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):
March 1, 1999
TV GUIDE, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-22662 73-1290412
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
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)
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ITEM 5. OTHER MATTERS
Updated Disclosures Under Item 1 of Form 10-K
The following discussion is intended to update the disclosure
contained under the heading "Regulation" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 under Item 1,
Business. It is updated to reflect legislative and other developments
occurring subsequent to the date of such Annual Report on Form 10-K;
capitalized terms have the same meanings as in such Annual Report on
Form 10-K.
Regulation
The satellite transmission, cable and telecommunications
industries are subject to federal regulatory conditions, including
Federal Communications Commission ("FCC") licensing and other
requirements. The industries are also often subject to extensive
regulation by local and state authorities. While most cable and
telecommunication industry regulations do not apply directly to the
Company, they affect programming distributors, the primary customer for
the Company's products and services. In the past, uncertainty about
proposed or even rumored regulatory changes has occasionally caused the
Company's programming distributor customers to postpone purchasing
decisions and actions. The Company monitors pending legislation to
ascertain relevance, analyze impact and develop strategic direction
surrounding regulatory trends and developments within the industry.
Copyright Matters. Under the "cable compulsory license"
provisions of the Copyright Act of 1976 (the "Copyright Act"),
programming distributors are required to pay copyright fees that arise
from their reception and distribution of satellite-transmitted
television broadcasts such as WGN and other superstations. These
provisions also grant an exemption which allows the Company to transmit
and market its superstations without agreements with, or copyright
payments to, the broadcast station or the program owners. The cable
television systems that carry the superstation broadcasts are
responsible for paying copyright fees to the United States Copyright
Office, a federal copyright fee collection agency. Legislation has
been recommended from time to time to repeal the cable compulsory
license provision, although no such legislation has been passed by
Congress. Similar legislation may be discussed and possibly introduced
in the near future to consider "reform" of the cable compulsory
license, and if adopted, such legislation could hinder or prevent the
Company from marketing superstation services such as WGN.
The Copyright Act and U.S. Copyright Office regulations generally
impose a significantly higher copyright fee on cable television systems
in certain markets for carrying more than two distant independent
television stations. This copyright fee structure limits the extent to
which cable television systems are able to carry superstations.
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Satellite Home Viewer Act of 1988. The Satellite Home Viewer Act
of 1988 ("SHVA I") provides for a "home satellite dish compulsory
copyright license" for the retransmission of network and superstation
signals and programming to the home satellite dish market. Under the
terms of SHVA I, satellite carriers, such as the Company's UVTV
division, are responsible for paying copyright fees to the U. S.
Copyright Office, which acts as a federal copyright fee collection
agency for the sale of superstation signals to home satellite dish
owners. On October 27, 1997, the Librarian of Congress ("Librarian")
finalized his decision to accept the Copyright Arbitration Rate Panel's
("CARP") recommendation that copyright fees for direct-to-home
satellite carriage of superstations and distant network television
broadcast signals be raised to $0.27 per subscriber, per month. The
CARP also recommended that these increases be retroactive to July 1,
1997; however, the Librarian ruled to effect the change January 1,
1998. Superstation copyright fees previously ranged from $0.14 to
$0.175 per subscriber, per month while network affiliate fees
approximated $0.06 per subscriber, per month. Several programming
packagers of home satellite services, such as the Company's
Superstar/Netlink Group LLC ("SNG") subsidiary and distributors of
programming to C-band direct-to-home programming packagers, such as
UVTV and the Company's Denver 6 service, thereafter announced price
increases to cover the increase in the copyright fee. Effective January
1, 1998, SNG increased the rates charged to its retail customers to
cover the increased copyright fees, limiting its exposure to the
remaining subscription period for those customers who purchased
programming in advance for more than one month. In addition, on that
same date, UVTV and the Company's Denver 6 service increased the rates
charged to their wholesale C-band customers. Therefore, the copyright
fee increases were not expected to have a material adverse effect on
the Company's financial position or results of operations in the near
term. The Satellite Home Viewer Act of 1994 extended the home
satellite dish compulsory license, which had been scheduled to expire
on December 31, 1994, through the end of 1999.
Satellite Home Viewer Improvement Act of 1999. The Satellite Home
Viewer Improvement Act of 1999 ("SHVA II") was signed into law November
29, 1999, as part of an appropriations bill. SHVA II extends the SHVA
I compulsory copyright license for superstations and distant network
stations for an additional five years, until December 31, 2004. SHVA
II also reduces the associated license fees for superstations to 18.9
cents and for distant network stations to 14.85 cents retroactive to
July 1, 1999. SHVA II requires the FCC to conduct a number of
rulemakings that may ultimately subject superstations and distant
network stations delivered by satellite directly to dish owners to new
program exclusivity rules (similar to those imposed on these types of
signals distributed by cable operators and other wireline programming
distributors), including syndicated exclusivity, network non-
duplication and sports blackout rules. The impact of these rules on
the distribution of signals by UVTV, the Company's Denver 6 service and
SNG cannot be determined until the rules are promulgated, but any such
rules may restrict and negatively impact the distribution of
superstations and distant network stations by satellite.
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SHVA I prohibited the retransmission by a satellite carrier of a
television broadcast signal of a network television station to
households that receive a Grade B intensity over-the-air signal of a
television broadcast station affiliated with such network and to
households that receive (or within the past 90 days had received)
through a cable system the signal of a television station affiliated
with such network. SHVA II retains the Grade B eligibility standard
for distant network stations, but eliminates the 90-day waiting period
and directs the FCC to review the signal strength measurement and
subscriber eligibility standards in a rulemaking and report to
Congress. SHVA II also provides a copyright liability moratorium for
all satellite carriers distributing distant network signals to existing
(as of October 31, 1999) and recently terminated (after July 11, 1998)
subscribers who are within Grade B contours of local network
affiliates. Moreover, the entire C-Band industry (including the
Company's Denver 6 service as a satellite carrier and SNG as a
programming distributor) is exempt from all restrictions on delivering
distant network signals to subscribers who received C-Band service
before October 31, 1999. SHVA II also impacts the C-Band and DBS
industry generally with rulemakings, exemptions and added regulatory
requirements, the combined effect of which may restrict and make
uneconomic the uplinking and distribution of distant network stations
and superstations to dish owners. While SNG is not a satellite
carrier, certain programming sold by SNG, such as Denver 6 and
PrimeTime 24, is subject to these rules. The Company's Denver 6
service, as a satellite carrier, is subject to the new provisions in
SHVA II.
The broadcast networks and their affiliates commenced infringement
actions against certain satellite carriers for violation of the network
service restrictions. Negotiations between certain satellite carriers,
the National Association of Broadcasters, certain network-affiliated
television stations and their respective affiliate associations
resulted in an agreement that restricted distribution of distant
network signals through the adoption of a "red zone/green zone"
plan which limited the Company's Denver 6 service, and SNG's ability to
sell network television station signals into certain markets. With the
passage of SHVA II, the Company has the option of discontinuing the
"red zone/green zone" agreement and utilizing the exemption for C-Band
subscribers to continue distributing distant network signals.
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"Local-Into-Local". SHVA II provides satellite carriers a new
compulsory copyright license, which is permanent and royalty-free, for
the delivery of local network stations into local markets (defined as
the station's DMA and county of license). This license is available
for service to commercial establishments and applies to Mexican and
Canadian broadcast signals. Satellite carriers will have to obtain
retransmission consent (after a six-month grace period ending May,
2000) and comply with must carry rules that are to be promulgated by
the FCC effective January 1, 2002. The Company has no plans to
distribute local signals in the C-Band markets. DBS carriers expect to
serve the larger television markets only (currently Top 10 markets;
expected Top 50). Unless and until a rural loan guarantee program
becomes law (deleted from SHVA II before passage) in a subsequent
congressional session, it is not certain that local signals will be
distributed in the smaller and rural television markets. The
distribution of local signals will enhance DBS carriers' ability to
compete with cable and may enhance, subject to the limitations above,
the distribution of superstations to DBS subscribers. The availability
of local signals to DBS, without corresponding local signals for C-
Band, may contribute to the ongoing decline of C-Band subscribers.
1992 Cable Act. In October 1992, Congress enacted the 1992 Cable
Act, which provided a comprehensive regulatory framework for the
operation of cable television systems, including substantial rate
regulation for certain services and equipment provided by most cable
television systems in the United States. Pursuant to the 1992 Cable
Act, the FCC adopted regulations with respect to rates charged for
certain cable television services and for equipment to receive those
services. Regulations and policies adopted by the FCC under the 1992
Cable Act may impair the Company's ability to offer competitive rates
and volume discounts on certain of its products and services and may
affect the rates charged by SNG to home satellite dish programming
packagers.
Telecommunications Act of 1996. In February 1996, Congress
enacted the Telecommunications Act of 1996, which provides for
substantial deregulation of both the cable and telephone industries,
allowing each to compete with the other in local market areas and also
enables electric utilities to enter the telecommunications industries.
While there are no provisions in the Telecommunications Act of 1996
that affect the Company directly, it indirectly may create more
competition and less regulation within the video services
marketplace.
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Updated Disclosures About Certain Financial Information from Form 10-K
On March 1, 1999, the Company acquired Liberty Media Corporation's
Netlink division in a transaction accounted for as a combination of
entities under common control, similar to a pooling of interests. The
following disclosures under the headings "Selected Financial Data",
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements" have been revised
from those contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 to reflect the inclusion of the
businesses acquired in the Liberty Transaction and are intended to be
current through the date such Annual Report was originally filed.
Capitalized terms have the same meanings as in such Annual Report on
Form 10-K.
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data for each of the
five years in the period ended December 31, 1998 are derived from the
audited consolidated financial statements of the Company. This
financial data includes the results of operations and financial
position of the businesses acquired in March 1999 in the Liberty
Transaction, which was accounted for as a combination of entities under
common control, similar to a pooling of interests. This financial data
also gives retroactive effect to a two-for-one split of the Company's
common stock on December 17, 1999. This financial data does not include
the results of operations or financial position of the businesses
acquired in March 1999 in the TV Guide Transaction, which was accounted
for as a purchase transaction. The data set forth in this table should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated
Financial Statements and the Notes thereto and other financial
information included herein.
