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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24218
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4782077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6922 Hollywood Boulevard, 12th Floor, Los Angeles, California 90028
(Address of principal executive offices including zip code)
(323) 817-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of May 2, 2003, there were outstanding 408,156,553 shares of the
registrant's Common Stock, par value $0.01 per share.
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 ............ 1
Condensed Consolidated Statements of Operations - Unaudited for the three months ended March 31, 2003
and 2002 .............................................................................................. 2
Condensed Consolidated Statements of Stockholders' Equity - Unaudited for the three months ended
March 31, 2003 and 2002 ............................................................................... 3
Condensed Consolidated Statements of Cash Flows - Unaudited for the three months ended
March 31, 2003 and 2002 ............................................................................... 4
Notes to Condensed Consolidated Financial Statements - Unaudited ........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................. 38
Item 4. Controls and Procedures ................................................................................. 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................................... 39
Item 6. Exhibits and Reports on Form 8-K ........................................................................ 39
Signature .......................................................................................................... 40
Items 2, 3, 4 and 5 of PART II are not applicable and have been omitted.
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
2003 2002
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 348,579 $ 350,262
Restricted cash ........................................................ 37,241 37,068
Marketable securities .................................................. 1,284 11,456
Receivables, net ....................................................... 152,410 152,522
Deferred tax asset, net ................................................ 41,438 41,438
Other current assets ................................................... 25,880 25,202
------------ ------------
Total current assets ............................................. 606,832 617,948
Property and equipment, net .................................................. 55,554 60,334
Indefinite-lived intangible assets ........................................... 316,273 316,273
Finite-lived intangible assets, net .......................................... 288,292 347,551
Goodwill ..................................................................... 589,845 589,845
Investments .................................................................. 2,306 2,403
Other assets ................................................................. 136,301 154,820
------------ ------------
$ 1,995,403 $ 2,089,174
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................. $ 285,675 $ 292,427
Current portion of long-term debt and capital lease obligations ........ 92,386 92,348
Current portion of deferred revenue .................................... 209,401 219,417
------------ ------------
Total current liabilities ........................................ 587,462 604,192
Deferred tax liability, net .................................................. 206,287 242,823
Long-term debt and capital lease obligations, less current portion ........... 140,795 163,861
Deferred revenue, less current portion ....................................... 157,905 163,584
Other liabilities ............................................................ 19,181 20,244
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share ................................. 4,182 4,182
Additional paid-in capital ............................................. 8,456,506 8,422,797
Accumulated deficit .................................................... (7,451,203) (7,405,841)
Accumulated other comprehensive (loss) income, net of tax .............. (730) 4,204
Unearned compensation .................................................. (26,716) (32,606)
Treasury stock, at cost ................................................ (98,266) (98,266)
------------ ------------
Total stockholders' equity ....................................... 883,773 894,470
------------ ------------
$ 1,995,403 $ 2,089,174
------------ ------------
See accompanying Notes to Condensed Consolidated Financial Statements.
-1-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
Three Months Ended
March 31,
----------------------
2003 2002
---------- ----------
Revenues:
Publishing ......................................................... $ 108,987 $ 123,010
Cable and satellite ................................................ 85,033 105,585
Consumer electronics licensing ..................................... 33,863 31,886
--------- ----------
227,883 260,481
Operating expenses:
Operating expenses, exclusive of expenses shown below .............. 196,729 207,197
Stock compensation ................................................. 39,595 17,126
Depreciation and amortization ...................................... 65,662 106,275
Impairment of intangible assets .................................... -- 11,038
--------- ----------
301,986 341,636
--------- ----------
Operating loss ........................................................... (74,103) (81,155)
Interest expense ......................................................... (1,953) (2,660)
Other income (expense), net .............................................. 748 (7,303)
--------- ----------
Loss before income taxes and cumulative effect of an accounting change ... (75,308) (91,118)
Income tax benefit ....................................................... (29,946) (43,480)
--------- ----------
Loss before cumulative effect of an accounting change .................... (45,362) (47,638)
Cumulative effect of an accounting change, net of tax .................... -- (223,225)
--------- ----------
Net loss ..................................................... $ (45,362) $ (270,863)
--------- ----------
Basic and diluted loss per share:
Loss before cumulative effect of an accounting change .............. $ (0.11) $ (0.11)
Cumulative effect of an accounting change .......................... -- (0.54)
--------- ----------
Net loss ..................................................... $ (0.11) $ (0.65)
--------- ----------
Weighted average shares outstanding - basic and diluted .................. 408,156 414,785
--------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements.
-2-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - UNAUDITED
(In thousands)
Three Months Ended
March 31,
---------------------
2003 2002
-------- ----------
Balance at beginning of period ............................................. $894,470 $7,374,254
Net loss ................................................................... (45,362) (270,863)
Other comprehensive (loss) income .......................................... (4,934) 684
-------- ----------
Comprehensive loss ......................................................... (50,296) (270,179)
Other, principally shares issued pursuant to stock option plans, including
tax benefit, and amortization of unearned compensation ................... 39,599 22,324
-------- ----------
Balance at end of period ................................................... $883,773 $7,126,399
-------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements.
-3-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
---------- -----------
Cash flows from operating activities:
Net loss .............................................................................. $ (45,362) $ (270,863)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of an accounting change, net of tax ........................... -- 223,225
Depreciation and amortization ................................................... 65,662 106,275
Deferred income taxes ........................................................... (38,900) (47,350)
Tax benefit associated with stock options ....................................... -- 4,665
Stock compensation expense ...................................................... 39,595 17,126
Impairment of intangible assets ................................................. -- 11,038
Gain on sale of marketable securities ........................................... (2,026) --
Investment write-down ........................................................... -- 5,455
Loss on asset dispositions ...................................................... 190 218
Changes in operating assets and liabilities:
Receivables ............................................................. 351 38,115
Other assets ............................................................ 17,891 1,774
Accounts payable, accrued expenses and other liabilities ................ (5,493) 7,212
Deferred revenue ........................................................ (15,695) (15,760)
--------- ----------
Net cash provided by operating activities ......................... 16,213 81,130
--------- ----------
Cash flows from investing activities:
Purchases of marketable securities .................................................... -- (6,549)
Sales and maturities of marketable securities ......................................... 10,428 26,693
Proceeds from sale of assets .......................................................... 814 2
Additions to property and equipment ................................................... (2,623) (2,361)
--------- ----------
Net cash provided by investing activities ......................... 8,619 17,785
--------- ----------
Cash flows from financing activities:
Repayments under bank credit facility and term loan ................................... (22,500) (30,000)
Repayment of capital lease obligations ................................................ (528) (491)
Proceeds from exercise of stock options ............................................... 4 533
Distributions to minority interests ................................................... (3,874) (4,486)
--------- ----------
Net cash used in financing activities ............................. (26,898) (34,444)
--------- ----------
Effect of exchange rate changes on cash and cash equivalents ................................ 383 (21)
--------- ----------
Net (decrease) increase in cash and cash equivalents .............. (1,683) 64,450
Cash and cash equivalents at beginning of period ............................................ 350,262 349,250
--------- ----------
Cash and cash equivalents at end of period .................................................. $ 348,579 $ 413,700
--------- ----------
Supplemental disclosures of cash flow information:
Cash paid for income taxes ............................................................ $ 915 $ 4,850
Cash paid for interest ................................................................ 1,589 2,585
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) Organization and Basis of Presentation
Gemstar-TV Guide International, Inc., a Delaware corporation ("Gemstar" or
together with its consolidated subsidiaries, the "Company"), is a leading media
and technology company that develops, licenses, markets and distributes
technologies, products and services targeted at the television guidance and home
entertainment needs of consumers worldwide.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the accounting policies described in the
Company's 2002 Annual Report on Form 10-K and the interim period reporting
requirements of Form 10-Q. Accordingly, certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
The accompanying interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position of the Company and its results of operations and cash flows for such
periods. Operating results for any interim period are not necessarily indicative
of the results that may be expected for the full year.
Certain financial statement items for prior periods have been reclassified
to conform with the 2003 presentation.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"), which is effective for revenue arrangements entered
into in fiscal periods after June 15, 2003. This abstract addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. Separate contracts with the same entity or related
parties that are entered into at or near the same time are presumed to have been
negotiated as a package and should, therefore, be evaluated as a single
arrangement in considering whether there are one or more units of accounting.
That presumption can be overcome if there is sufficient evidence to the
contrary. This issue also addresses how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The Company does not expect that the adoption of EITF 00-21 will have a material
impact on its financial position or results of operations.
