year...... -- 32,846 9,950 -- 42,796
----- -------- -------- ----- --------
Cash and cash
equivalents at end of
year................... $ -- $ 24,320 $ 6,432 $ -- $ 30,752
===== ======== ======== ===== ========
</TABLE>
F-52
<PAGE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ -- $ 53,539 $(2,428) $-- $ 51,111
Investing activities:
Capital expenditures... -- (6,239) (8,188) -- (14,427)
Investments and
acquisitions.......... -- (106) -- -- (106)
Purchases of marketable
securities............ -- (47,065) -- -- (47,065)
Maturities of
marketable
securities............ -- 20,482 -- -- 20,482
Other.................. -- (198) (827) -- (1,025)
------- -------- ------- ---- --------
Net cash used in
investing activities... -- (33,126) (9,015) -- (42,141)
Financing activities:
Note payable
borrowings............ -- -- 7,245 -- 7,245
Repayment of capital
lease obligations..... -- (3,039) -- -- (3,039)
Issuance of stock...... 3,216 -- -- -- 3,216
Distributions to
minority interests.... -- -- (2,300) -- (2,300)
Intercompany
transfers............. (3,216) 4,073 (857) -- --
Other.................. -- 233 (14) -- 219
------- -------- ------- ---- --------
Net cash provided by
financing activities... -- 1,267 4,074 -- 5,341
------- -------- ------- ---- --------
Net increase (decrease)
in cash and cash
equivalents............ -- 21,680 (7,369) -- 14,311
Cash and cash
equivalents at
beginning of year...... -- 11,166 17,319 -- 28,485
------- -------- ------- ---- --------
Cash and cash
equivalents at end of
year................... $ -- $ 32,846 $ 9,950 $-- $ 42,796
======= ======== ======= ==== ========
</TABLE>
F-53
<PAGE>
UNITED VIDEO SATELLITE GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Amounts Balance
Balance at Charged Charged at End
Beginning to to Other of
Description of Period Expense Accounts Deductions Period
- ----------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful
accounts................... $2,785 $ 921 $ -- $1,007 $2,699
Year ended December 31, 1997:
Allowance for doubtful
accounts................... 2,535 521 -- 271 2,785
Year ended December 31, 1996:
Allowance for doubtful
accounts................... 1,788 1,140 1,969(1) 2,362 2,535
</TABLE>
- --------
(1) Amount represents the allowance for doubtful accounts contributed by
Liberty Media Corporation's Netlink division to the retail C-band home
satellite dish venture.
F-54
<PAGE>
APPENDIX II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
On June 11, 1998, UVSG and News Corp. announced the signing of an agreement
whereby UVSG will acquire the TV Guide businesses to create a multimedia
platform for offering program listings guide services to consumers and
advertisers. The combined company will be renamed TV Guide, Inc. UVSG had
previously announced on February 17, 1998, plans to acquire Liberty's
approximate 40% interest in SNG and Liberty's Netlink Wholesale Division. The
financial statements of Publications, the Netlink Wholesale Division and UVSG
are included in this offering memorandum. The following discussion includes a
separate analysis of results of operations and liquidity of Publications, the
Netlink Wholesale Division and UVSG as well as certain financial information
regarding the combined Company.
Summary Pro Forma Combined Information
The majority of the combined Company's revenues are generated from
programming guide services offered predominantly in the United States.
On a pro forma combined basis, the Company has revenue from the following
sources:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Publications and TVSM............................. $ 678,595 $ 714,574
Netlink Wholesale Division........................ 39,777 33,683
UVSG.............................................. 598,420 507,598
Eliminations...................................... (16,257) (10,861)
---------- ----------
$1,300,535 $1,244,994
========== ==========
Restricted Group.................................. $ 840,158 $ 852,144
========== ==========
</TABLE>
The majority of the Company's operating expenses consist of paper,
production and printing costs for the TV Guide Magazine and programming costs
for the Company's retail C-band operations. Depreciation and amortization
relates to the depreciation of the Company's property and equipment and
amortization of the Company's intangible assets.
The following operating results of the Company are presented on a pro forma
combined basis:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Consolidated:
Revenues......................................... $1,300,535 $1,244,994
Operating expenses, excluding depreciation and
amortization.................................... 1,013,546 947,623
---------- ----------
286,989 297,371
Depreciation and amortization.................... 129,428 118,800
---------- ----------
Operating income................................. $ 157,561 $ 178,571
========== ==========
Restricted Group:
Revenues......................................... $ 840,158 $ 852,144
Operating expenses, excluding depreciation and
amortization.................................... 623,854 609,723
---------- ----------
216,304 242,421
Depreciation and amortization.................... 113,828 111,562
---------- ----------
Operating income................................. $ 102,476 $ 130,859
========== ==========
</TABLE>
The decrease in combined operating income for the restricted group for the
year ended December 31, 1998 compared to the same period in 1997 resulted
primarily from the decrease in operating income for Publications, which had
operating income of approximately $150 million in calendar year 1998 compared
to $175 million in calendar year 1997. The reduction in Publications'
operating income in calendar year 1998 is principally related to the effects
of decreased circulation on the financial performance of the business. The
increases in revenues and operating income in Publications' most recent
quarterly results were principally due to increased advertising revenues
caused, in part, by a shift of advertising revenues into the quarter from
prior and/or subsequent quarters and what we believe may be a relative
strengthening of the advertising markets.
The pro forma information above may not be indicative of the results that
actually would have occurred if the Netlink Acquisition and the TV Guide
Acquisition had occurred on the dates indicated or which may be obtained in the
future.
II-1
<PAGE>
Historical Results of Operations
Publications
Six-Month Period Ended December 31, 1998 Compared to Six-Month Period Ended
December 31, 1997
In the fiscal six-month period ended December 31, 1998, Publications had
combined revenues of $341.2 million compared to combined revenues of $315.6
million in the fiscal six-month period ended December 31, 1997, representing a
net increase of approximately 8.1%. The increase was principally due to the
inclusion of TVSM's revenues in the current fiscal six-month period
(approximately $36.6 million) which were not included in the fiscal six-month
period ended December 31, 1997. The increase in revenues attributable to TVSM
was partially offset by a continued decline in circulation revenues for TV
Guide Magazine which was primarily attributable to the continued effects of
increased competition from television listings included in local newspapers,
electronic program guides and other sources. A $0.30 cover price increase for
TV Guide Magazine in October 1998 reduced the impact of otherwise lower
circulation revenues. Advertising revenues for TV Guide Magazine were
comparable for the six-month periods ended December 31, 1998 and 1997.
Operating expenses increased approximately 11.6% to $236.1 million from $211.6
million for the comparable period in fiscal 1998. The increase in operating
expenses was principally due to the inclusion of operating expenses of TVSM
and increased operating expenses caused by a shift in product mix to larger
format magazine designs. Selling, general and administrative expenses
increased by approximately 7.3% from $28.8 million to $30.9 million due
primarily to the inclusion of the results of TVSM in the fiscal six-month
period ended December 31, 1998.
For the reasons described above, EBITDA decreased $1.1 million, or
approximately 1.4%, to $74.2 million for the fiscal six-month period ended
December 31, 1998, from $75.3 million in the comparable six months in the
prior fiscal year, and combined operating income before amortization of
intangible assets decreased $1.5 million, or approximately 2.0%, to $70.7
million for the fiscal six-month period ended December 31, 1998, from $72.2
million in the comparable six months of the prior fiscal year. Publications
had an intercompany interest charge of $132.1 million for the fiscal six-month
period ended December 31, 1998, compared to $123.9 million in the comparable
six months of the prior fiscal year, an increase of $8.2 million, or
approximately 6.6%, which reflects higher intercompany debt levels in the
recent six-month period.
For the foregoing reasons, Publications experienced a net loss of $96.0
million for the fiscal six-month period ended December 31, 1998, compared to a
net loss of $84.8 million in the comparable six months of the prior fiscal
year.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
In the fiscal year ended June 30, 1998, Publications had combined revenues
of $616.8 million compared to combined revenues of $650.2 million in the
fiscal year ended June 30, 1997, representing a decrease of approximately
5.1%. The decrease was principally due to a decline in TV Guide Magazine's
circulation, which was primarily attributable to the effects of increased
competition from television listings included in local newspapers, electronic
program guides and other sources. Advertising revenues were comparable to the
prior year. Operating expenses increased approximately 0.5% to $410.7 million
in fiscal 1998 from $408.8 million in fiscal 1997. The increase in operating
expenses was principally related to higher production and distribution
expenses caused by a shift in product mix. Selling, general and administrative
expenses decreased by 2.9% from $56.3 million to $54.7 million due primarily
to lower compensation and other administrative expenses.
For the reasons described above, EBITDA decreased $33.6 million or 18.2% to
$151.4 million in fiscal 1998 from $185.0 million in fiscal 1997 and combined
operating income before amortization of intangible assets decreased $32.7
million, or approximately 18.4%, to $145.1 million in fiscal 1998 from $177.8
million in fiscal 1997. Publications had an intercompany interest charge of
$250.9 million in fiscal 1998, compared to $234.6 million in fiscal 1997, an
increase of $16.3 million, or approximately 6.9%.
For the foregoing reasons, Publications experienced a net loss of $172.4
million in fiscal 1998, compared to a net loss of $123.4 million in fiscal
1997.
II-2
<PAGE>
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Publications had combined revenues of $650.2 million in fiscal 1997
compared to combined revenues of $636.8 million in the fiscal year ended June
30, 1996, representing an increase of approximately 2.1%. The increase was due
to improved advertising revenue, offset by a slight decrease in circulation
revenue. Operating expenses increased approximately 1.4% to $408.8 million in
fiscal 1997 from $403.0 million in fiscal 1996. The increase in operating
expenses was principally related to the variable costs associated with the
increased revenues. Selling, general and administrative expenses increased by
13.4% from $49.6 million to $56.3 million, principally due to the inclusion of
the operating results of TVGEN which began operations on July 1, 1996.