Year Ended December 31,
-------------------------------------------
1998(1) 1997 1996(2) 1995 1994
------ ---- ------ ---- ----
Operating Data:
Revenues $621,940 $530,420 $484,713 $262,919 $196,679
Depreciation and
amortization (28,227) (18,850) (16,732) (11,769) (9,129)
Operating income 108,619 101,126 69,364 38,416 26,364
Interest expense (1,629) (2,122) (2,024) (2,003) (2,155)
Income tax expense (58,977) (38,438) (25,792) (14,483) (9,985)
Net income 102,059 67,435 46,302 23,172 16,307
Earnings per share (3):
Basic 0.59 0.39 0.28 0.16 0.12
Diluted 0.59 0.39 0.27 0.16 0.11
Cash dividends
declared per
common share -- -- -- -- --
Other Data:
EBITDA (4) $136,846 $119,976 $ 86,096 $ 50,185 $ 35,493
Capital expenditures 11,115 10,250 14,484 12,101 8,520
Net cash provided by
operating activities 95,385 80,864 60,800 33,534 38,571
Net cash provided by
(used in) investing
activities 61,735 (66,934) (42,196) (35,956) (51,388)
Net cash (used in)
financing
activities (34,032) (24,284) (4,188) (1,617) (2,549)
Ratio of earnings to
fixed charges (5) 22.6x 15.1x 11.4x 9.6x 6.8x
Balance Sheet Data:
Cash and cash
equivalents $155,644 $ 32,556 $ 42,910 $ 28,494 $ 32,524
Total assets 412,506 303,142 259,004 185,880 147,048
Capital lease
obligations and
long-term debt 13,007 17,207 20,718 23,992 26,542
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(1) Effective February 1, 1998, the Company's consolidated operating
results include the operating results of Turner Vision, Inc.'s
retail C-band business. Turner Vision contributed its retail C-
band business to Superstar/Netlink Group LLC ("SNG").
(2) Beginning January 25, 1996, the Company's consolidated operating
results include the operating results of Liberty Media
Corporation's ("Liberty Media") Netlink division which was
acquired by the Company on March 1, 1999 in a transaction
accounted for as a combination of entities under common control,
similar to a pooling of interests. January 25, 1996, is the date
Tele-Communications, Inc. ("TCI") acquired a controlling interest
in the Company. Liberty Media is a subsidiary of TCI.
(3) Earnings per share amounts have been adjusted to reflect the two-
for-one stock split paid on December 17, 1999 to holders of record on
December 3, 1999.
(4) EBITDA means operating income before depreciation and
amortization. EBITDA is presented supplementally as the Company
believes it is a widely used financial indicator of a leveraged
company's ability to service and incur indebtedness. The Company
believes EBITDA is a standard measure commonly reported and widely
used by analysts, investors and others associated with the media
and entertainment industry. However, EBITDA does not take into
account substantial costs of doing business, such as income taxes
and interest expense. While many in the financial community
consider EBITDA to be an important measure of comparative
operating performance, it should be considered in addition to, but
not as a substitute for, operating income, net income, cash flow
provided by operating activities and other measures of financial
performance prepared in accordance with generally accepted
accounting principles that are presented in the financial
statements included in this report. Additionally, the Company's
calculation of EBITDA may be different than the calculation
used by other companies and therefore, comparability may be
affected.
(5) For the ratio of earnings to fixed charges calculations, earnings
available for fixed charges consists of earnings before income
taxes and minority interests in earnings of consolidated
subsidiaries plus fixed charges. Fixed charges consist of interest
on debt and that portion of rental expense the Company believes to
be representative of interest.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the results of operations and
liquidity and capital resources of the Company includes the results of
operations and financial position of the businesses acquired in March
1999 in the Liberty Transaction. The following discussion does not
include the results of operations or financial position of the
businesses acquired in the TV Guide Transaction. See "TV Guide
Transaction, Liberty Transaction and Related Financings."
Results of Operations
Consolidated
The table below sets forth certain financial information for the
Company and each of the businesses operated by it during the years
ended December 31, 1998, 1997 and 1996.
Year Ended December 31,
1998 1997 1996
------------- ------------- -------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
(In thousands)
Revenues:
TV Guide
Networks (1) $ 76,822 12% $ 62,956 12% $ 49,636 10%
Superstar (2)(3) 426,586 69 350,490 66 327,817 68
UVTV (2)(3) 84,741 14 74,614 14 67,894 14
SSDS 40,959 6 42,134 8 36,161 8
SpaceCom 16,536 3 17,682 3 15,636 3
Other/Eliminations (23,704) (4) (17,456) (3) (12,431) (3)
-------- --- -------- --- -------- ---
Total $621,940 100% $530,420 100% $484,713 100%
======== === ======== === ======== ===
Operating income(loss):
TV Guide
Networks (1) $ 13,772 13% $ 13,889 14% $ 8,410 12%
Superstar (2)(3) 58,001 53 46,073 45 29,536 43
UVTV (2)(3) 41,561 38 41,201 41 35,931 52
SSDS (1,355) (1) (2,376) (2) (5,894) (9)
SpaceCom 1,949 2 3,509 3 1,839 3
Other/Eliminations (5,309) (5) (1,170) (1) (458) (1)
-------- --- -------- --- -------- ---
Total $108,619 100% $101,126 100% $ 69,364 100%
======== === ======== === ======== ===
Consolidated
depreciation and
amortization $ 28,227 $ 18,850 $ 16,732
Consolidated capital
expenditures 11,115 10,250 14,484
Net cash provided by
operating activities 95,385 80,864 60,800
Net cash provided by
(used in) investing
activities 61,735 (66,934) (42,196)
Net cash (used in)
financing activities (34,032) (24,284) (4,188)
Other data:
EBITDA (4) $136,846 $119,976 $ 86,096
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(1) The revenues and operating income for TV Guide Networks (formerly
Prevue Networks) include TV Guide Channel, Sneak Prevue and other
guide services offered both domestically and internationally.
(2) The amounts shown in the above tables for Superstar and UVTV
represent their revenues and operating income included in the
Company's consolidated results of operations. Beginning January
25, 1996, these operating results include the operating results of
Liberty Media's Netlink division which was acquired by the Company
on March 1, 1999 in a transaction accounted for as a combination
of entities under common control, similar to a pooling of
interests. January 25, 1996 is the date TCI acquired a controlling
interest in the Company. Liberty Media is a subsidiary of TCI.
Beginning February 1, 1998, Superstar's operating results also
include the retail C-band operations of Turner Vision, Inc.
(3) Effective January 1, 1997, the Company increased the price at
which UVTV charges SNG for certain programming, primarily WGN and
Denver 6. Had these rates not been in effect during 1998 and 1997,
UVTV's revenue and operating income would have been approximately
$4.6 million lower and Superstar's operating income would have
been approximately $4.6 million higher in each of those years.
(4) EBITDA means operating income before depreciation and
amortization. EBITDA is presented supplementally as the
Company believes it is a widely used financial indicator of a
leveraged company's ability to service and incur indebtedness.
The Company believes EBITDA is a standard measure commonly
reported and widely used by analysts, investors and others
associated with the media and entertainment industry. However,
EBITDA does not take into account substantial costs of doing
business, such as income taxes and interest expense. While many in
the financial community consider EBITDA to be an important measure
of comparative operating performance, it should be considered in
addition to, but not as a substitute for, operating income, net
income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with GAAP
that are presented in the financial statements. Additionally, the
Company's calculation of EBITDA may be different than the
calculation used by other companies and therefore, comparability
may be affected.
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Revenues for 1998 were $621.9 million, compared to $530.4 million
in 1997 and $484.7 million in 1996. Revenues increased $91.5 million,
or 17%, 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 TV Guide
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 direct broadcast satellite market. Revenues increased $45.7
million, or 9%, in 1997, compared to 1996, primarily due to $13.3
million of additional revenues attributable to the retail C-band
operations of Liberty's Netlink division which, for accounting
purposes, were combined with those of Superstar's retail operations
effective January 25, 1996; increased advertising and service fee
revenues by TV Guide Networks; increased revenues from system
integration services of SSDS; and growth in retail revenue by
Superstar.
Operating expenses, excluding depreciation and amortization, were
$485.1 million for the year ended December 31, 1998, compared to $410.4
million in 1997 and $398.6 million in 1996. Operating expenses
increased $74.7 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 TV Guide
Networks; increased legal fees related to litigation and patent
filings; and increased costs associated with TV Guide 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
direct broadcast satellite market and a reduction in programming costs
resulting from renegotiated programming contracts. Operating expenses,
excluding depreciation and amortization, increased $11.8 million, or
3%, in 1997, compared with 1996, primarily due to $9.2 million of
additional expenses attributable to Netlink and increased personnel
costs resulting from the growth in TV Guide Networks.
Depreciation and amortization was $28.2 million in 1998, compared
to $18.8 million and $16.7 million in 1997 and 1996, respectively.
Depreciation and amortization increased $9.4 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 TV Guide products. Depreciation and
amortization increased $2.1 million, or 13%, in 1997, compared with
1996, primarily due to increased acquisitions of equipment to support
the various TV Guide products and increased personnel at TV Guide
Networks and Superstar.
A $37.9 million gain on issuance of equity by 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 $431,000
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 1996.
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TV Guide Networks
The following table sets forth certain financial information for
TV Guide Networks (formerly Prevue Networks) for the years ended
December 31, 1998, 1997 and 1996:
Year ended December 31,
1998 Change 1997 Change 1996
---- ------ ---- ------ ----
(In thousands)
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%
TV Guide 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. TV Guide 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 TV Guide Channel and Sneak Prevue increased $2.1
million, or 10%, and $500,000, or 5%, respectively, in 1998 compared to
1997. Domestically, TV Guide 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 TV Guide Channel and Sneak Prevue increased by $3.0
million, or 18%, and $1.8 million, or 26%, respectively, in 1997
compared to 1996. TV Guide 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 TV Guide
Networks growth, the continued roll-out of TV Guide Interactive,
increased legal fees related to litigation and patent filings and
costs associated with TV Guide 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 TV
Guide Interactive and costs associated with TV Guide 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 TV Guide products and assets to support additional personnel.
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Superstar
The following table sets forth certain financial information for
Superstar for the years ended December 31, 1998, 1997 and 1996:
Year ended December 31,
1998 Change 1997 Change 1996
---- ------ ---- ------ ----
(In thousands)
Revenues $426,586 22% $350,490 7% $327,817
Operating expenses 358,317 19% 301,209 2% 295,859
Depreciation and
amortization 10,268 220% 3,208 32% 2,422
-------- -------- --------
Operating income $ 58,001 26% $ 46,073 56% $ 29,536
======== ======== ========
Operating margin
percentage 14% 13% 9%
Revenues generated by Superstar during 1998 were $426.6 million,
compared to $350.5 million in 1997 and $327.8 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
direct broadcast satellite market of $9.3 million. The contracts
governing the commissions earned as a service agent in the direct
broadcast satellite 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 $22.7 million, or 7%, over those in 1996 was
primarily due to $13.3 million of additional revenues attributable to
the retail operations of Netlink, which, for accounting purposes, were
combined with those of Superstar's retail operations on January 25,
1996, as well as growth in commission income earned as a service agent
for program suppliers in the direct broadcast satellite 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 $295.9 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
direct broadcast satellite service agreement terminations, and
reductions in commissions paid to dealers. The increase in operating
expenses, excluding depreciation and amortization, of $5.3 million, or
2%, in 1997 as compared to the previous year was due to the addition of
Netlink's retail business, which contributed $9.2 million of the
operating expense increase, partially offset by a $3.9 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 direct
broadcast satellite market.