In November 2002, the EITF reached a consensus on EITF Issue No. 02-16,
Accounting for Consideration Received from a Vendor by a Customer ("EITF
02-16"). EITF 02-16 provides guidance as to how customers should account for
cash consideration received from a vendor. EITF 02-16 presumes that cash
received from a vendor represents a reduction of the prices of the vendor's
products or services, unless the cash received represents a payment for assets
or services provided to the vendor or a reimbursement of costs incurred by the
customer to sell the vendor's products. The provisions of EITF 02-16 apply to
all agreements entered into or modified after December 31, 2002. The Company
does not expect the provisions of EITF 02-16 to have a material impact on the
Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46"), which requires variable interest entities (commonly referred to as special
purpose entities) to be consolidated by the primary beneficiary of the entity if
certain criteria are met. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 will become effective for the Company during the third quarter of
2003. The Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial position.
-5-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(2) Acquisitions and Sales
TV Guide - Purchase Reserves
For the three months ended March 31, 2003, approximately $500,000 ($277,000
in third-party contract termination costs and $223,000 in separation costs) has
been charged against the reserve for third-party contract termination and
separation costs included in the purchase price allocation from the acquisition
of TV Guide, Inc. ("TV Guide") in 2000. The reserve had an outstanding balance
of $2.0 million at December 31, 2002. The Company expects that $1.4 million of
the remaining reserve for third-party contract termination and separation costs
will be expended during 2003 and approximately $100,000 in 2004.
WGN Superstation Transaction
In April 2001, the Company sold the business that distributes the WGN
Superstation signal for $106 million in cash payable over six years. Concurrent
with this transaction, the Company received a $100.0 million advertising
commitment for the magazine and its other platforms from the acquirer pursuant
to which the Company will be required to run advertising until 2007. The WGN
Superstation signal was originally acquired in July 2000, as a part of the
acquisition of TV Guide. Because the April 2001 transaction included the sale of
assets and an advertising revenue commitment, this multiple-element transaction
was covered by both Accounting Principles Board ("APB") Opinion No. 16,
"Business Combination", and the Company's revenue recognition policy on
multiple-element arrangements. As a result, $9.8 million was ascribed to the
magazine advertising element and will be recognized as the advertising is run.
The remainder of the value ($75.5 million on a discounted basis) was ascribed to
the book value of the assets sold and $14.7 million will be recognized as
interest income over the six-year contract term. During the three months ended
March 31, 2003 and 2002, the Company recorded interest income of $865,000 and
$1.2 million, respectively. At March 31, 2003, the Company had a receivable
related to this transaction of $52.3 million. The Company did not run
advertising or recognize advertising revenue in connection with this commitment
during the three months ended March 31, 2003. In the comparable period of 2002,
the Company recognized approximately $411,000 of advertising revenue under the
advertising commitment.
(3) Credit Arrangements
The Company's wholly owned subsidiary, TV Guide, has a $300 million
six-year revolving credit facility and a $300 million four-year amortizing term
loan. The credit facility and term loan expire in February 2005. Borrowings
under the credit facility and term loan bear interest (2.31% at March 31, 2003)
either at the banks' prime rate or LIBOR, both plus a margin based on a sliding
scale tied to TV Guide's leverage ratio, as defined in the loan documents. The
credit facility and term loan are guaranteed by certain subsidiaries of TV Guide
and the stock of certain TV Guide subsidiaries is pledged as collateral. The
credit facility and term loan restrict TV Guide's ability to pay dividends. This
restriction does not apply to the Company's ability to pay dividends. In
addition, TV Guide is required to maintain certain financial covenants. As of
March 31, 2003, TV Guide was in compliance with these covenants. The credit
facility and term loan also restrict the transfer of assets by TV Guide to the
Company. As of March 31, 2003, TV Guide had available borrowing capacity under
the six-year revolving credit facility of $160.6 million.
Principal payments of $67.5 million in the remainder of 2003 and $23.0
million in 2004 are scheduled for payment under the $300 million amortizing term
loan. Outstanding borrowings at March 31, 2003 and December 31, 2002 were $138.4
million for both periods under the revolving credit facility and $90.5 million
and $113.0 million, respectively, under the term loan. At March 31, 2003, the
Company had an outstanding letter of credit issued under the revolving credit
facility for $1.0 million. The Company has determined that TV Guide may be
unable to maintain compliance with a financial covenant in its term loan
agreement that requires it to maintain a minimum ratio of EBITDA to fixed
charges, as defined in the agreement, during the latter part of 2003. While the
Company believes that its current financial liquidity position gives it adequate
flexibility to refinance the term loan or seek other alternatives before the
financial covenant requirements are violated, there can be no assurance that any
measures taken to maintain compliance or to mitigate the effects of any
noncompliance will be successful.
-6-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(4) Legal Proceedings
SEC Matters
On May 5, 2003, the United States Securities and Exchange Commission
("SEC") filed a proceeding captioned In the Matter of an Application for a
Temporary Order Pursuant to Section 1103 of the Sarbanes-Oxley Act in the United
States District Court for the Central District of California, seeking an order
requiring the Company to place certain payments to be made by the Company to
former executives Henry C. Yuen and Elsie Ma Leung in an escrow account for a
45-day period. On May 9, 2003, the district court held a hearing with respect to
this application, and another application discussed below, seeking, among other
things, to prevent temporarily the payment to Dr. Yuen and Ms. Leung of
approximately $37 million being held by the Company in segregated accounts that
were established in connection with the Company's November 2002 management and
corporate governance restructuring. At the conclusion of the hearing, the court
ordered, among other things, that the Company continue to retain the funds in
those segregated accounts for a period of 45 days under Section 1103 of the
Sarbanes-Oxley Act.
Securities and Derivative Litigation
In 2002, the Company and certain of its executive officers and directors
were served with a number of complaints, filed in the United States District
Court for the Central District of California, alleging violations of the
Securities Exchange Act of 1934 (the "1934 Act") and the Securities Act of 1933
(the "1933 Act"). The alleged claims were brought under Sections 10(b) and 20(a)
of the 1934 Act, Section 11 of the 1933 Act and SEC Rule 10b-5. The suits allege
that the defendants intentionally failed to properly account for revenue accrued
from Scientific-Atlanta, Inc. ("SA"), failed to properly account for a
non-monetary transaction, pursuant to which intellectual property rights were
obtained, in exchange for cash and advertising credits; and failed to properly
record the fair value of technology investments and marketable securities
acquired in connection with the Company's acquisition of TV Guide. Plaintiffs
allege that this had the effect of materially overstating the Company's reported
financial results. The Court appointed the Teachers Retirement System of
Louisiana and the General Retirement System of the City of Detroit as co-lead
plaintiffs, and appointed Bernstein, Litowitz, Berger & Grossman, L.L.P., as
lead plaintiffs' counsel. The Georgica Advisors plaintiff group filed a petition
with the United States Court of Appeals for the Ninth Circuit seeking to reverse
the lead plaintiff determination. The issue is now before the Ninth Circuit. The
current co-lead plaintiffs have filed an amended, consolidated complaint naming
the Company, Dr. Yuen and Ms. Leung as defendants. The consolidated
complaint alleges essentially the same claims described above. On May 2, 2003,
the Company filed a motion to dismiss the consolidated complaint.
In April and May 2002, the Company, along with its directors and several of
its executive officers, were sued in four purported shareholder derivative
actions, one of which was filed in the Court of Chancery of the State of
Delaware, County of New Castle. These purported derivative lawsuits allege
various breaches of fiduciary duty and violations of the California Corporations
Code based upon the same general set of alleged facts and circumstances as the
federal shareholder suits. On May 14, 2003, plaintiff's counsel in the Delaware
derivative action announced that the plaintiff would seek to dismiss the
complaint without prejudice and requested that the parties so stipulate.
On October 31, 2002, the Company was served with a purported shareholder
derivative action in the United States District Court for the Central District
of California, based upon the same general set of alleged facts and
circumstances. Pursuant to the parties' stipulation and court order, no response
is due to the federal derivative complaint until 30 days after a ruling on any
motion to dismiss in the federal shareholder class action described above. On
April 30, 2003, the plaintiff filed an ex parte application to (i) lift the stay
in this matter for the limited purpose of petitioning the court to prevent
certain payments from being made by the Company to Dr. Yuen and Ms. Leung and
(ii) prevent the Company from making any such payments. The payments at issue
are the same as those discussed above in connection with the SEC's action. On
May 9, 2003, the district court held a consolidated hearing on this matter and
the SEC's action, the result of which is discussed above.
In January 2003, the Company was served with a complaint brought by the
Investment Division of the State of New Jersey in California Superior Court
against the Company, Dr. Yuen and Ms. Leung, alleging violations of federal
securities laws, state corporations laws including California Business and
Professions Code sections 17200 et seq, and common law torts. On May 9, 2003,
the plaintiff filed an amended complaint against the Company, Dr. Yuen and Ms.
Leung. The amended complaint no longer alleges violations of Federal securities
laws. The subject matter of the amended complaint includes the transactions at
issue in the Company's other shareholder and derivative litigation. In addition,
the amended complaint includes allegations related to the Company's accounting
for a series of additional transactions and investments, including: AOL/Time
Warner; a cable set-top box manufacturer; a consumer electronics manufacturer;
and certain transactions and investments in connection with the Company's merger
with TV Guide, among others. The Company will file a response to this amended
-7-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(4) Legal Proceedings
complaint, and, by order of the Court, any hearing on that response is to be
scheduled for no later than June 16, 2003.