For the reasons described above, EBITDA increased slightly to $185.0
million in fiscal 1997 from $184.1 million in fiscal 1996, and combined
operating income before amortization of intangible assets increased slightly
to $177.8 million in fiscal 1997 from $177.6 million in fiscal 1996.
Publications had an intercompany interest charge of $234.6 million in fiscal
1997, compared to $233.0 million in fiscal 1996.
For the foregoing reasons, Publications experienced a net loss of $123.4
million in fiscal 1997, compared to a net loss of $122.0 million in fiscal
1996.
Netlink Wholesale Division
Year Ended December 31, 1998 Compared to December 31, 1997
Revenue increased 18%, or $6,094,000, for the year ended December 31, 1998
as compared to the year ended December 31, 1997. This increase was primarily
attributable to an 11%, or $2,969,000, increase in Denver 6 Service revenue
and a 42%, or $2,765,000 increase in SMATV revenue. The increase in the Denver
6 Service revenue was primarily attributable to rate increases for DTH
customers reflecting the copyright fee increase described below. However,
certain other adjustments to rates offset a portion of this increase. The
SMATV revenue increase reflected a 7% rate increase combined with subscribers
buying additional channels and a 61% increase in the number of subscribers.
Operating expenses increased 53%, or $8,706,000, for the year ended
December 31, 1998 as compared to the year ended December 31, 1997, primarily
due to a 36%, or $1,936,000, increase in programming costs, which were
directly related to the increase in SMATV revenue and a 204%, or $6,597,000,
increase in copyright fees. This increase in copyright fees was primarily due
to an increase in the monthly copyright fee from 6 cents for network stations
and 14 cents or 17.5 cents for superstations to the new 27 cents per channel
per subscriber monthly copyright rate. Selling, general and administrative
costs increased 45%, or $458,000, primarily due to $273,000 related to stay
bonuses and severance paid or accrued during the year ended December 31, 1998,
a $120,000 increase in legal fees and a $184,000 increase in overhead. Bad
debt expense decreased 73%, or $209,000 mainly due to a reduced estimate of
uncollectible accounts during the year ended December 31, 1998 based on
historical collection rates compared to 1997.
Depreciation and amortization was consistent from 1998 to 1997.
As a result of the foregoing, operating income decreased by 18%, or
$2,862,000, for the year ended December 31, 1998, as compared to the year
ended December 31, 1997.
Year Ended December 31, 1997 Compared to December 31, 1996
Revenue increased 13%, or $3,977,000, for the year ended December 31, 1997,
as compared to the year ended December 31, 1996. This increase was primarily
attributable to an increase in revenue from SMATV systems, which represented
19% of revenue for the year ended December 31, 1997. The SMATV revenue
increase was driven by a 4% increase in rates combined with a 122% increase in
subscribers. The subscriber increase was largely attributable to an increase
in the number of SMATV systems operated by two of Netlink Wholesale Division's
SMATV customers. Additionally, Netlink Wholesale Division's share of revenue
from the
II-3
<PAGE>
wholesale marketing and distribution of WGN increased 10% as a result of
increases in rates charged wholesale customers. Revenue from WGN marketing and
distribution represented 12% of the Netlink Wholesale Division's revenue for
the year ended December 31, 1997. Denver 6 Service revenue decreased by less
than 1% compared to the prior year mainly due to a decrease in revenue related
to Netlink Wholesale Division's decision to discontinue transmission of the
Atlanta 3 stations during the first quarter of 1996, offset by a 2% increase
in revenue from SNG. Revenue from SNG, which represented 47% and 44% of total
Denver 6 Service revenue during 1997 and 1996, respectively, increased
primarily due to a 4% increase in SNG subscribers, offset by credits offered
by SNG related to the sale of certain packages to SNG subscribers.
Operating expenses increased 23%, or $3,039,000, for the year ended
December 31, 1997, as compared to the year ended December 31, 1996, primarily
due to a 126% increase in programming costs which were directly related to the
increase in SMATV revenue. Selling, general and administrative costs increased
5%, or $52,000, primarily due to increased personnel costs. Bad debt expense
increased 10%, or $25,000, mainly due to an increase in accounts receivable of
13% in 1997 compared to 1996.
Depreciation and amortization was consistent from 1996 to 1997.
As a result of the foregoing, operating income increased 6%, or $860,000,
for the year ended December 31, 1997, compared to the year ended December 31,
1996.
II-4
<PAGE>
UVSG
Consolidated
The table below sets forth certain financial information for UVSG and each
of the businesses operated by it during the years ended December 31, 1998,
1997 and 1996. Each of the businesses below other than the Prevue Networks and
UVTV are classified as unrestricted subsidiaries under the Indenture.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Prevue Networks (1)........... $ 76,822 13% $ 62,956 12% $ 49,636 11%
Superstar (2)(3).............. 426,586 71% 350,490 69% 301,640 69%
UVTV (3)...................... 44,964 7% 40,931 8% 38,188 9%
SSDS.......................... 40,959 7% 42,134 8% 36,161 8%
SpaceCom...................... 16,536 3% 17,682 4% 15,636 4%
Other/Eliminations............ (7,447) (1)% (6,595) (1)% (4,093) (1)%
-------- --- -------- --- -------- ---
Total......................... $598,420 100% $507,598 100% $437,168 100%
======== === ======== === ======== ===
Operating income (loss):
Prevue Networks (1)........... $ 13,772 14% $ 13,889 16% $ 8,410 15%
Superstar (2)(3).............. 58,001 61% 46,073 54% 30,328 55%
UVTV (3)...................... 28,641 30% 25,419 30% 20,995 38%
SSDS.......................... (1,355) (1)% (2,376) (3)% (5,894) (10)%
SpaceCom...................... 1,949 2% 3,509 4% 1,839 3%
Other/Eliminations............ (5,309) (6)% (1,170) (1)% (458) (1)%
-------- --- -------- --- -------- ---
Total......................... $ 95,699 100% $ 85,344 100% $ 55,220 100%
======== === ======== === ======== ===
Consolidated depreciation and
amortization.................. $ 28,027 $ 18,651 $ 16,323
Consolidated capital
expenditures.................. 11,111 10,238 14,427
Net cash provided by operating
activities.................... 94,242 77,986 51,111
Net cash provided by (used in)
investing activities.......... 61,739 (66,924) (42,141)
Net cash provided by (used in)
financing activities.......... (31,217) (23,106) 5,341
Other data: EBITDA (4)......... $123,726 $103,995 $ 71,543
</TABLE>
- --------
(1) The revenues and operating income for Prevue Networks include Prevue
Channel, Sneak Prevue and other services offered both domestically and
internationally.
(2) The amounts shown in the above tables for Superstar represent Superstar's
revenues and operating income included in UVSG's consolidated results of
operations. Beginning April 1, 1996, these operating results include the
combined retail operations of Superstar and those of Liberty's Netlink
division. Beginning February 1, 1998, these operating results include the
retail operations of Turner Vision.
(3) Effective January 1, 1997, UVSG increased the price at which UVTV charges
SNG for certain programming, primarily WGN. Had these rates not been in
effect during 1998 and 1997, UVTV's revenue and operating income would
have been approximately $2.3 million lower and Superstar's operating
income would have been approximately $2.3 million higher in each of those
years.
(4) EBITDA means operating income before depreciation and amortization. EBITDA
is presented supplementally as UVSG believes it is a widely used financial
indicator of a leveraged company's ability to service and incur
indebtedness. UVSG 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 included in this offering
memorandum. Additionally, UVSG's calculation of EBITDA may be different
than the calculation used by other companies and therefore, comparability
may be affected.
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
Revenues for 1998 were $598.4 million, compared to $507.6 million in 1997
and $437.2 million in 1996. Revenues increased $90.8 million, or 18%, in 1998,
compared to 1997, primarily due to $89.5 million of additional revenues
attributable to Turner Vision's retail C-band operations which were combined
with those of SNG effective February 1, 1998 and increased advertising and
service fee revenues by Prevue Networks. These increases were partially offset
by a decrease of $9.3 million in commission revenues from Superstar acting as
a service agent in the DBS market. Revenues increased $70.4 million, or 16%,
in 1997, compared to 1996,
II-5
<PAGE>
primarily due to $39.5 million of additional revenues attributable to the
retail C-band operations of Liberty's Netlink division which were combined
with those of Superstar's retail operations effective April 1, 1996; increased
advertising and service fee revenues by Prevue Networks; increased revenues
from system integration services of SSDS; and growth in retail revenue by
Superstar.
Operating expenses, excluding depreciation and amortization, were $474.7
million for the year ended December 31, 1998, compared to $403.6 million in
1997 and $365.6 million in 1996. Operating expenses increased $71.1 million,
or 18%, in 1998 over those in 1997 primarily due to $77.8 million of
additional expenses attributable to Turner Vision; increased personnel costs
resulting from the growth in Prevue Networks; increased legal fees related to
litigation and patent filings; and increased costs associated with Prevue
Channel's new format under the TV Guide brand. These increases were partially
offset by a $7.4 million decrease in operating expenses due to the termination
of Superstar's service agent agreements with program suppliers in the DBS
market and a reduction in programming costs resulting from renegotiated
programming contracts. Operating expenses, excluding depreciation and
amortization, increased $38.0 million, or 10%, in 1997, compared with 1996,
primarily due to $35.9 million of additional expenses attributable to Netlink
and increased personnel costs resulting from the growth in Prevue Networks.