Depreciation and amortization was $10.3 million in 1998, compared
to $3.2 million and $2.4 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 increase in
depreciation and amortization in 1997 of $786,000, or 32%, was
primarily the result of additional data processing equipment and office
furniture purchases necessitated by the increase in subscribers and
employees.
12
<PAGE>
UVTV
The following table sets forth certain financial information for
UVTV for the years ended December 31, 1998, 1997 and 1996:
Year ended December 31,
1998 Change 1997 Change 1996
---- ------ ---- ------ ----
(In thousands)
Revenues $84,741 14% $74,614 10 % $67,894
Operating expenses 40,460 31% 30,825 5 % 29,313
Depreciation and
amortization 2,720 5% 2,588 (2)% 2,650
------- ------- -------
Operating income $41,561 1% $41,201 15 % $35,931
======= ======= =======
Operating margin
percentage 49% 55% 53%
UVTV's revenues for 1998 were $84.7 million, compared to $74.6
million in 1997 and $67.9 million in 1996. The increase in revenues in
1998 of $10.1 million, or 14%, from those in 1997 was largely
attributable to UVTV/WGN cable subscriber growth and cable rate
increases coupled with an increase in SMATV revenue of $2.8 million due
to higher rates and subscribers. 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%, during 1998. The increase in 1997 revenues of
$6.7 million, or 10%, from those in 1996 was largely attributable to
the SNG price increases described above and an increase in SMATV rates
and subscribers, coupled with an increase in subscribers for other UVTV
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
$40.5 million in 1998, compared to $30.8 million and $29.3 million in
1997 and 1996, respectively. The increase in operating expenses,
excluding depreciation and amortization of $9.6 million, or 31%, from
1997 to 1998 was due primarily to the increase in C-band copyright fees
discussed above coupled with increased SMATV programming costs directly
related to the increase in SMATV revenue. Expenses increased $1.5
million, or 5%, from 1996 to 1997 as a result of increased SMATV
programming costs directly related to the increase in SMATV revenue,
partially offset by decreased compensation related to decreased
headcount.
Depreciation and amortization in 1998 was $2.7 million, relatively
unchanged from 1997 and 1996 levels.
13
<PAGE>
OTHER
SSDS
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 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
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.
14
<PAGE>
Liquidity and Capital Resources
Cash provided by operations continues to be the Company's primary
source of funds to finance operating needs, capital expenditures and
investments. In 1998, net cash flows from operating activities were
$95.4 million, reflecting the continued growth of the Company'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 the Company's investments and acquisitions of $42.1 million,
capital expenditures of $11.1 million, net reduction in the Company'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, the Company's cash, cash equivalents and
marketable securities aggregated $161.4 million, an increase of $16.6
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 the
Company had an approximate 80% ownership interest as of December 31,
1998. 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. The Company's policy
pertaining to the temporary investment of cash available for operations
currently prohibits exposure to interest rate fluctuations for periods
in excess of 18 months.
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.
The Company collects annually, in advance, a majority of its SNG
subscription fees and certain of its UVTV superstation and TV Guide
Networks' revenues. As of December 31, 1998, the unearned portion of
all prepayments totaled $109.9 million, of which approximately $100.5
million, or 91%, 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. The Company's liability
is limited to a refund of unearned prepayments in the event that the
Company is unable to provide service. No material refunds have been
paid to date.
Under the terms of the capital leases for two satellite
transponders placed in service by UVTV and TV Guide Networks in 1992,
the Company 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. The Company
expects to further reduce the lease obligation during 1999 by
approximately $3.7 million. The Company also leases various other
satellite transponders accounted for as operating leases.
Capital expenditures during 1998 of $11.1 million were principally
attributable to the expansion of the Company's teleport facilities,
purchase of control units provided to TV Guide Network's cable
television customers, data processing equipment and systems and
furniture, fixtures and facilities used by the Company.
The Board of Directors has authorized the Company to repurchase
from time to time up to an aggregate of 14.0 million shares of the
Company's Class A Common Stock using existing cash resources. Through
December 31, 1998, approximately 2.8 million shares had been
repurchased by the Company.
The Company continues to explore opportunities to expand the
market shares of its existing businesses, develop new products and
acquire interests in new businesses.
15
<PAGE>
TV Guide Transaction, Liberty Transaction and Related Financings
On March 1, 1999, the Company acquired from Liberty Media
Corporation, a wholly owned subsidiary of Tele-Communications, Inc.,
the stock of three of its subsidiaries that indirectly owned
approximately 40% of SNG (bringing TVG's ownership interest in SNG to
approximately 80%) and Liberty's Netlink Wholesale Division, which
includes a business that provides the Denver 6 services and a separate
business that sells programming packages to satellite master antenna
television systems serving hotels and multi-unit dwellings (the
"Liberty Transaction"). Liberty received 25,500,000 shares of TVG Class
B Common Stock as consideration.
Immediately after closing the Liberty Transaction, the Company
acquired from a subsidiary of The News Corporation Limited, the stock
of certain corporations (the "TV Guide Transaction") which publish TV
Guide Magazine and other printed television program listings guides and
distribute, through the Internet, an entertainment service known as TV
Guide Online (formerly TV Guide Entertainment Network or TVGEN). A
subsidiary of News Corp. received 45,006,824 shares of TVG Class A
Common Stock, 74,993,176 shares of TVG Class B Common Stock and $800
million in cash as consideration. In addition, the subsidiary of News
Corp. acquired 13,068,216 additional shares of TVG Class A Common Stock
for approximately $129 million in cash to equalize the TVG Class A
Common Stock ownership of TCI and News Corp. (the "Equity
Equalization").
Upon closing of the above transactions, the Company's name was
changed to TV Guide, Inc. and Liberty and News Corp. each directly or
indirectly owned approximately 44% of the issued and outstanding common
stock of the Company representing approximately 98% (approximately 49%
each) of the total voting power of TVG common stock.
The $800 million cash consideration portion of the TV Guide
Transaction was funded from the following sources: net proceeds from
the sale of $400 million of 8 1/8% senior subordinated notes due 2009,
$185 million from bank borrowings, $129 million from the Equity
Equalization, and the remainder from existing cash balances.
The Company entered into a $300 million six-year revolving credit
facility and a $300 million 364-day revolving credit facility with a
group of banks on March 1, 1999. Borrowings outstanding under the 364-
day revolving credit facility convert to a five-year term loan at
maturity. Borrowings under the credit facilities bear interest either
at the bank's prime rate or LIBOR, both plus a margin based on a
sliding scale tied to the Company's leverage ratio. For the first year
of the credit facilities, the LIBOR margin is fixed at a minimum of
1.25%. The credit facilities are subject to prepayment or reduction at
any time without penalty. Borrowings to consummate the TV Guide
Transaction were drawn under the $300 million six-year revolving credit
facility.
The Company believes that, after giving effect to the TV Guide
Transaction and the Liberty Transaction, the related financings and
restrictions contained in the indenture on the activities of the
Company and the restricted subsidiaries, based on the Company's current
level of operations, cash and cash equivalents, marketable securities
and cash generated from operations, together with expected availability
under the bank credit facilities, subject to the covenants therein,
will be sufficient to enable the Company to service indebtedness, make
capital expenditures and meet operating costs and expenses for the
foreseeable future. If and when appropriate, the Company or its
affiliates may elect to incur additional indebtedness or to raise
equity in the public or private markets.
16
<PAGE>
The bank credit facilities and the indenture governing the notes
impose significant operating and financial restrictions on the Company.
These restrictions may significantly limit or prohibit the Company from
engaging in certain transactions, including the following: borrowing
additional money, paying dividends or other distributions to
stockholders, allowing restricted subsidiaries to guarantee other debt,
limiting the ability of restricted subsidiaries to make payments to the
Company and other restricted subsidiaries, creating liens on assets,
selling assets, entering into transactions with affiliates, and
engaging in certain mergers or consolidations. In addition, the
indenture limits the Company's ability and the ability of restricted
subsidiaries to make investments, but only if the credit ratings on the
notes fall below certain levels. These restrictions could limit the
Company's ability to obtain financing for working capital, capital
expenditures, acquisitions, debt service requirements and other
purposes. The restrictions may also affect the Company's ability to
actively manage its businesses, including entering into joint ventures
that advance the Company's strategy.
The Company has a significant amount of indebtedness and debt
service obligations. As of March 1, 1999, after closing of the TV Guide
Transaction, the Company has approximately $600 million of long-term
debt (including current portion) and unused borrowing capacity under
bank credit facilities of approximately $400 million (subject to
customary borrowing conditions). In addition, subject to restrictions
contained in the bank credit facilities and the indenture governing the
notes, the Company may borrow more money for working capital, capital
expenditures, acquisitions and other purposes. The Company's
significant indebtedness could have important consequences. For
example, the Company's ability to obtain any necessary financing in the
future for working capital, capital expenditures, acquisitions, debt
service requirements and other purposes may be limited; a large portion
of the money earned by the Company's subsidiaries must be dedicated to
the payment of interest on debt and will not be available for financing
operations and other business activities; the level of debt and the
covenants governing such debt could limit the Company's flexibility in
planning for, or reacting to, changes in the Company's business because
certain financing options may be limited or prohibited; the Company's
degree of leverage may be more than that of competitors, which may
place the Company at a competitive disadvantage; and the Company's
level of debt may make the Company more vulnerable in the event of a
downturn in the Company's business or the economy in general.
The Company's ability to meet debt service obligations and
specified financial ratios and tests will depend on future performance.
The Company's future performance, in turn, will be subject to general
economic conditions and to financial, business and other factors
affecting operations, many of which are beyond its control. In the
event of a default under the bank credit facilities, the lenders could
terminate their commitments and declare all amounts borrowed, together
with accrued interest and other fees, to be due and payable. Borrowings
under other debt instruments that contain cross-acceleration or cross-
default provisions may also be accelerated and become due and payable.
If any of these events should occur, the Company may not be able to pay
such amounts.
17
<PAGE>
Year 2000 Matters
The Company and the businesses acquired in the TV Guide
Transaction and the Liberty Transaction are continuing to address the
year 2000 issue as described in detail below.
In 1997, the Company began the process of identifying, evaluating
and implementing changes to its computer systems, applications and
certain equipment with embedded technology necessary to address the
year 2000 issue. The Company has established an enterprise-wide
program to prepare for the year 2000 and is utilizing both internal and
external resources to identify, correct and test the systems for year
2000 compliance. The historical and estimated future costs related to
the year 2000 issues have not been and are not expected to be a
material cost to the Company.
The objective of the Company's year 2000 efforts is to determine
and assess the risks of the year 2000 issue and to plan and institute
mitigating actions to reduce those risks to acceptable levels. The
Company's standard for compliance requires that a computer system or
business process be designed to be used prior to, on and after January
1, 2000. Such systems or processes must be able to operate without
error in dates and date related data, including without limitation,
calculating, comparing, indexing and sequencing prior to, on and after
January 1, 2000.