The Company intends to defend all of its pending shareholder and derivative
litigation vigorously. Because of the preliminary nature of all these
proceedings and the uncertainty of litigation generally, the Company is unable
to predict at this time the likely outcome of the litigation or estimate its
liability, if any, with regard to these cases. However, the Company may be
required to pay judgments or settlements and incur expenses in these matters in
aggregate amounts that could have a material adverse effect on its financial
position or results of operations.
Patent and Antitrust Litigation
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. On January 12, 2001, Pioneer Digital Technologies filed its first amended
complaint which claims, among other matters, that the Company and certain of its
subsidiaries have violated state antitrust and unfair competition laws. Pioneer
Digital Technologies is seeking damages and injunctive relief against the
Company. The parties are in pretrial proceedings. On April 23, 2003, the Court
ordered that the trial date in this matter be continued from September 8, 2003
until May 3, 2004.
On November 2, 2001, Thomson multimedia, Inc. ("Thomson") sought leave to
add the Company and certain subsidiaries into a case captioned Pegasus
Development Corporation and Personalized Media Communications, L.L.C. v.
DirecTV, Inc., Hughes Electronics Corporation, Thomson Consumer Electronics,
Inc. and Philips Electronics North America Corporation; Thomson multimedia, Inc.
v. Pegasus Development Corporation, Personalized Media Communications, L.L.C.,
TVG-PMC, Inc., StarSight Telecast, Inc., and Gemstar-TV Guide International,
Inc., United States District Court for the District of Delaware, Case No.
00-1020 (GMS). At that time, Thomson asserted a declaratory judgment claim
against the Gemstar parties seeking a declaration of noninfringement and
invalidity of certain patents as to which the Company is a licensee. In an
amended complaint, Thomson also added a claim for antitrust violations under
federal and state law. On April 22, 2002, Thomson also filed a tag-along notice
with the MDL Panel requesting that this entire action be transferred to Georgia
for coordinated pretrial proceedings with the MDL proceedings discussed above.
On June 3, 2002, the MDL Panel issued a Conditional Transfer Order and
Simultaneous Separation and Remand of Certain Claims conditionally transferring
Thomson's antitrust claims to Georgia, but separating and remanding the balance
of the claims in this case to Delaware. In response, Thomson filed a motion with
the MDL Panel to transfer the entire case to Georgia. On October 16, 2002, the
MDL Panel issued an Order of Transfer and Simultaneous Separation and Remand of
Certain Claims in which it denied Thomson's motion to transfer the entire case
to Georgia. In so ruling, the MDL Panel adopted its decision in the June 3, 2002
Conditional Transfer Order and transferred Thomson's antitrust claims to
Georgia, but separated and remanded the balance of the claims in this case to
Delaware. On November 21, 2002, the Company filed its answer and asserted causes
of action against PMC for declaratory judgment and breach of contract. On May
14, 2003, the Court ordered that all proceedings in this case be stayed pending
the re-examination by the United States Patent and Trademark Office of certain
of the patents at issue.
Other Litigation
On September 25, 2002, the Company notified DIVA Systems Corporation
("DIVA") that it would not proceed with the purchase of DIVA's assets under an
Asset Purchase Agreement dated May 22, 2002 due to the threat of litigation by
SA. In response, on September 30, 2002, DIVA filed an adversary complaint
against the Company for breach of contract and other claims purportedly based
upon the Company's decision to terminate the Asset Purchase Agreement. On April
3, 2003, the parties signed a confidential agreement to resolve this matter in
its entirety. The terms of any settlement of this matter are subject to
Bankruptcy Court approval. Assuming such approval is obtained, the Company
expects to pay DIVA $39.5 million some time prior to September 30, 2003. The
Company plans to make this payment from its cash balances. The Company accrued
as a current liability at December 31, 2002 an amount sufficient to cover this
settlement.
On February 28, 2003, the Company received a letter from a senior executive
of one of its subsidiaries asserting a variety of claims relating generally to
the executive's acquisition of the Company's stock in connection with the
Company's acquisition of that subsidiary. On May 5, 2003, the executive filed a
lawsuit captioned Ms. Worsley, et al. v. Gemstar-TV Guide International, Inc.,
Dr. Yuen and Ms. Leung, Court of Chancery of the State of Delaware, County of
New Castle, Case No. 20290NC. The complaint alleges violations of the securities
laws, breach of contract and fraud and deceit, among other causes of action. The
relief sought in the complaint includes the imposition of a constructive trust
over certain securities and monetary damages, among other relief. The Company
intends to defend this action vigorously.
In addition to the items listed above, the Company is party to various
legal actions, claims and proceedings as set forth in its Form 10-K for the year
ended December 31, 2002 and other actions, claims and proceedings incidental to
its business. Litigation is uncertain, and the outcome of individual cases is
not predictable with any assurance. The Company has established loss provisions
for matters in which losses are probable and can be reasonably estimated. Some
of the matters pending against the Company involve potential compensatory,
punitive or treble damage claims, or sanctions, that if granted, could require
the Company to pay damages or make other expenditures in amounts that could have
a material adverse effect on the Company's financial position or results of
operations. At this time, except as expressly noted herein, the Company has not
reached a determination that any of the matters listed above or the Company's
other litigation are expected to result in liabilities that will have a material
adverse effect on the Company's financial position or results of operations
after taking into account the loss provisions that have been established as of
the date hereof.
-8-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(5) Related Party Transactions and Other Significant Relationships
As of March 31, 2003, The News Corporation Limited ("News Corporation")
beneficially owned approximately 43% of the Company's outstanding common stock.
The Company charged entities controlled by News Corporation $5.0 million and
$4.6 million for advertising and other services during the three months ended
March 31, 2003 and 2002, respectively. During those same periods, the Company
acquired programming from News Corporation-controlled entities of $765,000 and
$1.7 million, respectively. The Company also has the right to transmit
interactive program guide ("IPG") data in the vertical blanking interval of each
television broadcast station owned and operated by an affiliate of News
Corporation. In exchange for that right, the affiliate's stations are entitled
to a preferred position on the IPG in their designated market areas. As of March
31, 2003 and December 31, 2002, the Company had receivables due from News
Corporation-controlled entities totaling $3.2 million and $4.0 million,
respectively, and payables due to News Corporation-controlled entities totaling
$198,000 and $249,000, respectively. The Company reimburses News Corporation for
facilities and other general and administrative costs incurred on the Company's
behalf. Expenses associated with these costs approximated $966,000 and $1.1
million for the three months ended March 31, 2003 and 2002, respectively. News
Corporation also provides the Company with the services of the Company's acting
chief financial officer. Expenses associated with these services approximated
$200,000 for the three months ended March 31, 2003. In addition, the Company
purchases paper through a paper procurement arrangement with News Corporation at
negotiated prices with paper suppliers based on the combined paper requirements
of the two organizations. During the three months ended March 31, 2003 and 2002,
the Company also purchased catalog inventory and eBook content from News
Corporation-controlled entities totaling $61,000 and $39,000, respectively.
The Company has included in the amounts discussed above transactions with
News Corporation and all known entities in which News Corporation has an
interest greater than 50%. In addition, the Company has transactions with
entities in which News Corporation owns, directly or indirectly, 50% or less.
The Company, through its wholly owned subsidiary, TV Guide On Screen, Inc.
(formerly VideoGuide, Inc.) leases 18,887 square feet of office space from CMT
Partners, LP. The two sons of Douglas Macrae, an executive officer and member of
the Board of Directors of the Company, through the 1991 DBM Descendants Trust
("DBM"), own a 45% interest in CMT Partners, a privately held real estate
partnership. The remaining term of the current lease between the Company and CMT
Partners is one year with a renewal option at the expiration of the term. Rent
expense recognized under this lease for the three months ended March 31, 2003
and 2002 was $104,000 and $125,000, respectively. DBM receives distributions
from CMT Partners, which include profits from the lease arrangement with the
Company.
The Company has multiple transactions with Thomson, which include Thomson's
licensing of the Company's VCR Plus+ technology and GUIDE Plus+ IPG. In
connection with the IPG license, Thomson agreed to certain advertising
commitments on the Company's platforms, primarily the IPG platforms, and to
certain marketing and promotion commitments on Thomson products carrying the
Company's technology (that were to be funded by the Company). In addition, the
two companies were joint venture partners in the sale of advertising on
electronic program guides on televisions. During the three months ended March
31, 2003 and 2002, revenues earned from the relationship with Thomson were $1.6
million and $6.6 million, respectively. In accordance with the Company's revenue
recognition policy, revenues for Thomson are recorded net of amounts paid to
Thomson for market development arrangements. As of March 31, 2003 and December
31, 2002, the Company had receivables due from Thomson of $7.3 million and $6.1
million, respectively, and payables due to Thomson totaling $7.5 million at both
dates.
The Company and Thomson are currently renegotiating certain aspects of
their existing IPG license agreement. Consistent with the Company's revenue
recognition accounting policy, the Company did not record revenue and
cooperative advertising expenses during the quarter ended March 31, 2003 while
the agreements were under renegotiation.