Depreciation and amortization was $28.0 million in 1998, compared to $18.7
million and $16.3 million in 1997 and 1996, respectively. Depreciation and
amortization increased $9.3 million, or 50%, in 1998 over 1997 primarily as a
result of amortization of intangibles resulting from the acquisitions of
Turner Vision and ODS Technologies, LP, coupled with higher depreciation
resulting from the acquisition of equipment to support the various Prevue
products. Depreciation and amortization increased $2.4 million, or 15%, in
1997, compared with 1996, primarily due to increased acquisitions of equipment
to support the various Prevue products and increased personnel at Prevue
Networks and Superstar.
A $13.4 million gain on the issuance of equity by a subsidiary was
recognized in 1998. The gain resulted from the acquisition of Turner Vision.
Interest income was $6.3 million in 1998, compared to $5.9 million in 1997
and $3.4 million in 1996. The increase in interest income in both 1998 and
1997 was primarily attributable to higher cash balances.
Other income for 1998 totaled $11.6 million, compared to $401,000 in 1997
and $551,000 in 1996. Included in other income during the fourth quarter of
1998 was a $10.4 million gain associated with the sale of equity securities.
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 37% in 1998, relatively unchanged from 36% in 1997 and
37% in 1996.
Minority interest in earnings for the year ended December 31, 1998 was
$21.7 million compared to $17.8 million in 1997 and $9.7 million in 1996.
Minority interest represents that portion of earnings attributable to the 60%
(50% in 1997 and 1996) minority ownership in SNG, the 30% minority ownership
in SSDS and the 28% minority ownership in Sneak Prevue LLC. The increase in
minority interest in earnings of $3.9 million, or 22%, from 1997 to 1998 was
primarily attributable to Turner Vision's inclusion in the consolidated
operating results of the Company for eleven months in 1998. The increase from
1996 to 1997 of $8.1 million, or 84%, was primarily attributable to Netlink's
inclusion in the consolidated operating results of the Company for twelve
months in 1997 compared to nine months in 1996, coupled with increased
earnings of SNG.
II-6
<PAGE>
Prevue Networks
The following table sets forth certain financial information for Prevue
Networks for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 Change 1997 Change 1996
------- ------ ------- ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................................. $76,822 22 % $62,956 27% $49,636
Operating expenses....................... 53,562 32 % 40,548 20% 33,676
Depreciation and amortization............ 9,488 11 % 8,519 13% 7,550
------- ------- -------
Operating income......................... $13,772 (1)% $13,889 65% $ 8,410
======= ======= =======
Operating margin percentage.............. 18% 22% 17%
</TABLE>
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
Prevue Networks' revenues for 1998 were $76.8 million, compared to $63.0
million in 1997 and $49.6 million in 1996. The increase in revenues in 1998 of
$13.9 million, or 22%, over those in 1997 was principally attributable to
national advertising revenues, which grew $9.5 million, or 31%, due to higher
rates and a higher sell-out of conventional advertising with the remainder of
the increase primarily attributable to service fee revenues. Prevue
Interactive revenue recorded in 1998 totaled $2.1 million while no significant
revenue was recorded in prior years. In addition, domestic service fee
revenues attributable to Prevue Channel and Sneak Prevue increased $2.1
million, or 10%, and $500,000, or 5%, respectively, in 1998 compared to 1997.
Domestically, Prevue Channel subscriber counts increased by 2.5 million, or
5%, to 50.0 million during 1998 and subscribers receiving Sneak Prevue
decreased by 400,000, or 1%, to 35.0 million. The increase in revenues in 1997
of $13.3 million, or 27%, over those in 1996 was due to increased national
advertising revenues resulting from higher rates and expanded airtime combined
with increases in domestic service fee revenues. Advertising revenues
increased by $8.0 million, or 35%, in 1997 over those in 1996. Domestic
service fee revenues attributable to Prevue Channel and Sneak Prevue increased
by $3.0 million, or 18%, and $1.8 million, or 26%, respectively, in 1997
compared to 1996. Prevue Channel subscriber counts increased by 3.4 million,
or 8%, during 1997 and subscribers receiving Sneak Prevue increased during
1997 by 1.2 million, or 3%, primarily due to the formation of Sneak Prevue
LLC.
Operating expenses, excluding depreciation and amortization, were $53.6
million in 1998, compared to $40.5 million and $33.7 million in 1997 and 1996,
respectively. The increase in operating expenses, before depreciation and
amortization, of $13.0 million, or 32%, in 1998 was due to the addition of new
personnel required to support Prevue's growth, the continued roll-out of
Prevue Interactive, increased legal fees related to litigation and patent
filings and costs associated with Prevue Channel's new format under the TV
Guide brand. The increase in operating expenses, before depreciation and
amortization, of $6.9 million, or 20%, in 1997 as compared to the previous year
was due to the addition of new personnel required to support increased sales
volumes and data collection, the roll-out of Prevue Interactive and costs
associated with Prevue Channel's new format.
Depreciation and amortization in 1998 was $9.5 million, an increase of $1.0
million, or 11%, over that in 1997. Depreciation and amortization in 1997
increased $1.0 million, or 13%, over that in 1996. The increase in
depreciation and amortization in both 1998 and 1997 over the prior years' was
a result of the acquisition of additional assets, including customer control
units necessary to support the various Prevue products and assets to support
additional personnel.
II-7
<PAGE>
Superstar
The following table sets forth certain financial information for Superstar
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 Change 1997 Change 1996
-------- ------ -------- ------ --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues........................... $426,586 22% $350,490 16% $301,640
Operating expenses................. 358,317 19% 301,209 12% 269,115
Depreciation and amortization...... 10,268 220% 3,208 46% 2,197
-------- -------- --------
Operating income................... $ 58,001 26% $ 46,073 52% $ 30,328
======== ======== ========
Operating margin percentage........ 14% 13% 10%
</TABLE>
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
Revenues generated by Superstar during 1998 were $426.6 million, compared
to $350.5 million in 1997 and $301.6 million in 1996. The increase in revenues
in 1998 of $76.1 million, or 22%, over those in 1997 was largely due to $89.5
million of additional revenues attributable to the retail operations of Turner
Vision, which were acquired by SNG effective February 1, 1998, partially
offset by a decline in commission revenues from acting as a service agent in
the DBS market of $9.3 million. The contracts governing the commissions earned
as a service agent in the DBS market expired in 1997; however, Superstar will
continue to earn a declining level of commissions, generally through July
2000, on subscribers previously interfaced through Superstar. The net increase
in retail subscribers in 1998 was approximately 263,000, increasing total
subscribers as of December 31, 1998 to 1.2 million. The net increase was the
result of subscribers contributed by Turner Vision of 309,000, offset by a
decrease in subscribers resulting from the declining market. The industry
decreased 9% to 1.9 million subscribers during the same period. Average
revenue per retail subscriber decreased during 1998 as a result of a change in
package mix associated with the Turner Vision combination. The increase in
revenues in 1997 of $48.9 million, or 16%, over those in 1996 was primarily
due to $39.5 million of additional revenues attributable to the retail
operations of Netlink, which were combined with those of Superstar's retail
operations on April 1, 1996, as well as growth in commission income earned as
a service agent for program suppliers in the DBS market of $2.0 million.
Retail subscribers purchasing programming directly from SNG decreased during
1997 by approximately 69,000, or 7%, to 892,000 while the industry decreased
7% to 2.1 million subscribers during the same period.
Operating expenses, excluding depreciation and amortization, were $358.3
million in 1998, compared to $301.2 million and $269.1 million in 1997 and
1996, respectively. The increase in operating expenses, before depreciation
and amortization, of $57.1 million, or 19%, in 1998 as compared to the
previous year was due primarily to the addition of Turner Vision's retail
business, which contributed $77.8 million of the operating expense increase,
partially offset by a $20.7 million reduction in operating expenses primarily
due to programming fee savings resulting from renegotiated programming
contracts, Superstar's DBS service agreement terminations, and reductions in
commissions paid to dealers. The increase in operating expenses, excluding
depreciation and amortization, of $32.1 million, or 12%, in 1997 as compared
to the previous year was due to the addition of Netlink's retail business,
which contributed $35.9 million of the operating expense increase, partially
offset by a $3.8 million reduction in operating expenses due to greater
operating efficiencies as a result of the synergies realized in SNG and a
reduction in commission expense as a result of the termination of Superstar's
service agent agreements with two program suppliers in the DBS market.
Depreciation and amortization was $10.3 million in 1998, compared to $3.2
million and $2.2 million in 1997 and 1996, respectively. The increase in
depreciation and amortization of $7.1 million, or 220%, was primarily the
result of $6.7 million of goodwill amortization associated with the Turner
Vision acquisition. The
II-8
<PAGE>
increase in depreciation and amortization in 1997 of $1.0 million, or 46%, was
primarily the result of additional data processing equipment and office
furniture purchases necessitated by the increase in subscribers and employees.
UVTV
The following table sets forth certain financial information for UVTV for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 Change 1997 Change 1996
------- ------ ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues............................ $44,964 10% $40,931 7% $38,188
Operating expenses, before
depreciation and amortization...... 13,803 5% 13,123 (11)% 14,727
Depreciation and amortization....... 2,520 5% 2,389 (3)% 2,466
------- ------- -------
Operating income.................... $28,641 13% $25,419 21% $20,995
======= ======= =======
Operating margin percentage......... 64% 62% 55%
</TABLE>
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
UVTV's revenues for 1998 were $45.0 million, compared to $40.9 million in
1997 and $38.2 million in 1996. The increase in revenues in 1998 of $4.0
million, or 10%, from those in 1997 was largely attributable to UVTV/WGN cable
subscriber growth and cable rate increases. In addition, C-Band rates
increased as necessitated by the increase in copyright fees from $.14 or $.175
to $.27, effective January 1, 1998. UVTV/WGN subscriber counts increased by
5.0 million, or 12%, while UVTV/WPIX and UVTV/KTLA subscriber counts declined
207,000, or 6%, and 210,000, or 7%, respectively, during 1998. The increase in
1997 revenues of $2.7 million, or 7%, from those in 1996 was largely
attributable to SNG price increases coupled with an increase in subscribers
for UVTV's services. UVTV/WGN, UVTV/WPIX and UVTV/KTLA subscriber counts
increased 1.2 million, or 3%, 667,000, or 23%, and 747,000, or 34%,
respectively, during 1997. The increase in UVTV/WGN subscribers during 1997 is
net of the approximate 4.5 million reduction in subscribers that resulted on
January 1, 1997 when TCI discontinued UVTV/WGN from certain of its fully owned
systems then carrying the superstation. The positive impact on revenues from
increased subscribers in 1998 and 1997 was partially offset by the
consolidation of multiple system operators, which negatively impacted the
pricing of UVTV's services to certain cable systems, a trend which may
continue in future years.