The year 2000 project involves a four-phase approach to
determining year 2000 readiness of the Company's systems, software and
equipment. Phase 1, Assessment, involves the inventory of all systems,
software and equipment and the identification of any year 2000 issues.
Phase 1 was completed in May 1999. Phase 2, Remediation, involves
repairing, upgrading and/or replacing any non-compliant equipment and
systems. Phase 2 is 100% complete. Phase 3, Testing, involves testing
the Company's systems, software and equipment for year 2000 readiness,
or in certain cases, relying on test results provided to the Company.
Phase 3 is 100% complete. Phase 4, Implementation, involves placing
compliant systems, software and equipment into production or service.
Phase 4 is 100% complete.
18
<PAGE>
The Company's year 2000 project team has focused on the following
major areas:
Core Computer Systems. Information technology systems account for
much of the year 2000 work and include all computer systems and
technology managed by the Company. The Company's core computer systems
relate to editorial, fulfillment, subscriber management, billing and
production functions. All core systems have been assessed, remediated
where necessary, tested and implemented.
Equipment and Facilities. An inventory of all critical office
equipment and infrastructure has been completed and the Company has
completed minor modifications to these systems.
As part of the year 2000 project, the Company has contacted its
significant suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate
their year 2000 compliance issues. To date, no significant customers or
vendors have informed the Company that a material year 2000 issue
exists which could have a material effect on the Company. There can be
no assurance that the systems of other companies on which the Company's
business relies will be timely converted or that failure to convert by
another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the
Company and its operations.
The Company's failure to resolve year 2000 issues on or before
December 31, 1999 could result in system failures causing disruption in
routine business activities. Also, if critical systems related to the
Company's services are not successfully remediated, the Company could
face claims of breach of contract from customers, certain programming
providers and from other businesses that rely on the Company's
programming services. Additionally, failure of third parties upon whom
the Company relies to timely remediate their year 2000 issues could
result in disruption in the Company's daily operations and core
services. While the Company believes the year 2000 project will
adequately address the internal year 2000 issues, the overall risks
associated with the year 2000 issue remain difficult to accurately
describe and quantify until the Company obtains additional information
regarding the remediation activities of its third party suppliers and
customers. There can be no assurance that the year 2000 issue will not
have a material adverse effect on the Company and its operations.
The Company has completed contingency plans on all critical
processes to minimize the impact of any year 2000 related interruption.
The Company's capital spending plan provides for technology
investments in the periods prior to December 31, 1999, for systems
which would be operational after December 31, 1999. As a result of its
assessment and capital planning, no acceleration of material planned
system replacements were made due to year 2000 issues.
19
<PAGE>
Cautionary Statement
This report contains certain "forward-looking statements" within
the meaning of federal securities laws about the Company's financial
condition, results of operations and business. Such forward-looking
statements may include, among other things, statements concerning:
future acquisitions, changes in net revenues from the Company's
businesses, the impact of governmental regulations, competitive
conditions in industries in which the Company does business, liquidity
and future capital expenditures, Year 2000 matters, the outcome of
certain litigation, alternative sources of supplies and services needed
by the Company and developments in the Company's interactive guide
businesses. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause our actual results,
performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by us in
those statements. The most important factors that could prevent the
Company from achieving our stated goals include, but are not limited
to, the following:
-- continued declines in circulation and operating profits for TV
Guide Magazine,
-- changes in the regulation of the cable television and/or satellite
industries adverse to the Company's services,
-- loss of the cable and/or satellite compulsory licenses provided by
federal law,
-- the willingness of cable and satellite television systems to
acquire and install new equipment that will allow us effectively
to market our interactive technology,
-- increased price and service competition within the industry,
-- our ability to keep pace with technological developments to
protect the Company's intellectual property rights, and defend
against claims by others asserting infringement of their
intellectual property rights,
-- a reduction in demand for advertising and competition from other
media companies for audience and advertising revenues,
-- changes in paper prices or postal rates and
-- operating and financial risks related to integrating the TV Guide
businesses and other acquired businesses.
Because forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those
expressed or implied by such statements. The cautionary statements
contained or referred to in this section should be considered in
connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on the Company's behalf
may issue. The Company undertakes no obligation to review or confirm
analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
20
<PAGE>
Financial Statements
The following consolidated financial statements of TV Guide, Inc.
(formerly United Video Satellite Group, Inc.), included in this Current
Report on Form 8-K, give retroactive effect to (a) the March 1, 1999
Liberty Transaction, which has been accounted for as a combination of
entities under common control, similar to a pooling of interests, as
described in Note 2 to the consolidated financial statements and (b) a
two-for-one split of the Company's common stock on December 17, 1999.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TV Guide, Inc.:
We have audited the accompanying consolidated balance sheets of TV
Guide, Inc. (formerly United Video Satellite Group, Inc.) 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 related financial
statement schedule. 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 TV Guide, Inc. (formerly United Video Satellite Group, Inc.) 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
March 1, 1999
(Except for the last paragraph of Note 11, as to which the date is
December 17, 1999).
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TV Guide, Inc.:
We have audited the accompanying consolidated statements of
income, changes in stockholders' equity, and cash flows of TV Guide,
Inc. (formerly United Video Satellite Group, Inc.) for the year ended
December 31, 1996. Our audit also included the related financial
statement schedule. 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 did not audit the financial statements of the businesses
described in Note 2 and referred to as the Liberty Transaction, which
statements reflect revenues constituting approximately 10% of the
related consolidated financial statement total and which reflect net
income constituting approximately 35% of the related consolidated
financial statement total for the year ended December 31, 1996. Those
statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data
included for the Liberty Transaction, is based solely on the reports of
the other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other
auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash
flows of TV Guide, Inc. (formerly 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
(Except for the Liberty Transaction described in Note 2, as to which
date is March 29, 1999).
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Liberty Media Corporation:
We have audited the combined statements of operations and combined
equity and cash flows of the Netlink Wholesale Division (as defined in
Note 1 to the combined financial statements) for the year ended
December 31, 1996 (not presented separately herein). 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 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 combined financial statements referred to
above present fairly, in all material respects, the results of
operations and cash flows of the Netlink Wholesale Division for the
year ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
February 15, 1999
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Liberty Media Corporation:
We have audited the statements of operations and accumulated
deficit and cash flows of the Netlink USA, Retail Division (an
operating division of Netlink USA, an indirect wholly owned partnership
of Liberty Media Corporation) for the period from January 25, 1996 to
March 31, 1996 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
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 financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows of Netlink USA, Retail Division for the period from January 25,
1996 to March 31, 1996, in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
March 22, 1999
24
<PAGE>
TV GUIDE, INC.
(formerly United Video Satellite Group, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $155,644 $ 32,556
Marketable securities, at fair value 5,804 112,334
Accounts receivable, net of allowance
for doubtful accounts of $2,917 and
$2,965 at December 31, 1998 and 1997,
respectively 64,632 58,851
Prepaid expenses and other 6,168 10,402
Deferred tax asset 1,811 2,123
-------- --------
Total current assets 234,059 216,266
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 45,762 51,681
Intangible assets, net of accumulated
amortization of $18,931 in 1998 and
$8,317 in 1997 113,523 32,265
Deferred tax asset -- 204
Other assets, net of accumulated
amortization of $42 in 1998 and
$33 in 1997 19,162 2,726
-------- --------
Total assets $412,506 $303,142
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,655 $ 6,103
Accrued liabilities 57,365 52,153
Note payable and current portion of
capital lease obligations
and long-term debt 5,463 10,957
Customer prepayments 109,929 91,929
-------- --------
Total current liabilities 178,412 161,142
Deferred compensation 367 871
Deferred tax liability 17,280 --
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; shares
outstanding: 95,787,376 in 1998 and
48,840,240 in 1997 479 244
Class B common stock, $.01 par value;
shares authorized: 300,000,000; shares
outstanding: 74,993,176 in 1998 and
37,496,588 in 1997 375 187
Additional paid-in capital 22,191 39,049
Accumulated other comprehensive
loss, net of tax (54) (13)
Retained earnings 176,853 81,314
-------- --------
Total stockholders' equity 199,844 120,781
-------- --------
Total liabilities and stockholders' equity $412,506 $303,142
======== ========
Restated for pooling of interests.
See accompanying notes.
25
<PAGE>
TV GUIDE, INC.
(formerly United Video Satellite Group, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Revenues:
Satellite services $540,632 $457,975 $426,236
Advertising sales 40,349 30,828 22,774
Systems integration
services 40,959 41,617 35,703
-------- -------- --------
621,940 530,420 484,713
Operating expenses:
Programming and
delivery 330,904 266,119 254,531
Selling, general
and administrative 154,190 144,325 144,086
Depreciation 13,961 12,316 10,284
Amortization 14,266 6,534 6,448
-------- -------- --------
513,321 429,294 415,349
-------- -------- --------
Operating income 108,619 101,126 69,364
Gain on issuance of equity
by subsidiary 37,898 -- --
Interest income 6,346 5,882 3,401
Interest expense (1,629) (2,122) (2,024)
Other income 11,607 431 551
Other expense (1,423) (71) (255)
-------- -------- --------
Income before income taxes
and minority interest 161,418 105,246 71,037
Provision for income taxes (58,977) (38,438) (25,792)
Minority interest
in earnings (382) 627 1,057
-------- -------- --------
Net income $102,059 $ 67,435 $ 46,302
======== ======== ========
Earnings per share:
Basic $ 0.59 $ 0.39 $ 0.28
Diluted 0.59 0.39 0.27
Restated for pooling of interests.
See accompanying notes.
26
<PAGE>
<TABLE>
<CAPTION>
TV GUIDE, INC.
(formerly United Video Satellite Group, Inc.)
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated
Notes Other
Class A Class B Additional Receivable Comprehen-
Common Common Paid-In From sive Income Retained
Stock Stock Capital Stockholders (Loss) Earnings Total
<S> <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 -- -- -- -- -- 46,302 46,302
Change in
unrealized
appreciation
(depreciation)
on available
for sale
securites:
Unrealized
holdings gain
net of
reclassi-
fication
adjustments
(net of income
taxes of $159) -- -- -- -- 271 -- 271
--------
Total
comprehen-
sive
income 46,573
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
Issuance of shares
to Liberty -- 63 (63) -- -- -- --
Net liabilities
contributed by
Liberty -- -- -- -- -- (39,936) (39,936)
Distributions to
Liberty -- -- -- -- -- (10,298) (10,298)
---- ---- ------- ------ ------ -------- --------
Balance at December
31, 1996 238 187 34,725 (509) 161 36,057 70,859
Comprehensive
income, net of
tax:
Net income -- -- -- -- -- 67,435 67,435
Change in
unrealized
appreciation
(depreciation)
on available
for sale
securities:
Unrealized
holdings loss
net of
reclassi-
fication
adjustments
(net of income
taxes of $102) -- -- -- -- (174) -- (174)
--------
Total
comprehen-
sive
income 67,261
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
Distributions to
Liberty -- -- -- -- -- (22,178) (22,178)
---- ---- ------- ----- ------ -------- --------
Balance at December
31, 1997 244 187 39,049 -- (13) 81,314 120,781
Comprehensive
income, net of
tax:
Net income -- -- -- -- -- 102,059 102,059
Change in
unrealized
appreciation
(depreciation)
on available
for sale
securities:
Unrealized
holdings loss,
net of
reclassi-
fication
adjustments
(net of income
taxes of $24) -- -- -- -- (41) -- (41)
--------
Total
comprehen-
sive
income 102,018
Two-for-one split
(24,224,833
Class A shares
and 18,748,294
Class B shares) 242 188 (430) -- -- -- --
Exercise of
stock options,
net of stock
tendered
(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
Distributions
to Liberty -- -- -- -- -- (6,520) (6,520)
------ ---- ------- ----- ------ -------- --------
Balance at December
31, 1998 $ 479 $375 $22,191 $ -- $ (54) $176,853 $199,844
====== ==== ======= ===== ====== ======== ========
</TABLE>
Restated for pooling of interests.