-9-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(6) Segment Information
Effective January 1, 2003, the Company restructured its businesses into
four groups which also represent its reportable business segments. Segments are
now organized along three industry lines in addition to a segment comprising
certain corporate functions and related expenses. The Publishing Segment
consists of the Company's print and electronic publishing units and websites
including TV Guide Magazine and Gemstar eBook brands, as well as TV Guide Online
and SkyMall catalog sales. The Publishing Segment also includes TV Guide Data
Solutions, a newly formed data collection and distribution business that gathers
program listings and channel lineups. The Cable and Satellite Segment offers
products and services to consumers and service providers in the cable and
satellite industry. The business units in this segment include TV Guide Channel,
TV Guide Interactive, TVG Network, Superstar/Netlink Group, UVTV, SpaceCom and
several other smaller related businesses. The Consumer Electronics Licensing
("CE Licensing") Segment is responsible for the licensing of the Company's
proprietary technologies and intellectual property to the consumer electronics
("CE") manufacturing industry and interactive television software providers, and
for the sale of advertising carried on the interactive program guides deployed
in CE devices. The CE Licensing Segment licenses video recording technology
currently marketed under the VCR Plus+ system brand in North America and under
other brands in Europe and Asia, and interactive program guides marketed under
the GUIDE Plus+ and new TV Guide On Screen brands in North America and under the
G-GUIDE brand in Asia. This segment also licenses intellectual property to
interactive television software providers and manufacturers of set-top boxes for
the digital satellite system ("DSS") industry, and to program listings providers
in the online, personal computer and other non-television businesses. In
addition, the CE Licensing Segment incurs costs associated with patent
prosecution and certain litigation. The Corporate Segment comprises various
centralized functions, including corporate management, corporate legal,
corporate finance and other functions that are managed centrally, and related
costs such as certain litigation and insurance costs.
The Company's reportable industry segments are strategic business units
that offer distinct products and services and compete in distinct industries.
The Company's chief operating decision maker uses adjusted EBITDA (operating
income before stock compensation expense, depreciation and amortization and
impairment of intangible assets) to evaluate the performance of and allocate
resources to the industry segments. Balance sheets of the reportable segments
are not used by the chief operating decision maker to allocate resources or
assess performance of the businesses.
Previously, the Company had segmented its businesses by revenue type, which
required allocation of operating results for certain business units, principally
TV Guide Interactive, TVG Network and SkyMall, between two or more segments. By
contrast, the Company's new segments reflect full operating results of their
respective business units. This change is intended to provide greater business
unit accountability and improve the transparency of operating performance. The
Company's previous reportable segments were identified as Technology and
Licensing, Interactive Platform and Media and Services. Amounts for the three
months ended March 31, 2002 have been reclassified to conform to the 2003
presentation.
-10-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(6) Segment Information (continued)
Segment information for the three months ended March 31, 2003 and 2002 is
presented and reconciled to consolidated loss before income taxes and cumulative
effect of an accounting change as follows (in thousands):
Three Months Ended
March 31,
-------------------
2003 2002
-------- ---------
Publishing Segment:
Revenues ....................................................................... $108,987 $ 123,010
Operating Expenses(1) .......................................................... 97,119 104,867
-------- ---------
Adjusted EBITDA(2) ............................................................. $ 11,868 $ 18,143
-------- ---------
Cable and Satellite Segment:
Revenues ....................................................................... $ 85,033 $ 105,585
Operating Expenses(1) .......................................................... 51,982 63,390
-------- ---------
Adjusted EBITDA(2) ............................................................. $ 33,051 $ 42,195
-------- ---------
CE Licensing Segment:
Revenues ....................................................................... $ 33,863 $ 31,886
Operating Expenses(1) .......................................................... 22,216 21,080
-------- ---------
Adjusted EBITDA(2) ............................................................. $ 11,647 $ 10,806
-------- ---------
Corporate Segment:
Operating Expenses(1) .......................................................... $ 25,412 $ 17,860
-------- ---------
Adjusted EBITDA(2) ............................................................. $(25,412) $ (17,860)
-------- ---------
Consolidated:
Revenues ....................................................................... $227,883 $ 260,481
Operating Expenses(1) .......................................................... 196,729 207,197
-------- ---------
Adjusted EBITDA(2) ............................................................. $ 31,154 $ 53,284
Stock Compensation Expense ..................................................... 39,595 17,126
-------- ---------
EBITDA(3) ...................................................................... $ (8,441) $ 36,158
Depreciation and amortization .................................................. (65,662) (106,275)
Impairment of intangible assets ................................................ -- (11,038)
-------- ---------
Operating loss ................................................................. (74,103) (81,155)
Interest expense ............................................................... (1,953) (2,660)
Other income (expense), net .................................................... 748 (7,303)
-------- ---------
Loss before income taxes and cumulative effect of an accounting change ......... $(75,308) $ (91,118)
-------- ---------
- ---------
(1) Operating expenses means operating expenses, excluding stock compensation
expense, depreciation and amortization and impairment of intangible
assets.
-11-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(6) Segment Information (continued)
(2) Adjusted EBITDA is defined as operating (loss) income, excluding stock
compensation expense, depreciation and amortization and impairment of
intangible assets. Due to purchase accounting related to our mergers with
TV Guide on July 12, 2000 and SkyMall on July 18, 2001, the results of
operations reflect significant increases in amortization of finite-lived
intangible assets. Accordingly, our industry segments (Publishing, Cable
and Satellite and CE Licensing) are measured based on adjusted EBITDA. We
believe adjusted EBITDA to be relevant and useful information as adjusted
EBITDA is the primary measure used by our management to measure the
operating profits or losses of our business.
(3) EBITDA is defined as operating (loss) income, excluding depreciation and
amortization and impairment of intangible assets. EBITDA is presented
supplementally as we believe it is a standard measure commonly reported
and widely used by analysts, investors and others associated with our
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 accounting principles generally
accepted in the United States that are presented in the financial
statements included in this report. Additionally, our calculation of
EBITDA may be different than the calculation used by other companies and,
therefore, comparability may be affected.
(7) Income Taxes
The provision for income tax benefit as a percentage of loss before income
taxes and cumulative effect of an accounting change was 40% for the three months
ended March 31, 2003 compared to 48% for the same period in 2002. The overall
effective tax rate reported by the Company in any single period is impacted by,
among other things, the country in which earnings or losses arise, applicable
statutory tax rates and withholding tax requirements for particular countries,
the availability of net operating loss carry forwards and the availability of
tax credits for taxes paid in certain jurisdictions. Because of these factors,
it is reasonable that the Company's current and future tax expense as a
percentage of income before income taxes may vary from period to period.
(8) Stock-Based Employee Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123 ("Statement 148"). Statement 148 requires prominent
disclosures in annual and interim financial statements regarding the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company measures compensation expense for its
stock option awards under the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations. APB 25 requires
compensation expense to be recognized based on the excess, if any, of the quoted
market price of the stock at the date of the grant and the amount an employee
must pay to acquire the stock. Options awarded under the Company's stock option
plans are granted with an exercise price equal to the fair market value on the
date of the grant. Exceptions to the Company's stock option policy relate to (a)
a 1998 stock option grant to the Company's former chief executive officer that
specified a measurement date subsequent to the date of the award, and (b)
unvested stock options assumed by the Company in the TV Guide acquisition for
which a portion of the purchase price was assigned to unearned compensation.
Also see Note 9 and Note 11.
-12-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(8) Stock-Based Employee Compensation (continued)
The following table presents the effect on net loss and basic and diluted
net loss per common share had the Company adopted the fair value method of
accounting for stock-based compensation under Statement 123 (in thousands,
except per share data).
Three Months Ended
March 31,
--------------------
2003 2002
-------- ---------
Net loss, as reported ....................................................................... $(45,362) $(270,863)
Add: Stock-based employee compensation expense included in reported net loss, net of
related tax effects ........................................................................ 23,955 10,361
Deduct: Total stock-based employee compensation expense determined under fair value based
method for all awards, net of related tax effects .......................................... (3,943) (4,997)
-------- ---------
Pro forma net loss .......................................................................... $(25,350) $(265,499)
-------- ---------
Basic and diluted net loss per share:
As reported ............................................................................... $ (0.11) $ (0.65)
Pro forma ................................................................................. (0.06) (0.64)
The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option-pricing
model and is amortized over the vesting period of the underlying options.
Because additional options are expected to be granted each year, the above pro
forma disclosures may not be representative of pro forma effects on reported
results for future periods.
(9) Compensation Charge
Included in stock compensation expense for the three months ended March 31,
2003 is $33.7 million related to stock options held by the Company's former
chief executive officer and former chief financial officer. As described more
fully in Note 11, the Company terminated the former executives' employment for
cause on April 18, 2003. In 1998, the executives entered into employment
agreements that provided for accelerated vesting of options granted in the
period 1995 to 1998, as well as an extended post-employment exercise period to
the remaining term of the options. Prior to the 1998 agreements, such options
were only exercisable during the employment period with a limited
post-employment exercise period. Due to the extension of the post-employment
exercise period, a new measurement date occurred, at which time the intrinsic
value of the modification was determined to be $33.7 million. The intrinsic
value was computed as the difference between the exercise price per share and
the stock price per share on the new measurement date multiplied by the number
of options. Compensation expense is recognized only when the Company determines
that these executives will benefit from the extension of the post-employment
exercise period. As a result of the termination, the Company recognized a
pre-tax stock compensation charge of $33.7 million during the three months ended
March 31, 2003.