Operating expenses, excluding depreciation and amortization, were $13.8
million in 1998, compared to $13.1 million and $14.7 million in 1997 and 1996,
respectively. The increase in operating expenses, excluding depreciation and
amortization, of $680,000, or 5%, from 1997 to 1998 was due primarily to the
increase in C-band copyright fees discussed above which were partially offset
by a $472,000 decrease in compensation related to decreased headcount.
Expenses decreased $1.6 million, or 11%, from 1996 to 1997 as the result of
decreased compensation related to decreased headcount.
Depreciation and amortization in 1998 was $2.5 million, relatively
unchanged from 1997 and 1996 levels.
Other
SSDS
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
SSDS's revenues for 1998 were $41.0 million, a $1.2 million decrease, or
3%, compared to the prior year. Information technology consulting revenue
decreased by $4.2 million due to a decrease in billable hours. The
II-9
<PAGE>
decrease was partially offset by an increase in Knowledge Workers revenue of
$3.1 million due to new projects in 1998. 1997 revenue was $42.1 million,
compared to $36.2 million in 1996. The increase in revenues of $6.0 million,
or 17%, compared to 1996 was primarily attributable to the commercial and
public sector business, which experienced a combined increase of 45%, offset
by the defense business realizing a decrease of 8% from the prior year. The
increase in the commercial sector, which comprised the majority of the
increase, is a result of SSDS's efforts to focus on higher margin business
opportunities.
Operating expenses, before depreciation and amortization, decreased $2.5
million, or 6%, from 1997. The decrease in operating expense was due to lower
personnel costs and lower selling, general and administrative expense.
Operating expenses, before depreciation and amortization, increased in 1997 by
$2.0 million, or 5%, over 1996 primarily due to an increase in expenses
related to direct contract payroll costs associated with increased revenue,
partially offset by lower selling, general and administrative expense.
Depreciation and amortization increased in 1998 by $274,000, or 9%, and in
1997 by $398,000, or 15%, over the prior years' results. The increase in both
periods was the result of office expansions and infrastructure equipment
purchased during 1997 to support the increase in technical personnel.
SpaceCom
Year Ended December 31, 1998 Compared to December 31, 1997 and December 31,
1996
Revenues generated by SpaceCom during 1998 were $16.5 million, compared to
$17.7 million in 1997 and $15.6 million in 1996. SpaceCom's average occupancy
as of December 31, 1998 was 69%, which compares to 72% on December 31, 1997
and 70% on December 31, 1996. The reduction in occupancy in 1998 is
principally due to one of its paging customers migrating away from SpaceCom's
services.
Operating expenses, excluding depreciation and amortization, were $13.0
million in 1998, compared to $12.7 million and $12.4 million in 1997 and 1996,
respectively. The increase in operating expenses, before depreciation and
amortization, of $260,000, or 2%, in 1998 over 1997 resulted primarily from
increased transmission expenses due to the Galaxy IV failure, partially offset
by general and administrative efficiencies. The increase in operating
expenses, before depreciation and amortization, of $349,000, or 3%, in 1997
over 1996 is attributable to increased transmission expense.
Depreciation and amortization in 1998 was $1.6 million, a $154,000 increase
over 1997 due to depreciation on the $1.2 million expansion at the Chicago
International Teleport. Depreciation and amortization in 1997 was $1.4
million, relatively unchanged from 1996.
Liquidity and Capital Resources
The discussions of liquidity and capital resources that immediately follows
is presented for the Company on a combined basis, giving effect to the
Acquisitions and the related financings. The historical discussions of
liquidity and capital resources for Publications, the Netlink Wholesale
Division and UVSG follow. See "Unaudited Pro Forma Combined Financial
Statements" included in this offering memorandum.
TV Guide, Inc.
Cash provided by operations continues to be the Company's primary source of
funds to finance its operating needs, capital expenditures and investments. At
December 31, 1998, on a pro forma basis after giving effect to the
Acquisitions and the related financings (which consist of the issuance of the
notes, initial bank borrowings and cash proceeds from the Equity
Equalization), the combined Company's cash, cash equivalents and marketable
securities would have aggregated approximately $61.4 million (including
approximately $57.1 million in the unrestricted group of subsidiaries under
the indenture).
As of December 31, 1998, after giving effect to the Acquisitions and the
related financings, the combined Company would have had indebtedness
outstanding of approximately $603.8 million.
II-10
<PAGE>
Prior to the closing of the TV Guide Acquisition, the Company will have
available a $300 million six-year revolving credit facility and a $300 million
364-day revolving credit facility. Borrowings outstanding under the 364-day
revolving credit facility will convert to a five-year term loan at the end of
its term. Borrowings under the credit facilities will 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. For the first year of the credit
facilities, the LIBOR margin will be fixed at 1.25%. The credit facilities
will be subject to prepayment or reduction at any time without penalty and
will contain certain restrictive financial covenants. The Company intends to
make an initial borrowing of $185.3 million under the six-year revolving
credit facility to finance a portion of the TV Guide Acquisition. See
"Description of Certain Indebtedness--Bank Credit Facilities."
The combined Company has evaluated and expects to continue to evaluate
possible strategic acquisitions and dispositions of related businesses and
assets, some of which may be significant, on an ongoing basis and at any given
time it may be engaged in discussions or negotiations or enter into agreements
with respect to potential transactions. In particular, the Company is
currently in discussions with several parties regarding a possible sale of the
SNG business and certain other assets or a strategic marketing alliance or
other transaction consistent with the Company's strategy of converting its C-
band business into an equity position in a DBS company. In the event that the
Company enters into a definitive agreement with respect to any acquisition or
joint venture, it may require additional financing.
The Company believes that, after giving effect to the Acquisitions, the
related financings and restrictions contained in the indenture on the
activities of the Company and the restricted subsidiaries, based on the
combined Company's current level of operations, cash flow provided from
operating activities, together with expected availability under the bank
credit facilities, subject to the covenants therein, will be sufficient to
enable the combined Company to service indebtedness, make capital expenditures
and meet operating costs and expenses for the foreseeable future. Anticipated
capital expenditures of the combined Company for 1999 are approximately $37
million, which include approximately $16 million to replace the cable headend
equipment for the TV Guide Channel product. Additionally, the Company
anticipates spending approximately $30 million in 1999 to develop ODS. If and
when appropriate, the combined Company or its affiliates may elect to incur
additional indebtedness or to raise equity in the public or private markets.
The indenture for the notes and the Company's bank credit facilities will
impose certain operating and financial restrictions on the combined Company.
These restrictions include the designation of certain of our 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 our subsidiaries in the restricted
group and our subsidiaries in the unrestricted group. The subsidiaries in the
unrestricted group are not subject to the 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. Currently, the subsidiaries in the unrestricted
group do not require cash transfers from the subsidiaries in the restricted
group to finance their operations; however no assurance can be given that the
unrestricted subsidiaries will continue to generate sufficient cash flows to
fund future operations. In the event the unrestricted subsidiaries were unable
to generate sufficient cash flows to fund their operations, they may not be
able to access excess cash generated by the restricted group and could be
required to obtain funding from third party sources. No assurance can be given
that such funding could be obtained at rates acceptable to the subsidiaries in
the unrestricted group.
Publications
During the fiscal six-month period ended December 31, 1998, Publications'
cash provided by operations amounted to approximately $27.6 million compared
to cash provided by operations of $28.2 million in the comparable period in
the prior fiscal year. Operating cash flows in each period were principally
due to Publications' EBITDA for the period, net of additional seasonal working
capital requirements related to higher advertising revenues and the impact of
new third party publications distributed by MMDI. Cash used in investing
activities was $5.9 million in the fiscal six-month period ended December 31,
1998, compared to $1.4 million in
II-11
<PAGE>
the comparable period in the prior fiscal year. The increase in cash used in
investing activities related to expenditures incurred in connection with the
acquisition of TVSM. Net cash used in financing activities was $21.7 million
in the fiscal six-month period ended December 31, 1998, compared to net cash
used in financing activities of $26.7 million in the comparable period in the
prior fiscal year. The changes in cash related to financing activities was due
to lower repayments of borrowings from affiliates.
During fiscal 1998 and fiscal 1997, Publications' cash provided by
operations amounted to $121.4 million and $179.2 million, respectively.
Operating cash flows in each period were principally due to Publications'
EBITDA for the period.
Cash used in investing activities was $2.6 million in fiscal 1998 compared
to $4.4 million in fiscal 1997. The decrease in cash used in investing
activities related to reduced capital expenditures in fiscal 1998.
Net cash used in financing activities was $118.8 million in fiscal 1998
compared to $174.8 million in fiscal 1997. The decrease in cash used in
financing activities was due to lower repayments of intercompany indebtedness
in 1998.