See accompanying notes.
27
<PAGE>
TV GUIDE, INC.
(formerly United Video Satellite Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Operating activities:
Net income $102,059 $ 67,435 $ 46,302
Adjustments to reconcile net income
to net cash provided by operating
activities:
Gain on issuance of equity by
subsidiary (37,898) -- --
Depreciation and amortization 28,227 18,850 16,732
Minority interest in earnings 382 (627) (1,057)
Deferred income taxes 17,830 2,169 (1,365)
Amortization of bond premiums 1,019 937 650
(Gain)loss on asset dispositions (10,890) (132) 123
Other 663 463 1,480
Changes in operating assets and
liabilities:
Accounts receivable 674 (10,626) (5,761)
Prepaid expenses and other 2,043 1,013 (3,025)
Accounts payable (1,517) (424) (62)
Accrued liabilities (1,954) 6,924 10,031
Customer prepayments (4,749) (4,691) (457)
Other (504) (427) (2,791)
------- ------- --------
Net cash provided by operating
activities 95,385 80,864 60,800
Investing activities:
Capital expenditures (11,115) (10,250) (14,484)
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) (1,588) (1,023)
--------- -------- --------
Net cash provided by (used in)
investing activities 61,735 (66,934) (42,196)
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 common stock 1,223 2,608 3,216
Repurchase of common stock (18,783) (2,077) --
Distributions to Liberty (6,520) (22,178) (10,298)
Other (258) 436 (1,298)
-------- -------- --------
Net cash (used in)
financing activities (34,032) (24,284) (4,188)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 123,088 (10,354) 14,416
Cash and cash equivalents at
beginning of year 32,556 42,910 28,494
-------- -------- --------
Cash and cash equivalents
at end of year $155,644 $ 32,556 $ 42,910
======== ======== ========
Restated for pooling of interests.
See accompanying notes.
28
<PAGE>
TV GUIDE, INC.
(formerly United Video Satellite Group, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The Company
TV Guide, Inc. ("TVG" or the "Company")(formerly United Video
Satellite Group, Inc., See Note 16) 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 TVG adopted the Agreement
and Plan of Merger dated as of July 10, 1995, as amended (the "Merger
Agreement"), among TVG, Tele-Communications, Inc. ("TCI") and TCI
Merger Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub was
merged into TVG, with TVG 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 TVG (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 44,461,568 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 8,581,864 shares were so
converted.
In connection with the Merger, TVG's then controlling stockholder
converted 49,493,176 of the shares of Class B Common Stock of TVG held
by him into shares of TVG Class A Common Stock. Pursuant to the terms
of the Merger Agreement, the remaining 49,493,176 shares of Class B
Common Stock retained by TVG's controlling stockholder were converted
into Merger Consideration.
As a consequence of the foregoing transactions, TCI acquired
49,493,176 shares of TVG Class B Common Stock and 8,581,864 shares of
TVG Class A Common Stock, together representing approximately 40% of
the issued and outstanding common stock of TVG and approximately 86% of
the total voting power of TVG common stock immediately after the
Merger, resulting in TVG becoming a majority-controlled subsidiary of
TCI.
On January 12, 1998, TCI acquired the remaining 49,493,176 shares
of TVG Series A Common Stock held by TVG's former controlling
stockholder, increasing TCI's equity ownership interest to
approximately 73% and its voting power to approximately 93%. (See Note
16).
29
<PAGE>
2. Significant Accounting Policies
Basis of Presentation and Liberty Transaction
On March 1, 1999, the Company issued to Liberty Media Corporation
("Liberty") 25,500,000 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"). This transaction has been
accounted for as a combination of entities under common control,
similar to a pooling of interests, from January 25, 1996, the date TVG
and the Liberty businesses were first under common control.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net Revenues:
TV Guide, Inc. $598,420 $507,598 $437,168
Liberty businesses 39,777 33,683 55,883
Eliminations (16,257) (10,861) (8,338)
-------- -------- --------
Combined $621,940 $530,420 $484,713
======== ======== ========
Net Income:
TV Guide, Inc. $ 64,777 $ 45,760 $ 30,084
Liberty businesses 37,282 21,675 16,218
-------- -------- --------
Combined $102,059 $ 67,435 $ 46,302
======== ======== ========
Prior to the combination, Liberty recorded revenues associated
with sales of programming to TVG. Furthermore, TVG recorded programming
fee expense associated with the purchase of programming from Liberty.
In recording the pooling-of-interests combination, eliminations have
been made to these consolidated financial statements for revenues and
programming and delivery expense of $16.3 million, $10.9 million and
$8.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Prior to the combination, TVG recognized Liberty's interest in
Superstar/Netlink Group LLC ("SNG") as a minority interest, and
included SNG's deficit minority interest as a reduction of TVG's
stockholders' equity. In recording the pooling-of-interests
combination, Liberty's equity interest in SNG's results of operations
(including its portion of the 1998 gain recognized as a result of the
Turner Vision transaction (See Note 3)), is included in the caption
"Liberty businesses" above. Accordingly, in recording the pooling-of-
interests combination, minority interest accounts previously recognized
in the TVG consolidated financial statements for Liberty's interest in
SNG have been eliminated.
Accounts payable/receivable between TVG and Liberty of $1.2
million and $916,000 have been eliminated in the consolidated financial
statements as of December 31, 1998 and 1997, respectively.
There were no other significant transactions between TVG and
Liberty prior to the combination.
30
<PAGE>
These financial statements present the consolidated financial
position, results of operations and cash flows of TVG and its
subsidiaries. All significant intercompany balances and transactions
have been eliminated. These consolidated financial statements give
retroactive effect to the Liberty Transaction, which has been accounted
for as a combination of entities under common control, similar to a
pooling of interests, from January 25, 1996, the date common control
was established, to December 31, 1998.
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.
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.
31
<PAGE>
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:
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
Intangible assets are being amortized on a straight-line basis
over 5-30 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.
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 on contracts are recorded in full
when a loss is anticipated.
Subsidiary Equity Transactions
The Company recognizes as non-operating income or loss its
proportionate share of increases or decreases in the equity of its
affiliates arising from equity transactions by 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.
32
<PAGE>
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):
1998 1997 1996
------------- -------------- -------------
Per Share Per Share Per Share
Amount Amount Amount
------ ------ ------
Net income $102,059 $67,435 $46,302
======== ======= =======
Weighted average
number of shares
of common stock
outstanding 171,916 $0.59 172,195 $0.39 167,794 $0.28
===== ===== =====
Effect of dilutive
securities -
stock options 1,855 1,422 3,004
------- ------- -------
Weighted average
number of shares
of common stock
and dilutive
potential common
shares 173,771 $0.59 173,617 $0.39 170,798 $0.27
======= ===== ======= ===== ======= =====
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 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.
33
<PAGE>
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 $27.5 million, $20.9
million and $20.7 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 and is provided
satellite transponder facilities and uplink services from TCI
consolidated affiliates. These purchases totaled $28.7 million, $27.1
million and $34.0 million for the years ended December 31, 1998, 1997
and 1996, respectively (See Note 16).
At December 31, 1998 and 1997, the Company had outstanding
receivables of $7.0 million and $2.8 million, respectively, due from
TCI consolidated affiliates and outstanding liabilities of $2.2 million
and $2.7 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.
34
<PAGE>
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 SNG in return for an approximate 20%
interest in SNG, reducing the Company's ownership interest in SNG to
approximately 80%. The Company continues to manage SNG and SNG's
operating results continue to be consolidated with those of the
Company.
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 $37.9 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 year 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):
1998 1997
---- ----
Pro forma:
Revenues $630,118 $619,676
Net income 72,071 56,179
Net income per share:
Basic $ 0.42 $ 0.33
Diluted 0.41 0.32
35
<PAGE>
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):
1998
----------------------------------------
Gross
Unrealized Estimated
Unamortized Gains Fair
Cost (Losses) Value
----------- ---------- ---------
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
======== ==== ========
1997
----------------------------------------
Gross
Unrealized Estimated
Unamortized Gains Fair
Cost (Losses) Value
----------- ---------- ---------
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
======== ==== ========
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".
36
<PAGE>
5. Property, Plant and Equipment
Property, plant and equipment as of December 31 are summarized as
follows (in thousands):
1998 1997
---- ----
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 49,453 42,329
-------- --------
127,669 118,274
Accumulated depreciation and
amortization 81,907 66,593
-------- --------
$ 45,762 $ 51,681
======== ========
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):
1998 1997
---- ----
Goodwill $102,181 $38,547
Patents 28,238 --
Other 2,035 2,035
-------- -------
132,454 40,582
Accumulated amortization (18,931) (8,317)
-------- -------
$113,523 $32,265
======== =======
37
<PAGE>
7. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows (in thousands):
1998 1997
---- ----
Deferred tax assets:
Bad debt expense $ 729 $ 821
Deferred compensation 377 616
Compensated absences 282 401
Capital lease obligations 822 770
Operating loss carryforwards 3,196 3,196
Other 632 950
------- ------
Total deferred tax assets 6,038 6,754
Deferred tax liabilities:
Book/tax depreciation (4,482) (4,172)
Investment in Superstar/
Netlink Group LLC (16,652) --
Other (373) (255)
------- ------
Total deferred tax
liabilities (21,507) (4,427)
------- ------
Net deferred tax assets
(liabilities) $(15,469) $ 2,327
======= ======
Significant components of the provision for income taxes for the
years ended December 31 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Current:
Federal $38,353 $33,951 $25,604
State 2,794 2,318 1,553
------- ------- -------
41,147 36,269 27,157
Deferred:
Federal 16,582 1,992 (1,122)
State 1,248 177 (243)
------- ------- -------
17,830 2,169 (1,365)
------- ------- -------
$58,977 $38,438 $25,792
======= ======= =======
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to income tax expense is (in thousands):
1998 1997 1996
---- ---- ----
Tax at statutory rate (35%) $56,496 $36,836 $24,863
Minority interest in
consolidated entities not
subject to income taxes (32) 149 114
State taxes, net of federal
benefit 2,927 1,747 1,155
Effect of municipal interest
earned and exempt from
federal tax (1,215) (1,411) (791)
Non-deductible goodwill
amortization 780 780 836
Other 21 337 (385)
------- ------- -------
$58,977 $38,438 $25,792
======= ======= =======
Income taxes paid were approximately $32.9 million, $27.6 million
and $22.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
38
<PAGE>
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.