To the extent that other executives have had similar modifications to their
options, a potential future compensation charge may occur if the executives
benefit from the modification.
-13-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(10) Guarantees
The Company's obligations under its credit facility and term loan are
guaranteed by certain subsidiaries of TV Guide and the stock of TV Guide's
subsidiaries is pledged as collateral. At March 31, 2003, outstanding borrowings
under the credit facility and term loan were $138.4 million and $90.5 million,
respectively.
The Company is a party to a loan guarantee to assist a key printing
services supplier in obtaining a line of credit and term loans with a bank. The
loans permitted the printer to continue providing services to the Company. The
maximum exposure to the Company under this guarantee is $10.0 million.
The Company provides indemnification protection to certain of its licensees
under which the licensee is indemnified and held harmless from certain claims
arising out of the incorporation of the Company's products, services and/or
technologies into the licensee's products, provided the licensee meets the terms
and conditions of the agreement and/or additional performance or other
requirements for such indemnification. The Company's indemnification obligation
is typically limited to the cumulative amount paid to the Company by the
licensee under the license agreement; however, certain license agreements do not
specify a limit on amounts that may be payable under the indemnity arrangements.
The Company's SkyMall catalog subsidiary provides indemnification
protection to its airline and merchant partners. The indemnification
arrangements with airline partners generally provide that SkyMall will indemnify
the airline for, among other things, SkyMall's negligent acts or omissions, its
advertising and promotions and for intellectual property claims relating to
products offered in the catalog. The merchant agreements generally provide that
SkyMall will indemnify the merchant for claims relating to the activities or
operations of SkyMall. These indemnity arrangements with SkyMall's airlines and
merchants limit the circumstances under which indemnification is required, but
do not contain a limit on the amounts that may be payable under these
arrangements. To date, no material amounts have been paid by SkyMall under these
arrangements.
The Company also has agreements to indemnify a number of its former and
current officers and directors against losses incurred by them as a result of
their service as an officer and/or director of the Company. In particular, the
Company has certain agreements to indemnify and/or reimburse individuals for
legal fees and expenses incurred in connection with certain litigation and
investigatory proceedings. Among the individuals with whom the Company has such
agreements are Henry C. Yuen, Elsie Ma Leung, Peter C. Boylan and Jonathan
Orlick. The litigation and investigatory proceedings to which these agreements
relate include, but are not limited to, the investigation presently being
conducted by the SEC and the shareholder and derivative litigation to which the
Company is a party. The Company incurred approximately $3 million in legal
expenses in connection with these agreements in the three months ended March 31,
2003. Such expenses under indemnity arrangements were not material in the
comparable period of 2002. The Company maintains director and officer liability
insurance with respect to liabilities arising out of certain matters, including
matters arising under securities laws. This insurance is subject to limitations,
conditions and deductibles set forth in the insurance policy.
-14-
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Continued)
(11) Events Subsequent to Balance Sheet Date
Employment Terminations
On April 18, 2003, the Company terminated the employment of Dr. Yuen and
Ms. Leung for cause in accordance with the terms of each of their employment
agreements. Dr. Yuen and Ms. Leung have indicated that they intend to dispute
their terminations under the terms of their respective employment agreements. If
Dr. Yuen and/or Ms. Leung dispute their termination and an arbitration panel
concurs that each of them was properly terminated, the Company is not obligated
to make any awards of stock options, restricted stock or stock units
contemplated by the employment and termination agreements. The cash payments and
accelerated vesting of stock options set forth in their termination agreements
are not directly affected by the Company's determination to terminate their
employment under their employment agreements.
Pursuant to the terms of the Patent Rights Agreement entered into in
connection with the Company's November 2002 management and corporate governance
restructuring, the Company has the option to acquire certain of Dr. Yuen's
inventions during the period commencing on April 18, 2003 and ending on November
7, 2009. The Company agreed to grant Dr. Yuen a license to use any acquired
inventions outside of certain specified fields of use and Dr. Yuen agreed not to
compete with the Company within the fields of IPGs and interactive televisions.
In addition to a standard purchase amount for each invention acquired by the
Company, Dr. Yuen will receive (i) annual compensation of $250,000, (ii) an
acquisition fee of $250,000 for each acquired invention, (iii) a 2% royalty on
net sales generated during the term of the patent rights agreement from the sale
of specified products and services with a guaranteed minimum of $1.25 million
and a maximum of $2.75 million annually, and (iv) 200,000 stock options per year
at the market price on the date of grant during the term of this agreement.
Nasdaq Delisting Proceeding
On August 19, 2002, the Company received a Nasdaq Staff Determination that
its securities were subject to delisting from the Nasdaq Stock Market because
the Company failed to file its Form 10-Q for the quarter ended June 30, 2002 on
or before August 14, 2002. On November 8, 2002, the Nasdaq Listing
Qualifications Panel ("Nasdaq Panel") granted the Company's request for an
exception to continue its listing on the Nasdaq Stock Market subject to
satisfying certain conditions. On April 7, 2003, the Nasdaq Panel notified the
Company that the Company's securities would continue to be listed on the Nasdaq
Stock Market. However, to remain in compliance with Nasdaq's order, the Company
must solicit proxies and hold an annual meeting of stockholders on or before
June 30, 2003. The Company mailed proxy materials on or about April 28, 2003 and
has scheduled an annual meeting for May 20, 2003.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and
results of operations are based on our unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our
financial statements requires management to make estimates and assumptions in
applying certain critical accounting policies. Certain accounting estimates are
particularly sensitive because of their significance to our unaudited condensed
consolidated financial statements and because of the possibility that future
events affecting the estimates could differ markedly from our current
expectations. We believe that the following are some of the more critical
judgment areas in the application of our accounting policies that affect our
financial statements.
Revenue Recognition
General
We follow the provisions of Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2") and Staff Accounting Bulletin 101, Revenue Recognition
in Financial Statements ("SAB 101"), for revenue recognition. Under SOP 97-2 and
SAB 101, four conditions must be met before revenue can be recognized: (i) there
is persuasive evidence that an arrangement exists, (ii) delivery has occurred or
service has been rendered, (iii) the price is fixed or determinable and (iv)
collection is reasonably assured.
We have entered into various arrangements that contain multiple elements,
including licensing fees and advertising on various platforms, which may be in
more than one of our segments ("multiple-element arrangements"). For example, a
customer may license certain of our technology and purchase an advertising
package from us to provide the customer with print advertising in TV Guide
Magazine, an online platform or on the IPG platform. Multiple-element
arrangements may include situations where we are both a vendor and a cooperative
advertiser. See "Multiple-Element Arrangements" below.
License Fees
We license our proprietary technologies to consumer electronics
manufacturers and to service providers, including multiple system operators
("MSOs") and other owners and operators of cable television systems, telephone
networks, Internet service providers, Internet websites, direct-to-home
broadcast satellite providers, wireless systems and other multi-channel video
programming distributors. It is our normal practice to enter into written
agreements with our customers. We generally recognize such license fees based on
a per unit shipped model (with consumer electronics manufacturers) or a per
subscriber model (with service providers). Our revenues from per unit license
fees are recognized in the period the manufacturers report the number of units
shipped. Revenues from per subscriber fees are recognized in the month services
are provided by a licensee, as reported to us by the licensee. See
"Multiple-Element Arrangements" below.
Revenues from annual and other license fees generally are recognized based
on the specific terms of the license agreements. For instance, we have entered
into certain arrangements under which substantial flat fees were paid upfront in
addition to ongoing per-unit license fees. In such cases, the pre-paid fees are
deferred and recognized as revenue on a straight line basis over the term of the
agreement. In certain cases, we will license our technology for an unlimited
number of units over a specified period of time and for which we have continuing
obligations. We record the fees associated with these arrangements on a straight
line basis over the specified term. In addition, we have licensing arrangements
with MSOs under which we share a portion of the interactive platform advertising
revenue that we generate through the MSO. In some cases, we guarantee that a
substantial portion of the MSO's license fees paid to us will be reimbursed to
the MSO through our ad-sharing obligation. To the extent the ad-sharing fees are
not sufficient to meet these guarantees, we are obligated to purchase
advertising on the MSO's platform. Because the license fee is not fixed or
determinable until resolution of the sharing or advertising buyback, which is
typically settled quarterly, the advertising buyback guarantees and advertising
sharing are netted against the license fees so that only a net license fee
amount is recognized.
From time to time, the license agreement between us and a licensee may
expire. While a new license agreement is being negotiated, the licensee may
continue to ship the same units or the same services may continue to be deployed
containing our patented or proprietary technologies and the licensee continues
to report units shipped or subscriber information on a periodic basis. License
and subscriber fees may continue to be received at the old contract rates and on
a timely basis. In such cases, we continue to recognize license and subscriber
fee revenue. However, revenue is not recognized when collection is not
reasonably assured and in no case when payment is not received for greater than
90 days (which is the longest standard customer payment term related to certain
MSO contracts).