Publications has historically relied on its parent corporation, News Corp.,
to provide financing for its operations. In December 1998, Publications
satisfied approximately $2.8 billion of its borrowings due to affiliates. In
connection with the TV Guide Acquisition (see Note 1 of the combined financial
statements of Publications), intercompany indebtedness existing at the time of
the closing of the TV Guide Acquisition will be satisfied by way of an
indirect capital contribution from News Corp. or a subsidiary of News Corp.
Publications' operating cash flow of $27.6 million was the principal source
of cash during the fiscal six month period ended December 31, 1998.
Publications is a guarantor in connection with several of News Corp.'s and
its subsidiaries' financing arrangements. In connection with the consummation
of the TV Guide Acquisition, Publications will be released from its contingent
obligations related to these financing arrangements.
Netlink Wholesale Division
Net cash provided by operating activities was approximately $9.0 million,
$9.7 million and $9.1 million for the years ended December 31, 1998, 1997 and
1996, respectively. Amounts expended for investing activities was less than
the cash provided by operating activities in each such period. In the event
Netlink Wholesale Division were required to expend more on capital or other
investing activities, Netlink Wholesale Division believes that net cash
provided by operating activities and its ability, if necessary, to obtain
financing would provide adequate sources of short-term and long-term liquidity
in the future.
UVSG
Cash provided by operations continues to be UVSG's primary source of funds
to finance operating needs, capital expenditures and investments. In 1998, net
cash flows from operating activities were $94.2 million ($90.5 million after
distributions to minority interests), reflecting the continued growth of
UVSG's after-tax earnings. This cash, plus existing cash resources and
proceeds from the exercise of stock options of $1.2 million and net sales and
maturities of marketable securities of $115.8 million, were used to fund
UVSG's investments and acquisitions of $42.1 million, capital expenditures of
$11.1 million, net reduction in UVSG's capitalized lease obligations, note
payable and long term debt of $9.7 million and repurchase of common stock of
$18.8 million during 1998.
At December 31, 1998, UVSG's cash, cash equivalents and marketable
securities aggregated $161.3 million, an increase of $18.2 million over that
as of December 31, 1997. The above total includes $57.5 million of cash and
cash equivalents held by SNG, in which UVSG had a 40% ownership interest as of
December 31, 1998. SNG will be an unrestricted subsidiary under the indenture
for the notes. UVSG has invested the majority
II-12
<PAGE>
of its cash available for current operations in investment grade municipal
governmental obligations. As of December 31, 1998, approximately $5.8 million
of such securities had maturities greater than 90 days and were classified as
available-for-sale marketable securities. UVSG's policy pertaining to the
temporary investment of cash available for operations currently prohibits
exposure to interest rate fluctuations to periods in excess of 18 months.
SSDS has a revolving credit facility with a bank which provides for
borrowings up to the lesser of 80% of billed trade receivables of SSDS
outstanding less than 90 days, subject to certain conditions, or $5.0 million
which expires April 30, 1999. 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 December 31, 1998 were $1.7 million.
UVSG collects annually, in advance, a majority of its SNG subscription fees
and certain of its UVTV superstation and Prevue Networks' revenues. As of
December 31, 1998, the unearned portion of all prepayments totaled $109.3
million, of which approximately $100.5 million, or 92%, was attributable to
SNG. Aggregate unearned prepayments increased by $18.0 million during the year
ended December 31, 1998, substantially all of which was attributable to the
customer prepayments associated with SNG's operations. UVSG's liability is
limited to a refund of unearned prepayments in the event that UVSG is unable
to provide service. No material refunds have been paid to date.
Under the terms of the capital leases for two satellite transponders placed
in service by UVTV and Prevue Networks in 1992, UVSG was obligated for net
minimum lease payments aggregating $16.8 million as of December 31, 1998, a
reduction of $3.5 million, or 17%, from the obligation existing at the prior
year's end. UVSG expects to further reduce the lease obligation during 1999 by
approximately $3.7 million. UVSG also leases various other satellite
transponders accounted for as operating leases. These operating leases
accounted for approximately $6.6 million in operating expenses, net of
sublease revenue, during 1998.
Capital expenditures during 1998 of $11.1 million were principally
attributable to the expansion of UVSG's teleport facilities, purchase of
control units provided to Prevue Network's cable television customers, data
processing equipment and systems and furniture, fixtures and facilities used
by UVSG.
SNG has historically made monthly distributions to its members of all cash
in excess of reasonable cash reserves established for anticipated working
capital requirements and capital expenditures. However, in anticipation of a
possible transaction with a DBS provider, SNG has been retaining cash in
excess of its anticipated operating and capital needs in order to build
working capital to desired levels. During the year ended December 31, 1998,
cash distributions to minority interests in SNG aggregated $3.7 million.
UVSG believes, except for the funds required to consummate the TV Guide
Acquisition (see Note 15 to UVSG's historical consolidated financial
statements included elsewhere in this offering memorandum), and except as
discussed above for SSDS, which will be required to renew or replace its
existing credit facility in April 1999, that currently available cash and cash
equivalents, marketable securities and cash flow generated from operations
will provide the resources necessary to meet its working capital and related
financing needs for the foreseeable future and to pursue opportunities to
expand its businesses. UVSG anticipates it will require approximately $700
million of financing, depending on available cash balances, to close the TV
Guide Acquisition and that such financing will be obtained through the
offering of the notes, $131 million sale of UVSG's common stock as part of the
TV Guide Acquisition and the remainder through initial borrowings of $185.3
million under the credit facilities. Should UVSG require additional financial
resources to execute its business plans, it will likely look to both debt and
equity as a source of funds.
The Board of Directors has authorized UVSG to repurchase from time to time
up to an aggregate of 7.0 million shares of UVSG's Class A Common Stock using
existing cash resources. Through December 31, 1998, approximately 1.4 million
shares had been repurchased by UVSG.
UVSG continues to explore opportunities to expand the market shares of its
existing businesses, develop new products and acquire interests in new
businesses.
II-13
<PAGE>
Inflation and Volatility of Paper Prices and Postal Rates
Publications continually reviews the impact and the volatility of paper
prices and postal rates. Postal rates increased in January 1999. Paper prices
rose significantly in 1995, dropped in 1996, and increased moderately in 1997
and 1998. Publications monitors the impact of changes in these costs and will
consider such changes in managing its business.
Year 2000
Publications, Netlink Wholesale Division and UVSG will continue addressing
the year 2000 issue as described in detail below through the date of the
Acquisitions. Following the Acquisitions, the Company will continue
appropriate efforts to remediate year 2000 concerns.
Publications
Publications is undertaking an enterprisewide project to assess and address
the potential impact of the year 2000 on the processing of date-sensitive
information by Publications' computerized information systems. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Certain programs may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures.
Publications' 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.
The objective of Publications' 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. Publications' 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.
Publications' year 2000 project team is focusing on the following major
areas:
Core Computer Systems. Information technology systems account for much
of the year 2000 work and include all computer systems and technology
managed by Publications. Publications' core computer systems relate to
editorial, fulfillment and production functions. All core systems have been
assessed, plans are in place and work is being undertaken to test and
implement changes where required.
Equipment and Facilities. An inventory of all critical office equipment
and infrastructure has been completed and Publications has developed plans
to assess any year 2000 issues related to critical items.
Customers and Vendors. Publications is developing a plan to contact its
major customers and vendors. To date, no significant customers or vendors
have informed Publications that a material Year 2000 issue exists which
could have a material effect on Publications. There can be no assurance
that the systems of other companies on which Publications' business relies
will be timely converted or that failure to convert by another company, or
a conversion that is incompatible with Publications' systems, would not
have a material adverse effect on Publications and its operations.
During 1999, Publications will continually review its progress against its
Year 2000 plans and conclude on the appropriate and feasible contingency plans
to reduce its exposure to Year 2000 related issues. Based on information
developed to date, costs of addressing potential problems are not currently
expected to have a material adverse impact on Publications' financial
position, results of operations or cash flows in future periods.
II-14
<PAGE>
However, if Publications, its customers or vendors are unable to resolve any
material Year 2000 issues in a timely manner, such inability could result in a
material financial risk.
Netlink Wholesale Division
A preliminary assessment has been done by the Company concerning the year
2000 issue. In discussions with Netlink Wholesale Division, it was
preliminarily concluded that the activity required for ensuring compliance on
the systems, software and equipment will not be significant. Upon completion
of the Netlink Acquisition by the Company, a more formalized and structured
approach will be used. This project is referred to as the year 2000 project.
The year 2000 project involves a four-phase approach to determining the
year 2000 readiness of the Netlink Wholesale Division's systems, software and
equipment. This approach provides a detailed method for tracking the
evaluation, repair and testing of the 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
January 1999. Phase 2, Remediation, involves repairing, upgrading and/or
replacing any non-compliant equipment and systems. Phase 2 is scheduled for
completion by May 1999. Phase 3, Testing, involves testing the systems,
software and equipment for year 2000 readiness, or in certain cases, relying
on test results provided to the Netlink Wholesale Division. Phase 3 is
scheduled for completion by July 1999. Phase 4, Implementation, involves
placing compliant systems, software and equipment into production or service.
Phase 4 is scheduled for completion by September 1999. The completion dates
set forth above are based on current expectations. However, due to the
uncertainties inherent in year 2000 remediation, there can be no assurance
that the projects will be completed on such dates.
As part of the year 2000 project, significant suppliers and customers will
be contacted to determine the extent to which the Netlink Wholesale Division
is vulnerable to those third parties' failure to remediate their year 2000
compliance issues. There can be no assurance that the systems of other
companies on which the Netlink Wholesale Division's business relies will be
timely converted or that failure to convert by another company, or a
conversion that is incompatible with the Netlink Wholesale Division's systems,
would not have a material adverse effect on the Netlink Wholesale Division and
its operations.