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):
Capital Operating
Leases Leases
------- ---------
Year ending December 31:
1999 $ 4,740 $17,958
2000 4,740 15,079
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 61,758
Less amount representing interest
at 7% 3,328 --
Less sublease revenues -- 2,030
------- -------
Net future minimum lease payments 16,752 $59,728
Less current portion 3,745 =======
-------
$13,007
=======
Rental expense under noncancellable operating leases amounted to
$17.5 million (net of $1.7 million in sublease revenues), $16.0 million
(net of $1.8 million in sublease revenues) and $14.5 million (net of
$1.7 million in sublease revenues) for the years ended December 31,
1998, 1997 and 1996, respectively.
39
<PAGE>
10. Stock Options and Other Employee Incentive Plans and Agreements
The Company sponsors the TV Guide, Inc. Equity Incentive Plan
under which 16 million shares of TVG'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 TV Guide, Inc. Stock Option Plan
for Non-Employee Directors under which 1 million shares of TVG's Class
A Common Stock are authorized to be issued in connection with the
exercise of stock options granted thereunder.
At December 31, 1998, 12.7 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):
Weighted-
Average
Exercise
Options Price Exercisable
--------- -------- -------------
At January 1, 1996 8,242 $ 2.13 2,460
Granted 2,552 5.55
Exercised (1,630) 2.02
Cancelled (1,610) 4.60
-----
At December 31, 1996 7,554 2.78 4,956
Granted 1,832 4.27
Exercised (4,177) 2.02
Cancelled (504) 2.94
-----
At December 31, 1997 4,705 4.02 1,416
Granted 1,417 8.30
Exercised (509) 3.42
Cancelled (72) 4.71
-----
At December 31, 1998 5,541 5.16 2,310
=====
40
<PAGE>
Exercise prices for options outstanding as of December 31, 1998
ranged from $2 to $8. 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, .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 $3.58, $3.82 and $5.08, respectively.
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):
1998 1997 1996
---- ---- ----
Pro forma net income $100,690 $66,735 $45,838
Pro forma earnings per
share:
Basic 0.59 0.39 0.27
Diluted 0.58 0.38 0.27
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.
41
<PAGE>
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 million shares and 300 million 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.
On December 17, 1999, 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 December 3, 1999. All references in the
financial statements and related notes to number of shares and per
share amounts have been adjusted to reflect the stock split.
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.
42
<PAGE>
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 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 TV Guide Networks, Inc. subsidiary
(formerly Prevue Network's, Inc.) of the 121 Patent and U.S. Patent No.
4,751,578 (the "578 patent") seeking damages and injunctive relief. The
original Complaint did not specify a product accused of infringement.
On September 30, 1998, Gemstar and StarSight filed an Amended Complaint
adding SuperGuide Corporation ("SuperGuide") as a plaintiff, TCI as a
defendant, and specifying TV Guide Interactive as the allegedly
infringing product. TCI Communications, Inc. was subsequently
substituted for TCI. TV Guide Networks answered the Amended Complaint
on October 15, 1998, asserting the defenses of non-infringement,
invalidity and estoppel with respect to both the 121 and 578 Patents,
and inequitable conduct unenforceability with respect to the 121
Patent. In addition, TV Guide Networks asserted that StarSight had
violated the antitrust laws. On August 7, 1998, TV Guide Networks moved
to transfer this action to the U.S. District Court for the Northern
District of Oklahoma. On February 2, 1999, the California Court granted
TV Guide Networks motion to transfer. On December 23, 1998, Gemstar,
StarSight and SuperGuide filed a motion before the Judicial Panel on
Multidistrict Litigation ("JPML") to consolidate and transfer for
pretrial proceedings, this action and four other patent infringement
lawsuits Gemstar and its affiliated companies have pending with
manufacturers of cable television set-top boxes. In their motion,
Gemstar and its affiliates suggested either the Central or Northern
District of California as the appropriate venue for pretrial
proceedings. TV Guide Networks opposed the motion for consolidation. A
hearing on the motion to consolidate and transfer took place on March
26, 1999. 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 TV Guide Networks and TCI Communications,
Inc. pending a decision by the JPML on their motion to consolidate and
transfer. On February 2, 1999, the Court deemed the motion to stay to
be moot in light of its decision to transfer the action on TV Guide
Networks motion to the Northern District of Oklahoma. 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.
43
<PAGE>
The State of Illinois (the "State") has asserted that certain
uplinking services performed by the Company at its Chicago teleport are
subject to the State's Telecommunications Excise Tax Act. The State
contends that the Company should have collected approximately $1.5
million in excise taxes from its customers during the period August
1985 through June 1994 and remitted such receipts to the State. In
addition to that amount, the State has assessed penalties and interest
of approximately $900,000. The Company, after consulting with outside
counsel, strongly disagrees with the State's position. 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 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. All claims
relative to this case have been settled and the case has been dismissed
with prejudice.
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.
44
<PAGE>
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 (TV Guide Networks), 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. TV Guide Networks 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. TV Guide Networks 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.
Segment information as of December 31, 1998, 1997 and 1996 and for
each of the years then ended is as follows:
<TABLE>
<CAPTION>
TV
Guide Other Corporate
Networks 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 $ 60,725 $16,848 $ -- $ -- $540,632
Advertising revenues 40,349 -- -- -- -- -- 40,349
Systems integration
services -- -- -- 40,959 -- -- 40,959
Intersegment revenues -- -- 24,016 -- -- (24,016) --
------- -------- -------- ------- ------- -------- --------
Total revenues 76,822 426,586 84,741 57,807 -- (24,016) 621,940
Operating expenses,
excluding
depreciation
and amortization 53,562 358,317 40,460 55,391 1,380 (24,016) 485,094
------- -------- -------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization $23,260 $ 68,269 $ 44,281 $ 2,416 $(1,380) $ -- 136,846
======= ======== ======== ======= ======= ========
Depreciation and
amortization (28,227)
Gain on issuance of
equity by subsidiary 37,898
Interest income 6,346
Interest expense (1,629)
Other income 11,607
Other expense (1,423)
--------
Income before income
taxes and minority
interest $161,418
========
Segment assets $62,333 $204,439 $ 97,931 $79,001 $18,994 $(50,192) $412,506
======= ======== ======== ======= ======= ======== ========
1997
Revenues from external
customers:
Satellite services $32,128 $350,490 $ 57,676 $17,681 $ -- $ -- $457,975
Advertising revenues 30,828 -- -- -- -- -- 30,828
Systems integration
services -- -- -- 41,617 -- -- 41,617
Intersegment revenues -- -- 16,938 518 -- (17,456) --
------- -------- -------- ------- ------- -------- --------
Total revenues 62,956 350,490 74,614 59,816 -- (17,456) 530,420
Operating expenses,
excluding
depreciation
and amortization 40,548 301,209 30,825 54,148 1,170 (17,456) 410,444
------- -------- -------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization $22,408 $ 49,281 $ 43,789 $ 5,668 $(1,170) $ -- 119,976
======= ======== ======== ======= ======= ========
Depreciation and
amortization (18,850)
Interest income 5,882
Interest expense (2,122)
Other income 431
Other expense (71)
--------
Income before income
taxes and minority
interest $105,246
========
Segment assets $46,060 $ 98,589 $ 85,030 $58,479 $43,681 $(28,697) $303,142
======= ======== ======== ======= ======= ======== ========
1996
Revenues from external
customers:
Satellite services $26,862 $327,817 $ 55,921 $15,636 $ -- $ -- $426,236
Advertising revenues 22,774 -- -- -- -- -- 22,774
Systems integration
services -- -- -- 35,703 -- -- 35,703
Intersegment revenues -- -- 11,973 458 -- (12,431) --
------- -------- -------- ------- ------- -------- --------
Total revenues 49,636 327,817 67,894 51,797 -- (12,431) 484,713
Operating expenses,
excluding
depreciation
and amortization 33,676 295,859 29,313 51,742 458 (12,431) 398,617
------- -------- -------- ------- ------- -------- --------
Earnings before
interest, income
taxes,
depreciation and
amortization $15,960 $ 31,958 $ 38,581 $ 55 $ (458) $ -- 86,096
======= ======== ======== ======= ======= ========
Depreciation and
amortization (16,732)
Interest income 3,401
Interest expense (2,024)
Other income 551
Other expense (255)
--------
Income before income
taxes and minority
interest $ 71,037
========
Segment assets $57,317 $ 87,157 $ 61,511 $60,177 $44,028 $(51,186) $259,004
======= ======== ======== ======= ======= ======== ========
</TABLE>
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.
45
<PAGE>
15. Quarterly Financial Data (unaudited)
Quarters Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share amounts)
1998
----
Revenues $146,164 $155,045 $159,430 $161,301
Operating expenses 124,496 127,335 127,230 134,260
Operating income 21,668 27,710 32,200 27,041
Net income 38,961 17,916 21,060 24,122
Earnings per
share:
Basic 0.23 0.10 0.12 0.14
Diluted 0.22 0.10 0.12 0.14
1997
----
Revenues $127,970 $133,833 $131,637 $136,980
Operating expenses 106,765 109,154 105,109 108,266
Operating income 21,205 24,679 26,528 28,714
Net income 14,024 16,379 17,412 19,620
Earnings per
share:
Basic 0.08 0.09 0.10 0.11
Diluted 0.08 0.09 0.10 0.11
46
<PAGE>
16. Subsequent Acquisitions
On June 10, 1998, TVG and News America Incorporated, a subsidiary
of The News Corporation Limited ("News Corp."), entered into an
agreement to purchase News America Publications Inc. and TVSM, Inc. in
exchange for 45,006,824 shares of TVG Class A common stock, 74,993,176
shares of TVG 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.
On March 1, 1999, the Company completed the TV Guide Transaction.
The $800 million cash consideration portion of the transaction was
funded from existing cash balances, the issuance of $400 million in 8
1/8% senior subordinated notes due 2009, bank borrowings of
approximately $185 million drawn under a new bank credit facility and
proceeds from the issuance of equity to a subsidiary of News Corp. to
equalize News Corp.'s ownership in TVG with that of TCI, all of which
were completed on the same day. As a result of the TV Guide Transaction
and the Liberty Transaction, News Corp. has an approximate 44% interest
in the Company, with TCI Ventures Group and Liberty having an
approximate 44% combined interest, and the other stockholders of the
Company having approximately 13%. Following the transaction, News
Corp. and the combination of TCI Ventures Group/Liberty each have
approximately 49% of the voting power of the Company's outstanding
stock. Also, on March 1, 1999, the Company's name was changed to TV
Guide, Inc. ("TVG"). All references to United Video Satellite Group,
Inc. have been changed to TV Guide, Inc. throughout these financial
statements. The TV Guide Transaction will be accounted for as a
purchase.