Multiple-Element Arrangements
In accounting for multiple-element arrangements, one of the key judgments
to be made is the accounting value that is attributable to the different
contractual elements. The appropriate allocation of value not only impacts which
segment is credited with the revenue, it also impacts the amount and timing of
revenue recorded in the consolidated statement of operations during a given
period due to the differing methods of recognizing revenue by each of the
segments, as discussed above.
Revenue is allocated to each element based on the accounting determination
of the relative fair value of that element to the aggregate fair value of all
elements. The fair values must be reliable, verifiable and objectively
determinable. When available, such determination is based principally on the
pricing of similar cash arrangements
-16-
with unrelated parties that are not part of a multiple-element arrangement. When
sufficient evidence of the fair values of the individual elements does not
exist, revenue is not allocated among them until that evidence exists. Instead,
the revenue is recognized as earned using revenue recognition principles
applicable to the entire arrangement as if it were a single-element arrangement.
At this time, in all instances where IPG advertising is part of a
multiple-element transaction, no revenue is allocated to IPG advertising for
accounting purposes, and all revenue is allocated to other elements of the
transaction. For accounting purposes, we expect to record IPG advertising
associated with multiple-element arrangements in this manner until such time as
we conclude that we can determine the fair value of IPG advertising in a
reliable, verifiable and objective manner.
Purchase Accounting
The Company's acquisitions of TV Guide and SkyMall have been accounted for
under the purchase method of accounting for business combinations. The judgments
made in determining the estimated fair value and expected useful lives assigned
to each class of assets and liabilities acquired can significantly impact net
income. For example, different classes of assets will have useful lives that
differ. Consequently, to the extent a longer-lived asset is ascribed greater
value under the purchase method than a shorter-lived asset, there may be less
amortization expense recorded in a given period.
Determining the fair value of certain assets and liabilities acquired is
judgmental in nature and often involves the use of significant estimates and
assumptions. As permitted by the accounting rules, we used the one-year period
following the consummation of the acquisitions to obtain the information
necessary to finalize estimates of the fair value of assets and liabilities
acquired. One of the areas that requires more judgment in determining fair
values and useful lives is intangible assets. To assist in this process, we
obtained appraisals from independent valuation firms for certain significant
tangible and intangible assets and liabilities.
Impairment of Long-Lived Assets, Long-Lived Assets to Be Disposed Of and
Intangible Assets
We review our long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The value of our intangible
assets, including goodwill, is exposed to future adverse changes if we
experience declines in operating results or experience significant negative
industry or economic trends or if future performance is below historical trends.
We periodically review intangible assets and goodwill for impairment using the
guidance of applicable accounting literature. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
the undiscounted future operating 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
exceeds 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.
We have a significant amount of property and equipment and intangible
assets. The determination as to whether events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable involves
management's judgment. In addition, should we conclude that recoverability of an
asset is in question, the estimate of undiscounted future operating cash flows
is used to determine whether an asset is recoverable and, if not, the final
determination of the fair value of the asset is also based on the judgment of
management. These judgments can be impacted by a variety of underlying
assumptions, such as the general business climate, effectiveness of competition
and supply and cost of resources. Accordingly, actual results can differ
significantly from the assumptions made by management in making its estimates.
Future changes in management's estimates could result in indicators of
impairment and actual impairment charges where none exist as of the date of this
report.
New accounting standards effective January 1, 2002, eliminate the
impairment recoverability tests for certain other intangible assets with
indefinite lives and require that such assets be valued at the lower of their
carrying value or fair value. Goodwill is no longer amortized but remains
subject to an annual impairment test performed at the reporting unit level. Fair
value is determined primarily using the estimated future cash flows associated
with the asset under review, discounted at a rate commensurate with the risk
involved. Changes in estimates of future cash flows could result in a write-down
of the asset in a future period. Absent any interim evidence of impairments, we
will perform our annual impairment test of goodwill and other indefinite lived
intangibles for all reporting units on October 31 of each year.
-17-
Income Taxes
We account for income taxes under the 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
carry-forwards. 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. We record a valuation
allowance, if necessary, to reduce deferred tax assets to an amount management
believes is more likely than not to be realized.
We have income both from foreign and domestic sources. In the preparation
of our financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate, including estimating both our
actual current tax exposure and assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. Assessment of our
actual current tax exposure includes assessing tax strategies, the status of tax
audits and open audit periods with the taxing authorities. To the extent that we
have deferred tax assets, we must assess the likelihood that our deferred tax
assets will be recovered from taxable temporary differences, tax strategies or
future taxable income and to the extent that we believe that recovery is not
likely, we must establish a valuation allowance. As of March 31, 2003, we have
established a valuation allowance of $28.0 million against our deferred tax
assets. In the future, we may adjust our estimates of the amount of valuation
allowance needed and such adjustment would impact our provision for income taxes
in the period of such change.
Legal and Other Loss Contingencies
A significant amount of management estimation is required in determining
when, or if, an accrual should be recorded for a contingent matter and the
amount of such accrual, if any. Due to the uncertainty of determining the
likelihood of a future event occurring and the potential financial statement
impact of such an event, it is possible that upon further development or
resolution of a contingent matter, a charge could be recorded in a future period
that would be material to the Company's consolidated results of operations and
financial position.
Allowance for Doubtful Accounts
We have significant amounts due to us from our customers. We continuously
evaluate our outstanding accounts receivable for collectibility. This evaluation
involves management's judgment in assessing the aging of the amounts due to us
and in reviewing the credit-worthiness of each customer. Should a customer's
financial condition deteriorate in a manner that could decrease the customer's
ability to pay amounts due to us, we might be required to provide additional
allowance for doubtful accounts, which would reduce our earnings.
-18-
The following table sets forth certain unaudited financial information for
the Company for the three months ended March 31, 2003 and 2002 (in thousands):
Three Months Ended
March 31,
-------------------
2003 2002
-------- ---------
Statement of Operations Data:
Revenues ...................................................... $227,883 $260,481
Operating expenses:
Operating expenses, exclusive of expenses shown below ... 196,729 207,197
Stock compensation ...................................... 39,595 17,126
Depreciation and amortization ........................... 65,662 106,275
Impairment of intangible assets ......................... -- 11,038
-------- --------
301,986 341,636
-------- --------
Operating loss ................................................ (74,103) (81,155)
Interest expense ........................................................... (1,953) (2,660)
Other income (expense), net ................................................ 748 (7,303)
-------- ---------
Loss before income taxes and cumulative effect of an accounting change ..... (75,308) (91,118)
Income tax benefit ......................................................... (29,946) (43,480)
-------- ---------
Loss before cumulative effect of an accounting change ...................... (45,362) (47,638)
Cumulative effect of an accounting change, net of tax ...................... -- (223,225)
-------- ---------
Net loss ................................................................... $(45,362) $(270,863)
-------- ---------
Other Financial Data:
Net cash provided by (used in):
Operating activities ........................................... $ 16,213 $ 81,130
Investing activities ........................................... 8,619 17,785
Financing activities ........................................... (26,898) (34,444)
-19-
Consolidated Results of Operations
Revenues for the three months ended March 31, 2003 were $227.9 million, a
decrease of $32.6 million or 13%, compared to the same period in 2002. The
decrease in revenues was primarily attributable to a $12.9 million decrease in
TV Guide Magazine's newsstand and subscription revenues, an $18.8 million
decrease in Superstar/Netlink C-band subscriber revenues, a $1.1 million
decrease in IPG advertising revenue and a $5.0 million decrease in revenues from
Thomson, which has ceased paying while aspects of potential new digital
satellite system ("DSS") and IPG agreements are being discussed. This decrease
was partially offset by a $4.9 million increase in VCR Plus+ revenues and $4.5
million in DSS revenues associated with a payment from a licensee for past
periods.
For the three months ended March 31, 2003, operating expenses were $196.7
million, a decrease of $10.5 million, or 5%, compared to the same period in the
prior year. The decrease was primary attributable to reduced programming costs
for Superstar/Netlink and production costs at TV Guide Magazine, which were
partially offset by a significant increase in legal and other corporate costs.
Included in stock compensation expense for the three months ended March 31,
2003 is $33.7 million related to stock options held by the Company's former
chief executive officer and former chief financial officer. As described more
fully in Note 11 to the Condensed Consolidated Financial Statements-Unaudited,
the Company terminated the former executives' employment for cause on April 18,
2003. In 1998, the executives entered into employment agreements that provided
for accelerated vesting of options granted in the period 1995 to 1998, as well
as an extended post-employment exercise period to the remaining term of the
options. Prior to the 1998 agreements, such options were only exercisable during
the employment period with a limited post-employment exercise period. Due to the
extension of the post-employment exercise period, a new measurement date
occurred, at which time the intrinsic value of the modification was determined
to be $33.7 million. The intrinsic value was computed as the difference between
the exercise price per share and the stock price per share on the new
measurement date multiplied by the number of options. Compensation expense is
recognized only when the Company determines that these executives will benefit
from the extension of the post-employment exercise period. As a result of the
termination, the Company recognized a pre-tax stock compensation charge of $33.7
million during the three months ended March 31, 2003.