The 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 Netlink Wholesale
Division's services are not successfully remediated, the Netlink Wholesale
Division could face claims of breach of contract from customers, certain
programming providers and from other businesses that rely on the Netlink
Wholesale Division's programming services. Additionally, failure of third
parties upon whom the Netlink Wholesale Division relies to timely remediate
their year 2000 issues could result in disruption in the Netlink Wholesale
Division'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 additional information is obtained
regarding the remediation activities of third party suppliers and customers.
There can be no assurance that the year 2000 issue will not have a material
adverse effect on the Netlink Wholesale Division and its operations.
There are plans to develop contingency plans on all critical processes to
minimize the impact of any year 2000 related interruption. Plans are expected
to be in place by July 1999.
UVSG
In 1997, UVSG 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. UVSG 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 UVSG.
II-15
<PAGE>
The year 2000 project involves a four-phase approach to determining the
year 2000 readiness of UVSG's systems, software and equipment. This approach
provides a detailed method for tracking the evaluation, repair and testing of
UVSG'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 January 1999. Phase 2, Remediation,
involves repairing, upgrading and/or replacing any non- compliant equipment
and systems. Phase 2 is scheduled for completion by March 1999. Phase 3,
Testing, involves testing UVSG's systems, software and equipment for year 2000
readiness, or in certain cases, relying on test results provided to UVSG.
Phase 3 is scheduled for completion by May 1999. Phase 4, Implementation,
involves placing compliant systems, software and equipment into production or
service. Phase 4 is scheduled for completion by July 1999. The completion
dates set forth above are based on UVSG's current expectations. However, due
to the uncertainties inherent in year 2000 remediation, there can be no
assurance that the projects will be completed on such dates.
As part of the year 2000 project, UVSG with the assistance of TCI is in the
process of contacting its significant suppliers and customers to determine the
extent to which UVSG is vulnerable to those third parties' failure to
remediate their year 2000 compliance issues. There can be no assurance that
the systems of other companies on which UVSG's business relies will be timely
converted or that failure to convert by another company, or a conversion that
is incompatible with UVSG's systems, would not have a material adverse effect
on UVSG and its operations.
UVSG'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 UVSG's services are not
successfully remediated, UVSG could face claims of breach of contract from
customers, certain programming providers and from other businesses that rely
on UVSG's programming services. Additionally, failure of third parties upon
whom UVSG relies to timely remediate their year 2000 issues could result in
disruption in UVSG's daily operations and core services. While UVSG 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 UVSG 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 UVSG and its operations.
UVSG is in the process of developing contingency plans on all critical
processes to minimize the impact of any year 2000 related interruption. These
plans have been completed at a high level and the detailed plans are expected
to be in place prior to May 31, 1999.
II-16
<PAGE>
APPENDIX III
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Financial Statements
The following unaudited pro forma combined financial statements have been
prepared to give pro forma effect to the Netlink Acquisition and the TV Guide
Acquisition.
The Netlink Acquisition will be accounted for as a combination of entities
under common control, in a manner similar to a pooling-of-interests. The
combined financial statements of UVSG and the Netlink Wholesale Division on an
as-if-pooled basis are presented as of December 31, 1998 and for each of the
years in the three-year period ended December 31, 1998. These financial
statements include the financial statements of the Netlink Wholesale Division
for periods subsequent to January 25, 1996, the date UVSG and the Netlink
Wholesale Division were first under common control.
The TV Guide Acquisition will be accounted for as a purchase. The pro forma
combined financial statements assuming both the Netlink Acquisition and the TV
Guide Acquisition ("UVSG Pro Forma") are presented as of December 31, 1998,
and for the year ended December 31, 1998.
The pro forma combined financial statements have been further modified to
present the UVSG Pro Forma combined financial statements separated between
amounts attributable to the Restricted Group and the Unrestricted Group.
Intercompany accounts and transactions previously eliminated in consolidation
have been reversed in the "Eliminations" column to present the separate
amounts for the Restricted Group and the Unrestricted Group.
Each of the Guarantor subsidiaries is a member of the Restricted Group
under the terms of the indenture. In addition, the Restricted Group includes
one partially-owned subsidiary and one foreign subsidiary, both of which are
included as Non-Guarantor subsidiaries in the condensed combining financial
information included in the notes to UVSG's historical financial statements
included elsewhere in this offering memorandum.
Separate financial statements of the guarantor subsidiaries have not been
presented herein as such subsidiaries are (or, subsequent to the acquisitions,
will be) wholly owned and will be joint and several full and unconditional
guarantors of the notes.
Pro forma net income of the Restricted Group excludes equity in the
earnings of the unrestricted subsidiaries as the Company believes this
presentation is a better indication of the financial performance of the
Restricted Group.
III-1
<PAGE>
United Video Satellite Group, Inc.
(TV Guide, Inc. as of the closing of the TV Guide Acquisition)
Unaudited Pro Forma Combined Balance Sheet
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
The Netlink Acquisition and the TV Guide Acquisition
------------------------------------------------------------------------------------------------
The Netlink Acquisition
--------------------------------------------
UVSG Netlink Pooled Publications Pro Forma UVSG
Historical Historical Adjustments Results Historical Adjustments Pro Forma Eliminations
---------- ---------- ----------- -------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash, cash
equivalents and
marketable
securities....... $161,320 $ 128 $ -- $161,448 $ -- $(800,000)(2) $ 61,448 $ --
716,000 (1)
(16,000)(6)
Accounts
receivable....... 59,280 6,594 (1,242)(a) 64,632 162,115 -- 226,747 --
Accounts and
notes receivable
from affiliates.. -- -- -- -- -- -- -- 79,850
Prepaid expenses
and other........ 5,610 558 -- 6,168 39,154 -- 45,322 --
Deferred tax
asset............ 1,811 -- -- 1,811 -- -- 1,811 --
-------- ------- ------- -------- ---------- --------- ---------- -------
Total current
assets.......... 228,021 7,280 (1,242) 234,059 201,269 (100,000) 335,328 79,850
Property, plant
and equipment,
net of
accumulated
depreciation and
amortization..... 45,179 583 -- 45,762 16,634 -- 62,396 --
Intangible
assets, net of
accumulated
amortization..... 111,420 2,103 -- 113,523 2,358,514 844,902 (2) 3,316,939 --
Deferred tax
asset............ -- 2,823 -- 2,823 -- -- 2,823 --
Other assets, net
of accumulated
amortization..... 19,162 -- -- 19,162 20,626 16,000 (6) 55,788 --
-------- ------- ------- -------- ---------- --------- ---------- -------
Total assets.... $403,782 $12,789 $(1,242) $415,329 $2,597,043 $ 760,902 $3,773,274 $79,850
======== ======= ======= ======== ========== ========= ========== =======
<CAPTION>
Pro Forma
-----------------------
Unrestricted Restricted
Group Group
------------ ----------
<S> <C> <C>
Assets
Cash, cash
equivalents and
marketable
securities....... $ 57,095 $ 4,353
Accounts
receivable....... 36,422 190,325
Accounts and
notes receivable
from affiliates.. 62,295 17,555
Prepaid expenses
and other........ 4,856 40,466
Deferred tax
asset............ 604 1,207
------------ ----------
Total current
assets.......... 161,272 253,906
Property, plant
and equipment,
net of
accumulated
depreciation and
amortization..... 11,256 51,140
Intangible
assets, net of
accumulated
amortization..... 109,071 3,207,868
Deferred tax
asset............ -- 2,823
Other assets, net
of accumulated
amortization..... 5,348 50,440
------------ ----------
Total assets.... $286,947 $3,566,177
============ ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
III-2
<PAGE>
United Video Satellite Group, Inc.
(TV Guide, Inc. as of the closing of the TV Guide Acquisition)
Unaudited Pro Forma Combined Balance Sheet
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
The Netlink Acquisition and the TV Guide Acquisition
---------------------------------------------------------------------------------------
The Netlink Acquisition
--------------------------------------------
UVSG Netlink Pooled Publications Pro Forma UVSG
Historical Historical Adjustments Results Historical Adjustments Pro Forma
---------- ---------- ----------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities and
Stockholders'
Equity
Accounts payable
and accrued
liabilities..... $ 58,626 $ 5,636 $(1,242)(a) $ 63,020 $ 100,022 $ -- $ 163,042
Accounts and
notes payable to
affiliates...... -- -- -- -- -- -- --
Other current
indebtedness.... 5,463 -- -- 5,463 -- -- 5,463
Customer
prepayments/deferred
revenue......... 109,260 669 -- 109,929 168,971 -- 278,900
-------- ------- ------- -------- ----------- ---------- ----------
Total current
liabilities.... 173,349 6,305 (1,242) 178,412 268,993 -- 447,405
Deferred
compensation.... 367 -- -- 367 -- -- 367
Deferred tax
liability....... 11,041 -- 9,062(c) 20,103 621,946 561,716 (2) 1,203,765
Other non-
current
liabilities..... -- -- -- -- 68,490 -- 68,490
Long-term debt.. 13,007 -- -- 13,007 -- 585,318 (1) 598,325
Due to
affiliates...... -- -- -- -- -- -- --
<CAPTION>
Pro Forma
-----------------------
Unrestricted Restricted
Eliminations Group Group
------------ ------------ ----------
<S> <C> <C> <C>
Liabilities and
Stockholders'
Equity
Accounts payable
and accrued
liabilities..... $ -- $ 43,795 $ 119,247
Accounts and
notes payable to
affiliates...... 79,850 17,555 62,295
Other current
indebtedness.... -- 1,754 3,709
Customer
prepayments/deferred
revenue......... -- 101,656 177,244
------------ ------------ ----------
Total current
liabilities.... 79,850 164,760 362,495
Deferred
compensation.... -- 85 282
Deferred tax
liability....... -- 4,208 1,199,557
Other non-
current
liabilities..... -- -- 68,490
Long-term debt.. -- -- 598,325
Due to
affiliates...... -- -- --
Minority
interest........ 3,596 -- -- 3,596 -- -- 3,596
Minority
interest........ (3,247) 349 --
Stockholders'
equity
Capital stock... 726 -- 128 (b) 854 -- 65 (1) 1,519
600 (2)
Additional paid-
in capital...... 22,319 -- (128)(b) 22,191 3,224,299 130,617 (1) 1,273,008
(2,104,099)(2)
Accumulated other comprehensive
losses.......... (54) -- -- (54) -- -- (54)
Retained
earnings
(accumulated
deficit) 180,610 6,484 (1,179)(c) 176,853 (1,586,685) 1,586,685(2) 176,853
(9,062)(c)
Group combined
equity.......... -- -- -- -- -- -- --
-------- ------- ------- -------- ----------- ---------- ----------
203,601 6,484 (10,241) 199,844 1,637,614 (386,132) 1,451,326
Minority
interest deficit
in
Superstar/Netlink
Group LLC (1,179) -- 1,179 (c) -- -- -- --
-------- ------- ------- -------- ----------- ---------- ----------
Total
stockholders'
equity......... 202,422 6,484 (9,062) 199,844 1,637,614 (386,132) 1,451,326
-------- ------- ------- -------- ----------- ---------- ----------
Total
liabilities
and
stockholders'
equity......... $403,782 $12,789 $(1,242) $415,329 $ 2,597,043 $ 760,902 $3,773,274
======== ======= ======= ======== =========== ========== ==========
Stockholders'
equity
Capital stock... (1,519) -- --
Additional paid-
in capital...... (1,273,008) -- --
Accumulated other comprehensive
losses.......... 54 -- --
Retained
earnings
(accumulated
deficit) (176,853) -- --
Group combined
equity.......... 1,454,573 117,545 1,337,028
------------ ------------ ----------
3,247 117,545 1,337,028
Minority
interest deficit
in
Superstar/Netlink
Group LLC -- -- --
------------ ------------ ----------
Total
stockholders'
equity......... 3,247 117,545 1,337,028
------------ ------------ ----------
Total
liabilities
and
stockholders'
equity......... $ 79,850 $286,947 $3,566,177
============ ============ ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
III-3
<PAGE>
United Video Satellite Group, Inc.