The bank credit facilities consist of 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 convert to a five-year term loan at maturity. Borrowings under
the credit facilities bear interest either at the bank's prime rate or
LIBOR, both plus a margin based on a sliding scale tied to the
Company's leverage ratio. For the first year of the credit facilities,
the LIBOR margin is fixed at a minimum of 1.25%. The credit facilities
are subject to prepayment or reduction at any time without penalty.
Borrowings to consummate the TV Guide Transaction were drawn under the
$300 million six-year revolving credit facility.
The indenture for the notes and the Company's bank credit
facilities impose certain operating and financial restrictions on the
Company. These restrictions include the designation of certain of the
Company's subsidiaries as "restricted" for certain financing and
operating matters which may significantly limit the ability of the
Company to execute transactions, including the transfer of cash,
between subsidiaries in the restricted group and subsidiaries in the
unrestricted group. The subsidiaries in the unrestricted group are not
subject to 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.
17. Supplemental Guarantor Information
In connection with the TV Guide Transaction, TVG issued $400 million in
aggregate principal amount of its senior subordinated notes due 2009, which
are not callable until 2004. A group of TVG's subsidiaries (the "Guarantors")
guarantee the senior subordinated indebtedness. Supplemental condensed
combining financial information of TVG, the Guarantors and the remainder of
TVG's consolidated group (the "Non-Guarantors") is presented below.
Investments in the Non-Guarantors by their parent companies that
are part of TVG and the Guarantors are presented under the equity
method of accounting in the combining financial information. The
principal elimination entries eliminate intercompany sales and
purchases of video products, intercompany interest income and expense,
equity in earnings of subsidiaries and investments in and amounts due
to and from subsidiaries.
Because of the factual basis underlying the obligations created
pursuant to a senior secured credit facility and other obligations that
may constitute senior indebtedness of the Guarantors of the senior
subordinated notes, it is not possible to predict how a court in
bankruptcy would accord priorities among the obligations of the Company
and its subsidiaries.
47
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
As of December 31, 1998
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents $ -- $ 98,556 $ 57,088 $ -- $155,644
Marketable
securities,
at fair value -- 5,804 -- -- 5,804
Accounts receivable,
net of allowance
for doubtful
accounts -- 26,035 39,839 (1,242) 64,632
Accounts and notes
receivable from
affiliates -- 18,237 62,911 (81,148) --
Other current assets -- 2,517 5,462 -- 7,979
--------- -------- -------- --------- --------
Total current
assets -- 151,149 165,300 (82,390) 234,059
Property, plant and
equipment, at cost,
net of accumulated
depreciation and
amortization -- 33,305 12,457 -- 45,762
Intangible assets, net
of accumulated
amortization -- 5,076 108,447 -- 113,523
Investment in
subsidiaries, at
equity 199,844 -- -- (199,844) --
Other assets, net of
accumulated
amortization -- 14,028 5,171 (37) 19,162
-------- -------- -------- --------- --------
Total assets $199,844 $203,558 $291,375 $(282,271) $412,506
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 4,611 $ 2,286 $ (1,242) $ 5,655
Accounts and notes
payable to
affiliates -- 62,911 18,237 (81,148) --
Accrued liabilities -- 15,710 41,655 -- 57,365
Note payable and
current portion
of capital lease
obligations and
long-term debt -- 3,746 1,754 (37) 5,463
Customer prepayments -- 7,061 102,868 -- 109,929
-------- -------- -------- -------- --------
Total current
liabilities -- 94,039 166,800 (82,427) 178,412
Deferred liabilities -- 4,293 13,354 -- 17,647
Capital lease
obligations and
long-term debt -- 13,007 -- -- 13,007
Minority interest -- -- 349 3,247 3,596
Stockholders' equity:
Common stock 854 806 48 (854) 854
Other stockholders'
equity 198,990 91,413 110,824 (202,237) 198,990
-------- -------- -------- --------- --------
Total stock-
holders' 199,844 92,219 110,872 (203,091) 199,844
equity
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity $199,844 $203,558 $291,375 $(282,271) $412,506
======== ======== ======== ========= ========
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
As of December 31, 1997
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents $ -- $ 26,124 $ 6,432 $ -- $ 32,556
Marketable
securities,
at fair value -- 112,334 -- -- 112,334
Accounts receivable,
net of allowance
for doubtful
accounts -- 15,404 44,363 (916) 58,851
Accounts and notes
receivable from
affiliates -- 10,288 60,256 (70,544) --
Other current assets -- 4,120 8,405 -- 12,525
--------- -------- -------- --------- --------
Total current
assets -- 168,270 119,456 (71,460) 216,266
Property, plant and
equipment, at cost,
net of accumulated
depreciation and
amortization -- 36,645 15,036 -- 51,681
Intangible assets, net
of accumulated
amortization -- 5,688 26,577 -- 32,265
Investment in
subsidiaries, at
equity 120,781 -- -- (120,781) --
Other assets, net of
accumulated --
amortization -- 2,804 230 (104) 2,930
-------- -------- -------- --------- --------
Total assets $120,781 $213,407 $161,299 $(192,345) $303,142
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 1,530 $ 5,489 $ (916) $ 6,103
Accounts and notes
payable to
affiliates -- 60,256 10,288 (70,544) --
Accrued liabilities -- 13,817 38,336 -- 52,153
Note payable and
current portion
of capital lease
obligations and
long-term debt -- 3,495 7,566 (104) 10,957
Customer prepayments -- 7,415 84,514 -- 91,929
-------- -------- -------- --------- --------
Total current
liabilities -- 86,513 146,193 (71,564) 161,142
Deferred liabilities -- 358 513 -- 871
Capital lease
obligations and
long-term debt -- 16,752 455 -- 17,207
Minority interest -- -- 31 3,110 3,141
Stockholders' equity:
Common stock 431 383 48 (431) 431
Other stockholders'
equity 120,350 109,401 14,059 (123,460) 120,350
-------- -------- -------- --------- --------
Total stock-
holders' 120,781 109,784 14,107 (123,891) 120,781
equity
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity $120,781 $213,407 $161,299 $(192,345) $303,142
======== ======== ======== ========= ========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1998
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services $ -- $111,831 $452,817 $ (24,016) $540,632
Advertising sales -- 40,349 -- -- 40,349
Systems integration
services -- -- 40,959 -- 40,959
-------- -------- -------- --------- --------
-- 152,180 493,776 (24,016) 621,940
Operating expenses:
Programming and
delivery -- 33,972 320,948 (24,016) 330,904
Selling, general and
administrative -- 53,743 100,447 -- 154,190
Depreciation and
amortization -- 10,588 17,639 -- 28,227
-------- -------- -------- --------- --------
-- 98,303 439,034 (24,016) 513,321
-------- -------- -------- --------- --------
Operating income -- 53,877 54,742 -- 108,619
Equity in earnings
of subsidiaries 102,059 -- -- (102,059) --
Other income
(expense),
net -- 10,966 41,833 -- 52,799
-------- -------- -------- --------- --------
Income before income
taxes and minority
interest 102,059 64,843 96,575 (102,059) 161,418
Provision for income
taxes -- (21,838) (37,139) -- (58,977)
Minority interest in
earnings -- -- (316) (66) (382)
-------- -------- -------- --------- --------
Net income $102,059 $ 43,005 $ 59,120 $(102,125) $102,059
======== ======== ======== ========= ========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1997
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services $ -- $ 98,332 $377,099 $(17,456) $457,975
Advertising sales -- 30,828 -- -- 30,828
Systems integration
services -- -- 41,617 -- 41,617
------- -------- -------- -------- --------
-- 129,160 418,716 (17,456) 530,420
Operating expenses:
Programming and
delivery -- 24,976 258,599 (17,456) 266,119
Selling, general and
administrative -- 40,797 103,528 -- 144,325
Depreciation and
amortization -- 9,271 9,579 -- 18,850
------- -------- -------- -------- --------
-- 75,044 371,706 (17,456) 429,294
------- -------- -------- -------- --------
Operating income -- 54,116 47,010 -- 101,126
Equity in earnings
of subsidiaries 67,435 -- -- (67,435) --
Other income
(expense),
net -- 1,764 2,356 -- 4,120
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 67,435 55,880 49,366 (67,435) 105,246
Provision for income
taxes -- (20,047) (18,391) -- (38,438)
Minority interest in
earnings -- -- (9) 636 627
------- -------- -------- -------- --------
Net income $67,435 $ 35,833 $ 30,966 $(66,799) $ 67,435
======= ======== ======== ======== ========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME
Year Ended December 31, 1996
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Revenues:
Satellite services $ -- $ 82,005 $356,662 $(12,431) $426,236
Advertising sales -- 22,774 -- -- 22,774
Systems integration
services -- -- 35,703 -- 35,703
------- -------- -------- -------- --------
-- 104,779 392,365 (12,431) 484,713
Operating expenses:
Programming and
delivery -- 20,294 246,668 (12,431) 254,531
Selling, general and
administrative -- 37,123 106,963 -- 144,086
Depreciation and
amortization -- 9,992 6,740 -- 16,732
------- -------- -------- -------- --------
-- 67,409 360,371 (12,431) 415,349
------- -------- -------- -------- --------
Operating income -- 37,370 31,994 -- 69,364
Equity in earnings
of subsidiaries 46,302 -- -- (46,302) --
Other income
(expense),
net -- 357 1,316 -- 1,673
------- -------- -------- -------- --------
Income before income
taxes and minority
interest 46,302 37,727 33,310 (46,302) 71,037
Provision for income
taxes -- (13,508) (12,284) -- (25,792)
Minority interest in
earnings -- -- -- 1,057 1,057
------- -------- -------- -------- --------
Net income $46,302 $ 24,219 $ 21,026 $(45,245) $ 46,302
======= ======== ======== ======== ========
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1998
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ -- $ 40,426 $54,719 $ 240 $ 95,385
Investing activities:
Capital expenditures -- (7,997) (3,838) 720 (11,115)
Investments and
acquisitions (31,848) (9,555) (699) -- (42,102)
Purchases of market-
able 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) 97,152 (3,503) (66) 61,735
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
Liberty -- (10,688) 4,168 -- (6,520)
Intercompany transfers 49,408 (50,965) 1,907 (350) --
Other -- -- (368) 110 (258)