To the extent that other executives have had similar modifications to their
options, a potential future compensation charge may occur if the executives
benefit from the modification.
Stock compensation expense also includes the amortization of the portion of
the purchase price of acquired businesses assigned to unearned compensation for
unvested stock options assumed by the Company. The unearned compensation is
being amortized over the remaining vesting period of the options using an
accelerated method. During the three months ended March 31, 2003, stock
compensation expense included the amortization of unearned compensation arising
from the issuance of restricted stock in connection with the 2002 management
restructuring. During the first quarter of 2003, excluding the $33.7 million
charge described above, stock compensation expense was $5.9 million as compared
with $17.1 million in the first three months of 2002. During the first quarter
of 2002, stock compensation expense included $12.9 million of accelerated
unearned compensation resulting from an executive who separated from the Company
in 2002, and $200,000 arising from the issuance of options to the Company's
former chief executive officer in 1998. Stock compensation expense for the
quarter ended March 31, 2003 includes $4.8 million relating to restricted stock
that was to be issued to two former executives in connection with the management
restructuring in the fourth quarter of 2002. This amount, along with $2.9
million recognized in 2002, will be reversed in the second quarter of 2003,
since these executives were terminated in April 2003 and the restricted stock
will not be issued.
Depreciation and amortization during the three months ended March 31, 2003
was $65.7 million, a decrease of $40.6 million, or 38%, compared to the same
period in 2002. The decrease in depreciation and amortization for the
three-month period was primarily a result of impairment charges recorded during
2002 on certain intangible assets with finite lives, which reduced amortization
in subsequent periods.
Impairment of intangible assets for the three months ended March 31, 2002
represents a write-down of the carrying amount of finite-lived intangible
assets.
Interest expense was $2.0 million for the three months ended March 31, 2003
compared to $2.7 million for the same period in 2002. The decrease in interest
expense was attributable to lower debt levels together with lower interest rates
during 2003.
-20-
Other income, net increased to $748,000 for the three months ended March
31, 2003 compared to other expense, net of $7.3 million for the same period in
2002. The increase in other income (expense) was primarily due to a $5.1 million
write-down during the first three months of 2002 of certain marketable
securities held by one of the Company's equity-method investees. The decline in
the fair value of such securities was determined to be other than temporary. No
similar write-downs were recognized in the first three months of 2003.
Additionally, the Company recorded a $2.0 million gain on the sale of marketable
securities in the first quarter of 2003.
The income tax benefit as a percentage of loss before income taxes and
cumulative effect of an accounting change was 40% for the three months ended
March 31, 2003 compared to 48% for the same period in 2002. The overall
effective tax rate reported by the Company in any single period is impacted by,
among other things, the country in which earnings or losses arise, applicable
statutory tax rates and withholding tax requirements for particular countries,
the availability of net operating loss carry forwards and the availability of
tax credits for taxes paid in certain jurisdictions. Because of these factors,
it is reasonable that the Company's current and future tax expense as a
percentage of income before income taxes may vary from period to period.
The cumulative effect of an accounting change relates to the Company's
adoption of Statement 142 effective January 1, 2002. The Company was required to
test goodwill and any intangible assets identified as having an indefinite
useful life for impairment in accordance with the provisions of Statement 142
and report any transitional impairment loss as the cumulative effect of a change
in accounting principle as of January 1, 2002 in the consolidated statement of
operations. The transitional impairment loss for indefinite lived intangible
assets from application of these new rules was $369.0 million ($223.2 million,
net of tax).
Segment Results of Operations
Effective January 1, 2003, the Company restructured its businesses into
four groups which also represent its reportable business segments. Segments are
now organized along three industry lines in addition to a segment comprising
certain corporate functions and related expenses. The Publishing Segment
consists of the Company's print and electronic publishing units and websites
including TV Guide Magazine and Gemstar eBook brands, as well as TV Guide Online
and SkyMall catalog sales. The Publishing Segment also includes TV Guide Data
Solutions, a newly formed data collection and distribution business that gathers
program listings and channel lineups. The Cable and Satellite Segment offers
products and services to consumers and service providers in the cable and
satellite industry. The businesses in this segment include TV Guide Channel, TV
Guide Interactive, TVG Network, Superstar/Netlink Group, UVTV, SpaceCom and
several other smaller related businesses. The Consumer Electronics Licensing
("CE Licensing") Segment is responsible for the licensing of the Company's
proprietary technologies and intellectual property to the consumer electronics
("CE") manufacturing industry and interactive television software providers, and
for the sale of advertising carried on the IPGs deployed in CE devices. The CE
Licensing Segment licenses video recording technology currently marketed under
the VCR Plus+ system brand in North America and under other brands in Europe and
Asia, and IPGs marketed under the GUIDE Plus+ and new TV Guide On Screen brands
in North America, and under the G-GUIDE brand in Asia. This segment also
licenses intellectual property to interactive television software providers and
manufacturers of set-top boxes for the DSS industry, and to program listings
providers in the online, personal computer and other non-television businesses.
In addition, the CE Licensing Segment incurs costs associated with patent
prosecution and certain litigation. The Corporate Segment comprises various
centralized functions, including corporate management, corporate legal,
corporate finance and other functions that are managed centrally, and related
costs such as certain litigation and insurance costs.
Previously, the Company had segmented its businesses by revenue type, which
required allocation of operating results for certain business units, principally
TV Guide Interactive, TVG Network and SkyMall, between two or more segments. By
contrast, the Company's new segments reflect full operating results of their
respective business units. This change is intended to provide greater business
unit accountability and improve the transparency of operating performance. The
Company's previous reportable segments were identified as Technology and
Licensing, Interactive Platform and Media and Services. Amounts for the three
months ended March 31, 2002 have been reclassified to conform to the 2003
presentation.
-21-
Segment information for the three months ended March 31, 2003 and 2002 is
presented and reconciled to consolidated loss before income taxes and cumulative
effect of an accounting change as follows (in thousands):
Three Months Ended
March 31,
--------------------
2003 2002
-------- ---------
Publishing Segment:
Revenues ................................................................. $108,987 $ 123,010
Operating Expenses(1) .................................................... 97,119 104,867
-------- ---------
Adjusted EBITDA(2) ..................................................... $ 11,868 $ 18,143
-------- ---------
Cable and Satellite Segment:
Revenues ................................................................. $ 85,033 $ 105,585
Operating Expenses(1) .................................................... 51,982 63,390
-------- ---------
Adjusted EBITDA(2) ..................................................... $ 33,051 $ 42,195
-------- ---------
CE Licensing Segment:
Revenues ................................................................. $ 33,863 $ 31,886
Operating Expenses(1) .................................................... 22,216 21,080
-------- ---------
Adjusted EBITDA(2) ..................................................... $ 11,647 $ 10,806
-------- ---------
Corporate Segment:
Operating Expenses(1) .................................................... $ 25,412 $ 17,860
-------- ---------
Adjusted EBITDA(2) ..................................................... $(25,412) $ (17,860)
-------- ---------
Consolidated:
Revenues ................................................................. $227,883 $ 260,481
Operating Expenses(1) .................................................... 196,729 207,197
-------- ---------
Adjusted EBITDA(2) ..................................................... $ 31,154 $ 53,284
Stock Compensation Expense ............................................... 39,595 17,126
-------- ---------
EBITDA(3) ................................................................ $ (8,441) $ 36,158
Depreciation and amortization ............................................ (65,662) (106,275)
Impairment of intangible assets .......................................... -- (11,038)
-------- ---------
Operating loss ........................................................... (74,103) (81,155)
Interest expense ......................................................... (1,953) (2,660)
Other income (expense), net .............................................. 748 (7,303)
-------- ---------
Loss before income taxes and cumulative effect of an accounting change ... $(75,308) $ (91,118)
-------- ---------
(1) Operating expenses means operating expenses, excluding stock compensation
expense, depreciation and amortization and impairment of intangible assets.
(2) Adjusted EBITDA is defined as operating (loss) income, excluding stock
compensation expense, depreciation and amortization and impairment of
intangible assets. Due to purchase accounting related to our mergers with
TV Guide on July 12, 2000 and SkyMall on July 18, 2001, the results of
operations reflect significant increases in amortization of finite-lived
intangible assets. Accordingly, our industry segments (Publishing, Cable
and
-22-
Satellite and CE Licensing) are measured based on adjusted EBITDA. We
believe adjusted EBITDA to be relevant and useful information as adjusted
EBITDA is the primary measure used by our management to measure the
operating profits or losses of our business.
(3) EBITDA is defined as operating (loss) income, excluding depreciation and
amortization and impairment of intangible assets. EBITDA is presented
supplementally as we believe it is a standard measure commonly reported and
widely used by analysts, investors and others associated with our 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 accounting principles generally
accepted in the United States that are presented in the financial
statements included in this report. Additionally, our calculation of EBITDA
may be different than the calculation used by other companies and,
therefore, comparability may be affected.
Publishing Segment
The Publishing Segment is responsible for the operations of TV Guide
Magazine, the Company's eBook businesses in North America and Europe, the online
website TV Guide Online, SkyMall and TV Guide Data Solutions, a data collection
and distribution unit.