(TV Guide, Inc. as of the closing of the TV Guide Acquisition)
Unaudited Pro Forma Combined Statement of Operations
Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
The Netlink Acquisition and the TV Guide Acquisition
--------------------------------------------------------------------------------------------------------------
The Netlink Acquisition
---------------------------------------------
UVSG Netlink Pooled Publications TVSM Pro Forma UVSG
Historical Historical Adjustments Results Historical Historical Adjustments Pro Forma Eliminations
---------- ---------- ----------- -------- ------------ ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $598,420 $39,777 $(16,257)(a) $621,940 $ 642,406 $36,189 $ -- $1,300,535 $24,016
Operating
expenses:
Programming and
delivery....... 322,059 25,102 (16,257)(a) 330,904 435,243 29,715 -- 795,862 24,016
Selling, general
and
administrative.. 152,635 1,555 -- 154,190 56,806 6,688 -- 217,684 --
Depreciation and
amortization... 28,027 200 -- 28,227 102,277 432 (1,508)(3) 129,428 --
-------- ------- -------- -------- --------- ------- -------- ---------- -------
502,721 26,857 (16,257) 513,321 594,326 36,835 (1,508) 1,142,974 24,016
-------- ------- -------- -------- --------- ------- -------- ---------- -------
Operating
income.......... 95,699 12,920 -- 108,619 48,080 (646) 1,508 157,561 --
Gain on issuance
of equity by
subsidiary...... 13,373 -- 24,525(c) 37,898 -- -- -- 37,898 --
Interest
expense......... (1,629) -- -- (1,629) (259,065) (358) (46,999)(4) (48,986) --
259,065 (5)
Other income
(expense)....... 16,530 -- -- 16,530 -- -- 16,530 --
-------- ------- -------- -------- --------- ------- -------- ---------- -------
Income (loss)
before income
taxes and
minority
interest........ 123,973 12,920 24,525 161,418 (210,985) (1,004) 213,574 163,003 --
(Provision)
benefit for
income taxes.... (37,507) (4,535) (16,935)(c) (58,977) 27,368 -- (27,953)(7) (59,562) --
Minority interest
in earnings (21,689) -- 21,307 (c) (382) -- -- -- (382) 290
-------- ------- -------- -------- --------- ------- -------- ---------- -------
Net income
(loss).......... $ 64,777 $ 8,385 $ 28,897 $102,059 $(183,617) $(1,004) $185,621 $ 103,059 $ 290
======== ======= ======== ======== ========= ======= ======== ========== =======
Earnings per
share:
Basic........... $ 0.88 $ 1.19 $ 0.68
Diluted......... $ 0.87 $ 1.17 $ 0.67
Number of shares:
Basic........... 73,208 85,958 152,492
Diluted......... 74,135 86,885 153,419
<CAPTION>
Pro Forma
-----------------------
Unrestricted Restricted
Group Group
------------ ----------
<S> <C> <C>
Revenues......... $484,393 $840,158
Operating
expenses:
Programming and
delivery....... 320,125 499,753
Selling, general
and
administrative.. 93,583 124,101
Depreciation and
amortization... 15,600 113,828
------------ ----------
429,308 737,682
------------ ----------
Operating
income.......... 55,085 102,476
Gain on issuance
of equity by
subsidiary...... 37,898 --
Interest
expense......... (707) (48,279)
Other income
(expense)....... 4,783 11,747
------------ ----------
Income (loss)
before income
taxes and
minority
interest........ 97,059 65,944
(Provision)
benefit for
income taxes.... (37,435) (22,127)
Minority interest
in earnings (316) 224
------------ ----------
Net income
(loss).......... $ 59,308 $ 44,041
============ ==========
Earnings per
share:
Basic...........
Diluted.........
Number of shares:
Basic...........
Diluted.........
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
III-4
<PAGE>
United Video Satellite Group, Inc.
(TV Guide, Inc. as of the closing of the TV Guide Acquisition)
Unaudited Pro Forma Combined Statement of Operations
Year Ended December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
The Netlink Acquisition
---------------------------------------------
UVSG Netlink Pooled
Historical Historical Adjustments Results
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $507,598 $33,683 $(10,861)(a) $530,420
Operating expenses:
Programming and delivery...... 260,584 16,396 (10,861)(a) 266,119
Selling, general and
administrative............... 143,019 1,306 -- 144,325
Depreciation and
amortization................. 18,651 199 -- 18,850
-------- ------- -------- --------
422,254 17,901 (10,861) 429,294
-------- ------- -------- --------
Operating income............... 85,344 15,782 -- 101,126
Interest expense............... (2,122) -- -- (2,122)
Other income .................. 6,212 30 -- 6,242
-------- ------- -------- --------
Income before income taxes and
minority interest............. 89,434 15,812 -- 105,246
Provision for income taxes..... (25,892) (5,744) (6,802)(c) (38,438)
Minority interest in earnings.. (17,782) -- 18,409 (c) 627
-------- ------- -------- --------
Net income..................... $ 45,760 $10,068 $ 11,607 $ 67,435
======== ======= ======== ========
Earnings per share*:
Basic......................... $ 0.62 $ 0.78
Diluted....................... $ 0.62 $ 0.78
Weighted average shares:
Basic......................... 73,347 86,097
Diluted....................... 74,058 86,808
</TABLE>
- --------
* Adjusted for two-for-one stock split in August 1998.
See accompanying notes to unaudited pro forma combined financial statements.
III-5
<PAGE>
United Video Satellite Group, Inc.
(TV Guide, Inc. as of the closing of the TV Guide Acquisition)
Unaudited Pro Forma Combined Statement of Operations
Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
The Netlink Acquisition
--------------------------------------------
UVSG Netlink Pooled
Historical Historical Adjustments Results
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues........................ $437,168 $55,883 $(8,338)(a) $484,713
Operating expenses:
Programming and delivery..... 227,938 34,931 (8,338)(a) 254,531
Selling, general and
administrative............... 137,687 6,399 -- 144,086
Depreciation and
amortization................. 16,323 409 -- 16,732
-------- ------- ------- --------
381,948 41,739 (8,338) 415,349
-------- ------- ------- --------
Operating income................ 55,220 14,144 -- 69,364
Other income (expense).......... 1,684 (11) -- 1,673
-------- ------- ------- --------
Income before income taxes and
minority interest.............. 56,904 14,133 -- 71,037
Provision for income taxes...... (17,122) (4,696) (3,974)(c) (25,792)
Minority interest in earnings... (9,698) -- 10,755 (c) 1,057
-------- ------- ------- --------
Net income...................... $ 30,084 $ 9,437 $ 6,781 $ 46,302
======== ======= ======= ========
Earnings per share(1):
Basic........................ $ 0.42 $ 0.55
Diluted...................... $ 0.41 $ 0.54
Weighted average shares:
Basic........................ 72,020 84,770
Diluted...................... 73,522 86,272
</TABLE>
- --------
(1) Adjusted for two-for-one stock split in August 1998.
See accompanying notes to unaudited pro forma combined financial statements.
III-6
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
Basis of Presentation
The Netlink Acquisition. In connection with the Netlink Acquisition, the
Company will acquire from Liberty all of the outstanding capital stock of the
three corporations that own Liberty's interest in SNG, the Denver 6 Service
and certain other programming interests in exchange for 12,750,000 shares of
the Company's Class B common stock. The Netlink Acquisition will be accounted
for as a merger of entities under common control, similar to a pooling-of-
interests. Periods subsequent to January 25, 1996, the date UVSG and the
Netlink Wholesale Division came under common control, are presented on an as-
if-pooled basis.