-------- -------- -------- ----- --------
Net cash provided by
(used in) financing
activities 31,848 (65,146) (560) (174) (34,032)
-------- -------- -------- ----- --------
Net increase in cash
and cash
equivalents -- 72,432 50,656 -- 123,088
Cash and cash
equivalents at
beginning of year -- 26,124 6,432 -- 32,556
-------- -------- -------- ----- --------
Cash and cash
equivalents at
end of year $ -- $ 98,556 $ 57,088 $ -- $155,644
======== ======== ======== ===== ========
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1997
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ -- $65,063 $15,824 $ (23) $80,864
Investing activities:
Capital expenditures -- (6,380) (4,117) 247 (10,250)
Purchases of market-
able securities -- (91,666) -- -- (91,666)
Sales and maturities
of marketable
securities -- 36,700 -- -- 36,700
Other -- (1,532) (67) (119) (1,718)
----- ------- ------- ----- -------
Net cash provided by
(used in) investing
activities -- (62,878) (4,184) 128 (66,934)
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
Liberty -- (7,980) (14,198) -- (22,178)
Intercompany transfers (531) 1,708 (1,177) -- --
Other -- 509 (73) -- 436
----- ------- ------- ----- -------
Net cash used in
financing
activities -- (9,021) (15,158) (105) (24,284)
----- ------- ------- ----- -------
Net increase in cash
and cash
equivalents -- (6,836) (3,518) -- (10,354)
Cash and cash
equivalents at
beginning of year -- 32,960 9,950 -- 42,910
----- ------- ------- ----- -------
Cash and cash
equivalents at
end of year $ -- $26,124 $ 6,432 $ -- $32,556
===== ======= ======= ===== =======
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996
(In thousands)
Guara- Non-Guara-
ntor ntor
The Subsi- Subsi- Elimina- Consoli-
Company diaries diaries tions dated
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ -- $ 62,040 $ (1,240) $ -- $ 60,800
Investing activities:
Capital expenditures -- (6,296) (8,188) -- (14,484)
Investments and --
acquisitions -- (106) -- -- (106)
Purchases of market-
able securities -- (47,065) -- -- (47,065)
Maturities of
marketable
securities -- 20,482 -- -- 20,482
Other -- (196) (827) -- (1,023)
-------- -------- -------- ----- --------
Net cash used in
investing
activities -- (33,181) (9,015) -- (42,196)
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
Liberty -- (8,341) (1,957) -- (10,298)
Intercompany transfers (3,216) 4,073 (857) -- --
Other -- 233 (1,545) -- (1,312)
-------- -------- -------- ----- --------
Net cash provided
by financing
activities -- (7,074) 2,886 -- (4,188)
-------- -------- -------- ----- --------
Net increase
(decrease) in cash
and cash
equivalents -- 21,785 (7,369) -- 14,416
Cash and cash
equivalents at
beginning of year -- 11,175 17,319 -- 28,494
-------- -------- -------- ----- --------
Cash and cash
equivalents at
end of year $ -- $ 32,960 $ 9,950 $ -- $ 42,910
======== ======== ======== ===== ========
</TABLE>
55
<PAGE>
TV GUIDE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Amounts Balance
Balance at Charged Charged at
Beginning to to Other End of
Description of Period Expense Accounts Deductions Period
- ----------- --------- ------- -------- ---------- ------
Year ended
December 31, 1998:
Allowance for
doubtful
accounts $2,965 $959 $ -- $1,007 $2,917
Year ended
December 31, 1997:
Allowance for
doubtful
accounts 2,535 701 -- 271 2,965
Year ended
December 31, 1996:
Allowance for
doubtful
accounts 1,788 1,140 1,969(1) 2,362 2,535
(1) Amount represents the allowance for doubtful accounts of Liberty
Media Corporation's Netlink division whose results of operations, for
accounting purposes, were combined with those of the Company's
effective January 25, 1996.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) 12.0 Restated Computation of Ratio of Earnings of Fixed
Charges
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of KPMG LLP
27.1 Restated Financial Data Schedule Twelve Months
Ended December 31, 1998
27.2 Restated Financial Data Schedule Twelve Months
Ended December 31, 1997
27.3 Restated Financial Data Schedule Twelve Months
Ended December 31, 1996
56
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TV GUIDE, INC.
(Registrant)
DATE: December 30, 1999 By: /s/ Peter C. Boylan III
-----------------------------
Peter C. Boylan III
President and
Chief Operating Officer
By: /s/ Craig M. Waggy
----------------------------
Craig M. Waggy
Senior Vice President and
Chief Financial Officer
57
<PAGE>
Exhibit 12
TV GUIDE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(amounts in thousands, except for ratios)
(unaudited)
Year Ended December 31
----------------------------------------
1998(1) 1997(1) 1996(1) 1995 1994
----------------------------------------
Earnings Available
for Fixed Charges:
Income before
income taxes
and minority
interest $161,418 $105,246 $71,037 $37,932 $26,292
Interest and
expense on
indebtedness 1,629 2,122 2,024 2,003 2,155
One-third of
rental expense,
net of sub-
leasing income
for operating
leases 5,828 5,326 4,837 2,433 2,400
-------- -------- ------- ------- -------
$168,875 $112,694 $77,898 $42,368 $30,847
======== ======== ======= ======= =======
Fixed Charges:
Interest and
expense on
indebtedness 1,629 2,122 2,024 2,003 2,155
One-third of
rental expense,
net of sub-
leasing income,
for operating
leases 5,828 5,326 4,837 2,433 2,400
-------- -------- ------- ------- -------
$ 7,457 $ 7,448 $ 6,861 $ 4,436 $ 4,555
======== ======== ======= ======= =======
Ratio of earnings
to fixed charges 22.65 15.13 11.35 9.55 6.77
===== ===== ===== ==== ====
(1) Restated to include the operating results of Liberty
Media Corporation's Netlink division, which was acquired by
the Company on March 1, 1999 in a transaction accounted for
as a combination of entities under common control, similar
to a pooling of interests.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TV Guide, 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
TV Guide, Inc. (formerly United Video Satellite Group, Inc.) of our
report dated March 1, 1999, except for the last paragraph of Note 11,
as to which the date is December 17, 1999, relating to the consolidated
balance sheets of TV Guide, Inc. 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, and related financial
statement schedule, which report is included in this Current Report on
Form 8-K of TV Guide, Inc.
KPMG LLP
Tulsa, Oklahoma
December 30, 1999
1
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated
February 10, 1997 (except for the Liberty Transaction described in Note
2, as to which the date is March 29, 1999), with respect to the
consolidated financial statements and schedule of TV Guide, Inc.
(formerly United Video Satellite Group, Inc.) included in this Current
Report on Form 8-K, in the following registration statements and
related prospectuses.
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
Ernst & Young LLP
Tulsa, Oklahoma
December 30, 1999
1
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TV Guide, 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
TV Guide, Inc. (formerly United Video Satellite Group, Inc.) of (a) our
report relating to the Netlink Wholesale Division combined statements
of operations and combined equity and cash flows for the year ended
December 31, 1996, and (b) our report relating to the Netlink USA,
Retail Division statements of operations and accumulated deficit and
cash flows for the period from January 25, 1996 to March 31, 1996,
which reports are included in this Current Report on Form 8-K of TV
Guide, Inc.
KPMG LLP
Denver, Colorado
December 30, 1999
1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1998 OF TV GUIDE, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000913061
<NAME> TV GUIDE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 155,644
<SECURITIES> 5,804
<RECEIVABLES> 67,549
<ALLOWANCES> 2,917
<INVENTORY> 0
<CURRENT-ASSETS> 234,059
<PP&E> 127,669
<DEPRECIATION> 81,907
<TOTAL-ASSETS> 412,506
<CURRENT-LIABILITIES> 178,412
<BONDS> 0
0
0
<COMMON> 854
<OTHER-SE> 198,990
<TOTAL-LIABILITY-AND-EQUITY> 412,506
<SALES> 0
<TOTAL-REVENUES> 621,940
<CGS> 0
<TOTAL-COSTS> 359,131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,629
<INCOME-PRETAX> 161,418
<INCOME-TAX> 58,977
<INCOME-CONTINUING> 102,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,059
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.59
<FN>
<F1>-RESTATEMENT REFLECTED HEREIN IS THE RESULT OF THE BUSINESSES ACQUIRED
ON MARCH 1, 1999 FROM LIBERTY MEDIA CORPORATION IN A TRANSACTION WHICH
WAS ACCOUNTED FOR AS A COMBINATION OF ENTITIES UNDER COMMON CONTROL,
SIMILAR TO A POOLING OF INTERESTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997 OF TV GUIDE, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000913061
<NAME> TV GUIDE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 32,556
<SECURITIES> 112,334
<RECEIVABLES> 61,816
<ALLOWANCES> 2,965
<INVENTORY> 0
<CURRENT-ASSETS> 216,266
<PP&E> 118,274
<DEPRECIATION> 66,593
<TOTAL-ASSETS> 303,142
<CURRENT-LIABILITIES> 161,142
<BONDS> 0
0
0
<COMMON> 431
<OTHER-SE> 120,350
<TOTAL-LIABILITY-AND-EQUITY> 303,142
<SALES> 0
<TOTAL-REVENUES> 530,420
<CGS> 0
<TOTAL-COSTS> 284,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,122
<INCOME-PRETAX> 105,246
<INCOME-TAX> 38,438
<INCOME-CONTINUING> 67,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,435
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
<FN>
<F1>-RESTATEMENT REFLECTED HEREIN IS THE RESULT OF THE BUSINESSES ACQUIRED
ON MARCH 1, 1999 FROM LIBERTY MEDIA CORPORATION IN A TRANSACTION WHICH
WAS ACCOUNTED FOR AS A COMBINATION OF ENTITIES UNDER COMMON CONTROL,
SIMILAR TO A POOLING OF INTERESTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1996 OF TV GUIDE, INC. AND IS QUALIFIED IN ITS ENTIRELY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000913061
<NAME> TV GUIDE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 42,910
<SECURITIES> 58,581
<RECEIVABLES> 51,816
<ALLOWANCES> 2,535
<INVENTORY> 0
<CURRENT-ASSETS> 163,482
<PP&E> 109,290
<DEPRECIATION> 52,122
<TOTAL-ASSETS> 259,004
<CURRENT-LIABILITIES> 162,145
<BONDS> 0
0
0
<COMMON> 490
<OTHER-SE> 70,369
<TOTAL-LIABILITY-AND-EQUITY> 259,004
<SALES> 0
<TOTAL-REVENUES> 484,713
<CGS> 0
<TOTAL-COSTS> 271,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,024
<INCOME-PRETAX> 71,037
<INCOME-TAX> 25,792
<INCOME-CONTINUING> 46,302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,302
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
<FN>
<F1>-RESTATEMENT REFLECTED HEREIN IS THE RESULT OF THE BUSINESSES ACQUIRED
ON MARCH 1, 1999 FROM LIBERTY MEDIA CORPORATION IN A TRANSACTION WHICH
WAS ACCOUNTED FOR AS A COMBINATION OF ENTITIES UNDER COMMON CONTROL,
SIMILAR TO A POOLING OF INTERESTS.
</FN>
</TABLE>