For the three months ended March 31, 2003, revenues for the Publishing
Segment were $109.0 million compared to $123.0 million for the same period in
2002. Revenues in this segment decreased by $14.0 million, primarily due to
decreased revenues earned by TV Guide Magazine.
The following table shows the breakdown of revenues in the Publishing
Segment by business unit (in thousands):
Three Three
Months Months
Ended Ended
March 31, March 31, Increase
2003 2002 (Decrease)
---- ---- ----------
Publishing Segment:
TV Guide Magazine ........................ $ 97,095 $109,816 $(12,721)
TV Guide Online .......................... 812 749 63
TV Guide Data Services ................... 76 86 (10)
Gemstar eBook ............................ 1,574 1,748 (174)
SkyMall .................................. 9,430 10,611 (1,181)
-------- -------- --------
Total .................................. $108,987 $123,010 $(14,023)
======== ======== ========
TV Guide Magazine experienced a 15% increase in new subscribers acquired
during the first quarter of 2003 compared with the same period in 2002, and
maintained renewal rates consistent with historical results. However, the
magazine continues to face declines in overall circulation revenue. The declines
are primarily the result of a reduced level of investment in subscriber
acquisition in recent years, and also due to reduced newsstand sales. At March
31, 2003, TV Guide Magazine had a rate base of 9.0 million, which was unchanged
from its rate base as of March 31, 2002. However, the number of bulk sold
subscriptions increased from 1.5 million copies at March 31, 2002 to 2.4 million
copies at March 31, 2003. Bulk sold subscriptions produce little or no
circulation contribution and are of substantially lesser economic value than
other sources of circulation. However, these copies generate additional
advertising revenues. The new management team at the magazine is engaged in
efforts designed to stabilize the paid circulation of the magazine. We expect
our individually paid circulation to continue to decline during the second and
third quarters of 2003, but improve during the fourth quarter of 2003. In order
to achieve this objective, the Company intends to make an investment in the
magazine business of $10 million to $20 million during the remainder of 2003.
Also during the three months ended March 31, 2003, advertising revenues
increased by $2.6 million over the same period in 2002, and partially offset a
$12.9 million decrease in revenues due to declines in circulation and a $2.4
million decline in other revenues related to the Company's exit from the
magazine distribution business in the
-23-
second quarter of 2002. The advertising gains were primarily a result of a 21%
increase in program promotion advertising over the comparable period in 2002,
which offset weakness in conventional advertising.
TV Guide Online derives revenues from subscriber and licensing
arrangements, advertising and merchandising sales. Revenues for the first
quarter increased by 8% from $0.7 million in 2002 to $0.8 million in 2003,
primarily due to an increase in advertising revenues resulting from an improved
advertising market and efforts to increase brand awareness.
SkyMall's net revenues are composed of commissions received on the sale of
merchandise advertised in its in-flight catalog or on its website
www.skymall.com, the selling price of merchandise sold through loyalty programs
and placement fees paid by participating merchants to include their products or
advertisements in SkyMall's catalog. Net revenues decreased for the three months
ended March 31, 2003 principally due to decreases in loyalty program revenues
and placement fees. The Company is evaluating all of its strategic alternatives
for its SkyMall subsidiary.
Gemstar eBook revenues declined from $1.7 million in the first quarter of
2002 to $1.6 million in the first quarter of 2003. Revenues are earned through
licensing of technology and selling e-book devices and content. The decline was
due to decreased sales of devices and content. The Company is evaluating its
strategic alternatives for its Gemstar eBook subsidiary, including a joint
venture, divestiture or shutdown.
Expenses in this segment for the three months ended March 31, 2003 were
$97.1 million compared with $104.9 million for the same period in 2002, a
decrease of 7%. The decrease in expenses was primarily attributable to cost
savings from exiting the magazine distribution business in 2002 and decreases in
printing and postage expenses.
Cable and Satellite Segment
The Cable and Satellite Segment operates Superstar/Netlink Group (SNG), TV
Guide Channel, TV Guide Interactive Program Guide (IPG), TVG Network (TVG) and
several other smaller related businesses. SNG delivers television programming to
C-band satellite dish owners. TV Guide Channel combines original programming
content with comprehensive television listings information for distribution to
multichannel video providers. TV Guide Interactive is an interactive television
guidance system that can be integrated into digital cable and satellite set-top
boxes. TVG is a 24-hour horseracing and interactive wagering network.
Segment revenues for the three months ended March 31, 2003 were $85.0
million, a decrease of $20.6 million, or 19%, from $105.6 million for the
comparable quarter of 2002. The decrease was primarily attributable to a
continuing decline in C-band subscribers in our SNG business unit, along with a
decline in IPG advertising revenue.
-24-
The following table shows the breakdown of revenues in the Cable and
Satellite Segment by business unit (in thousands):
Three Three
Months Months
Ended Ended
March 31, March 31, Increase
2003 2002 (Decrease)
---- ---- ----------
Cable and Satellite Segment:
Superstar/Netlink Group .................. $ 44,537 $ 63,353 $(18,816)
TV Guide Channel ......................... 25,544 24,536 1,008
TV Guide Interactive ..................... 4,660 7,155 (2,495)
TVG Network .............................. 3,442 1,583 1,859
Other .................................... 6,850 8,958 (2,108)
-------- -------- --------
Total .................................. $ 85,033 $105,585 $(20,552)
======== ======== ========
The C-band direct-to-home satellite market, in which SNG operates,
continues to decline due to the growth of the newer generation DSS systems and
continued cable system expansions. Moreover, SNG's decline has been accelerated
due to the success of the Company's subscriber conversion program with DISH
Network. On November 2, 1999, SNG signed an agreement with DISH Network to
promote and solicit orders for DISH Network. In exchange, SNG receives an
initial commission for each current or past SNG subscriber who subscribes to
DISH Network and a monthly residual commission over the life of the agreement.
The decline in SNG subscribers as a result of this agreement is expected to
continue. During the three months ended March 31, 2003, the number of C-band
subscribers in the industry decreased by 9% to approximately 534,000
subscribers. At March 31, 2003, SNG provided service to 321,000 of these
subscribers, a decrease of 11% from the subscribers served by SNG as of December
31, 2002. We expect the declines of the subscriber base of the C-band industry,
and the resulting impact on revenues in this segment, to continue during 2003
and 2004. The impact of the subscriber decline on revenue was partially offset
by an increase in the price of programming packages offered by SNG, and revenues
earned from the subscriber conversion agreement with DISH Network.
TV Guide Channel generated revenue of $25.5 million in the first quarter of
2003 compared to $24.5 million in the same period of 2002. Growth in advertising
was largely offset by revenue declines due to lost distribution. The Company
believes that growth in digital cable subscribers could increase the risk that
service providers would discontinue carriage of TV Guide Channel, a network that
is viewed as primarily geared toward analog subscribers. The Company plans to
moderately increase its investment in programming in this business with the goal
of repositioning the product for the digital cable and satellite environment.
TV Guide Interactive revenues decreased by $2.5 million for the three
months ended March 31, 2003 as compared with the same period in the prior year
due to a $1.5 million reduction in advertising revenue and a $1.0 million
decrease in licensing revenue caused by the acquisition of one of the Company's
licensees by another of the Company's licensees which resulted in a lower
combined rate. Distribution of TV Guide Interactive reached 10.2 million
subscribers as of March 31, 2003, up 24% from the same period in the prior year.
This segment also includes revenues derived from licensing TVG's
intellectual property and content to third parties and from interactive wagering
activities in certain markets. For the quarter ended March 31, 2003, TVG's
revenues were $3.4 million compared with $1.6 million for the same period in
2002, an increase of 117%, reflecting the addition of a licensee in May 2002 and
increased wagering volumes due to the launch of the Company's product in
California.
Expenses in this segment for the first three months of 2003 were $52.0
million, a decrease of $11.4 million, or 18%, from $63.4 million for the
comparable quarter of 2002. The decrease in expenses was primarily due to
reduced programming fees at SNG associated with the decrease in the number of
C-band subscribers.
-25-
Consumer Electronics Licensing (CE Licensing) Segment
The CE Licensing Segment operates GUIDE Plus+, VCR Plus+ and engages in
other intellectual property licensing activities. GUIDE Plus+ is an interactive
program guide (IPG) technology and service for the digital consumer electronics
arena. It is integrated into various CE devices, including televisions and
digital recording devices such as DVD recorders and personal video recorders
under license agreements with the manufacturers of such products. The CE
Licensing Segment is also responsible for the sale of advertising carried on the
IPGs that are deployed in CE products. In addition, this segment incurs the
costs associated with patent prosecution and certain litigation.
Revenues in the CE Licensing Segment were $33.9 million for the three
months ended March 31, 2003 compared with $31.9 million for the same period in
the prior year, an increase of $2.0 million, or 6%, primarily attributable to
increased shipments of products by licensees incorporating VCR+ technology.
The following table shows the breakdown of revenues in the CE Licensing
Segment by product (in thousands):
Three Three
Months Months
Ended Ended
March 31, March 31, Increase
2003 20