The historical operating results of SNG are included in the consolidated
operating results of UVSG for periods subsequent to April 1, 1996 as UVSG has
control over SNG's operations. Excluding Liberty's interest in SNG, the
remainder of the business interests being acquired by the Company are held by
the Netlink Wholesale Division. The presentation of the combined financial
statements of the Company and the Netlink Wholesale Division, including the
operations of Netlink's retail C-band business for the period from January 25,
1996 through March 31, 1996, the period from the date common control was
established through the formation of SNG, include an adjustment to:
(a) eliminate the sales of programming from the Netlink Wholesale Division
to SNG and related accounts receivable/payable;
(b) record the issuance of common stock to Liberty in connection with the
Netlink Acquisition; and
(c) record Liberty's gain associated with the minority interest adjustment
in SNG at the acquisition of Turner Vision and to eliminate the minority
interest in SNG's earnings attributable to Liberty's interest in SNG that is
being acquired by the Company as a part of the Netlink Acquisition and reflect
taxes on the associated earnings at Netlink's effective rate.
The as-if-pooled financial statements have been derived from the historical
consolidated financial statements of UVSG and the historical combined
financial statements of Netlink Wholesale Division included elsewhere in this
offering memorandum and are qualified in their entirety by reference to, and
should be read in conjunction with, such historical financial statements and
related notes thereto.
TV Guide Acquisition. In connection with the TV Guide Acquisition, the
Company will acquire all of the outstanding stock of Publications and TVSM
which own and publish TV Guide Magazine, publish cable-based television
listing guides, operate the web site now known as TV Guide Online and hold
certain other assets, in exchange for 22,503,412 shares of the Company's Class
A common stock, 37,496,588 shares of the Company's Class B common stock and
$800 million in cash. For purposes of the pro forma combined financial
statements, it is assumed that the Company will fund the cash portion of the
TV Guide Acquisition and related costs with gross proceeds of $400 million
from the offering, $185.3 million from initial borrowings under the bank
credit facilities, $130.7 million from issuance of the Equalization Shares and
$100 million from existing cash balances. The TV Guide Acquisition will be
accounted for as a purchase.
In June 1998, an indirect subsidiary of News Corp. acquired all of the
outstanding capital stock of TVSM which owns and publishes monthly proprietary
program listings for certain cable television systems and satellite
programming distributors. The operating results of TVSM subsequent to June 26,
1998, the acquisition date, are included with those of Publications and not
with the "TVSM Historical" financial information.
The pro forma combined financial statements have been derived from the as-
if-pooled financial statements of UVSG and the Netlink Wholesale Division, the
historical combined financial statements of Publications included elsewhere in
this offering memorandum, as adjusted to be presented on a calendar year
basis, and the historical financial statements of TVSM, not included in this
offering memorandum; and are qualified in their entirety by reference to, and
should be read in conjunction with, such historical financial statements and
related
III-7
<PAGE>
notes thereto. The pro forma information has been compiled as if the TV Guide
Acquisition occurred on December 31, 1998 for balance sheet purposes and on
January 1, 1998 for income statement purposes.
The pro forma combined financial information may not be indicative of the
results that actually would have occurred if the Netlink Acquisition and the TV
Guide Acquisition had occurred on the dates indicated or which may be obtained
in the future.
The pro forma adjustments are based on available financial information and
certain estimates and assumptions, therefore the actual adjustments could
differ from the pro forma adjustments. The Company has not yet completed its
analysis of the allocation of the purchase price in the TV Guide Acquisition
among identifiable intangible assets and goodwill. In the pro forma financial
information presented, the Company has allocated amounts to identifiable
intangible assets as follows:
<TABLE>
<CAPTION>
Intangible Asset Life (in thousands)
---------------- -------- --------------
<S> <C> <C>
Publishing rights............................... 40 years $2,913,265
Acquired subscriber accounts.................... 15 years 290,151
----------
$3,203,416
==========
</TABLE>
Publishing rights include the rights associated with publishing TV Guide
Magazine, including the use of the TV Guide trademark. Acquired subscriber
accounts include the value attributable to the customer list of subscribers to
TV Guide Magazine.
After closing the TV Guide Acquisition, the Company, with the assistance of
valuation consultants, will complete its evaluation of the fair value of the
assets acquired and the estimated lives of such assets. Accordingly, the
allocation of the purchase price and the lives of the assets, which are based
on preliminary estimates, may differ from the final purchase price allocation
and the final lives assigned to the assets.
The pro forma adjustments necessary to present the financial position and
results of operations of the Company are as follows:
(1) To reflect the issuance of $400 million aggregate principal amount of the
notes, initial borrowings of $185.3 million under the Company's bank
credit facilities and the issuance of the Equalization Shares equal to
$130.7 million in Class A common stock. The proceeds from these
transactions, together with $100 million cash on hand, will be used to
fund the cash consideration to be paid in the TV Guide Acquisition and for
related costs.
(2) To reflect the issuance of 22,503,412 shares of Class A common stock and
37,496,588 shares of Class B common stock, both at $18.68 per share, as
adjusted for the two-for-one stock split effected on August 20, 1998, and
the payment of $800 million in cash for a total consideration of $1.9
billion, in exchange for all of the outstanding capital stock of
Publications and TVSM. The $18.68 per share value of the Company's common
stock was determined based on an analysis of the market prices (without
adjustments for premium or discount) of UVSG's common stock for a few days
before and after the agreement on the TV Guide Acquisition was reached and
announced:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Class A common stock....................................... $ 225
Class B common stock....................................... 375
Paid in capital............................................ 1,120,200
Cash....................................................... 800,000
----------
Total consideration........................................ $1,920,800
==========
</TABLE>
III-8
<PAGE>
The excess of the consideration over the fair value of the net identifiable
tangible assets acquired was allocated to intangible assets as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Total consideration...................................... $1,920,800
Publications net tangible liabilities assumed............ 720,900
Deferred income taxes.................................... 561,716
----------
Identifiable intangible assets related to TV Guide
Acquisition............................................. 3,203,416
Historical TV Guide intangible assets.................... (2,358,514)
----------
Pro Forma adjustment to intangible assets................ $ 844,902
==========
</TABLE>
(3) To adjust amortization of the intangible assets associated with the TV
Guide Acquisition. The Company currently expects to amortize these assets
over lives ranging from 15 to 40 years on a straight-line basis.
(4) To reflect interest, at the rate of 8.125% and 6.65% per annum, based on
current interest rates, on the debt incurred under the offering and under
the bank credit facility, respectively, to fund the TV Guide Acquisition
and amortization of related costs. A change in the interest rate of 1/8 of
a percent would result in a change in interest expense of approximately
$730,000 annually.
(5) To eliminate intercompany interest expense.
(6) To reflect the payment and capitalization of acquisition-related costs.
The Company intends to amortize these assets over periods ranging from 6
to 10 years.
(7) To reflect income taxes resulting from the above pro forma adjustments.
Earnings per Share
The following information reconciles the number of shares used to compute
historical basic and diluted earnings per share to pro forma basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Basic Diluted Basic Diluted Basic Diluted
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of shares
of common stock and dilutive
potential shares of common
stock--historical............... 73,208 74,135 73,347 74,058 72,020 73,522
Common shares to be issued in
connection with the Netlink
Acquisition..................... 12,750 12,750 12,750 12,750 12,750 12,750
------- ------- ------ ------ ------ ------
Weighted average number of shares
of common stock and dilutive
potential shares of common
stock--pro forma--Netlink
Acquisition only................ 85,958 86,885 86,097 86,808 84,770 86,272
====== ====== ====== ======
Common shares to be issued in
connection with the TV Guide
Acquisition, including the
Equalization Shares............. 66,534 66,534
------- -------
Weighted average number of shares
of common stock and dilutive
potential shares of common
stock--pro forma--both Netlink
Acquisition and TV Guide
Acquisition..................... 152,492 153,419
======= =======
</TABLE>
III-9
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Company's previously filed
Registration Statements File No. 33-72272, No. 333-2866 and No. 333-2978.
ARTHUR ANDERSEN LLP
New York, New York
February 17, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors:
United Video Satellite Group, Inc.:
We consent to the incorporation by reference in the registration statements (No.
33-72272, No. 333-2866 and No. 333-2978) on Form S-8 of United Video Satellite
Group, Inc. of our report dated February 15, 1999, with respect to the
combined balance sheets of Netlink Wholesale Division as of December 31,
1998 and 1997, and the related combined statements of operations and equity
and cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in this current report on Form 8-K dated February 23,
1999.
KPMG LLP
Denver, Colorado
February 23, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors:
United Video Satellite Group, Inc.:
We consent to the incorporation by reference in the registration statements (No.
33-72272, No. 333-2866 and No. 333-2978) on Form S-8 of United Video Satellite
Group, Inc. of our report dated February 5, 1999, with respect to the
consolidated balance sheets of United Video Satellite Group, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows and the
financial statement schedule for the years then ended, which report appears in
this current report on Form 8-K dated February 23, 1999.
KPMG LLP
Tulsa, Oklahoma
February 23, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors:
United Video Satellite Group, Inc.:
We consent to the incorporation by reference of our report dated February 10,
1997, with respect to the consolidated financial statements and schedule of
United Video Satellite Group, Inc. included in the Form 8-K filed February 23,
1999, in the following registration statements and related prospectuses.
<TABLE>
<CAPTION>
<S> <C> <C>
Stock Option Plan for Form S-8 File No. 33-72272
Non-Employee Directors,
The Equity Incentive
Plan and the Stock
Option Assumption
Agreements of United
Video Satellite
Group, Inc.
United Video Satellite Form S-8 File No. 333-2866
Group, Inc. 401(k) Plan
United Video Satellite Form S-8 File No. 333-2978
Group, Inc. Stock Option
Plan for Non-Employee
Directors
</TABLE>
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 23, 1999
