<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 333-71305-03
USANI LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 59-3490970
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification No.)
</TABLE>
152 WEST 57TH STREET
NEW YORK, NEW YORK
(Address of principal executive offices)
10019
(Zip Code)
(212) 314-7300
(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 [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USANI LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production............. $307,360 $281,302 $ 955,725 $ 757,305
Electronic retailing........................... 281,946 258,038 842,851 766,458
Internet services.............................. 5,551 5,934 18,402 14,467
Other.......................................... -- 3,144 6,882 9,959
-------- -------- ---------- ----------
Total net revenues.......................... 594,857 548,418 1,823,860 1,548,189
-------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales.................................. 171,982 162,450 530,654 482,030
Program costs.................................. 147,549 151,149 466,896 408,948
Selling and marketing.......................... 74,121 63,701 209,859 188,932
General and administrative..................... 60,080 51,306 173,876 129,190
Other operating costs.......................... 22,081 22,414 66,400 65,265
Amortization of cable distribution fees........ 6,938 5,319 19,214 15,883
Depreciation and amortization.................. 44,058 41,818 130,620 110,069
-------- -------- ---------- ----------
Total operating costs and expenses.......... 526,809 498,157 1,597,519 1,400,317
-------- -------- ---------- ----------
Operating profit............................ 68,048 50,261 226,341 147,872
Other income (expense):
Interest income................................ 12,636 7,452 31,959 12,874
Interest expense............................... (21,066) (24,440) (61,685) (77,641)
Gain on sale of securities..................... 39,451 -- 89,721 --
Other, net..................................... (779) (3,553) 879 (16,273)
-------- -------- ---------- ----------
30,242 (20,541) 60,874 (81,040)
-------- -------- ---------- ----------
Earnings before income taxes and minority
interest.................................... 98,290 29,720 287,215 66,832
Income tax expense............................. (1,938) (738) (5,076) (4,646)
Minority interest.............................. 135 (154) 512 605
-------- -------- ---------- ----------
NET EARNINGS..................................... $ 96,487 $ 28,828 $ 282,651 $ 62,791
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
USANI LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 195,926 $ 234,903
Accounts and notes receivable, net of allowance of $33,820
and $20,572, respectively................................. 305,413 317,298
Inventories, net............................................ 423,511 411,727
Other current assets, net................................... 17,235 14,685
---------- ----------
Total current assets.............................. 942,085 978,613
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 109,245 95,013
Buildings and leasehold improvements........................ 58,180 55,136
Furniture and other equipment............................... 43,524 30,068
---------- ----------
210,949 180,217
Less accumulated depreciation and amortization.............. (69,840) (43,262)
---------- ----------
141,109 136,955
Land........................................................ 10,245 10,242
Projects in progress........................................ 24,127 14,587
---------- ----------
175,481 161,784
OTHER ASSETS
Intangible assets, net...................................... 5,146,230 5,307,517
Cable distribution fees, net ($36,830 and $39,650,
respectively, to related parties)......................... 131,191 100,416
Long-term investments....................................... 48,066 65,327
Notes and accounts receivable, net of current portion
($2,562 and $3,356, respectively, from related parties)... 32,356 41,508
Inventories, net............................................ 151,538 150,293
Advances to USAi and subsidiaries........................... 608,558 158,152
Deferred charges and other, net ($4,671 and $4,357,
respectively, from related parties)....................... 42,323 39,075
---------- ----------
$7,277,828 $7,002,685
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
USANI LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 4,068 $ 28,223
Accounts payable, trade..................................... 115,908 159,288
Obligations for program rights and film costs............... 245,227 184,074
Cable distribution fees payable ($18,567 and $18,633,
respectively, to related parties)......................... 41,149 44,588
Deferred revenue............................................ 47,180 30,813
Other accrued liabilities................................... 256,886 248,271
---------- ----------
Total current liabilities......................... 710,418 695,257
LONG-TERM OBLIGATIONS, net of current....................... 506,565 732,307
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 295,062 409,716
OTHER LONG-TERM LIABILITIES................................. 43,336 49,857
MINORITY INTEREST........................................... 623 143
MEMBERS' EQUITY
Class A (122,208,291 and 113,778,742, respectively)
shares.................................................... 1,905,439 1,753,618
Class B (141,080,766 and 133,689,889, respectively)
shares.................................................... 2,978,635 2,736,363
Class C (22,887,354) shares................................. 466,252 466,252
Retained earnings........................................... 371,941 142,045
Unrealized gain in available for sale securities............ -- 17,850
Unearned compensation....................................... (443) (723)
---------- ----------
Total members' equity............................. 5,721,824 5,115,405
---------- ----------
$7,277,828 $7,002,685
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
USANI LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
LLC LLC LLC RETAINED UNREALIZED UNEARNED
TOTAL SHARES SHARES SHARES EARNINGS GAINS COMPENSATION
---------- ---------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999....... $5,115,405 $1,753,618 $2,736,363 $466,252 $142,045 $17,850 $(723)
Comprehensive income:
Net earnings for the nine
months ended September 30,
1999......................... 282,651 -- -- -- 282,651 -- --
Decrease in unrealized gains in
available for sale
securities................... (17,850) -- -- -- -- (17,850) --
----------
Comprehensive income....... 264,801
----------
Issuance of LLC shares........... 401,319 159,047 242,272 -- -- -- --
Repurchase of LLC shares......... (7,226) (7,226) -- -- -- -- --
Mandatory tax distribution to LLC
Partners....................... (52,755) -- -- -- (52,755) -- --
Cancellation of employee equity
program........................ 280 -- -- -- -- -- 280
---------- ---------- ---------- -------- -------- ------- -----
BALANCE AT SEPTEMBER 30, 1999.... $5,721,824 $1,905,439 $2,978,635 $466,252 $371,941 $ -- $(443)
========== ========== ========== ======== ======== ======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
USANI LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 282,651 $ 62,791
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 130,620 110,069
Amortization of cable distribution fees................... 19,214 15,883
Amortization of program rights and film costs............. 391,088 356,219
Gain on sale of securities................................ (89,721) --
Minority interest......................................... (512) (605)
Changes in current assets and liabilities:
Accounts receivable.................................... 16,205 (82,380)
Inventories............................................ 375 (72,526)
Accounts payable....................................... (43,174) 39,633
Accrued liabilities.................................... 15,295 41,785
Payment for program rights and film costs................. (410,500) (335,005)
Increase in cable distribution fees....................... (35,624) (2,365)
Other, net................................................ 4,393 (12,779)
--------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 280,310 120,720
--------- -----------
Cash flows from investing activities:
Acquisition of Universal Transaction, net of cash
acquired............................................... -- (1,297,233)
Acquisitions, net of cash acquired........................ (7,500) --
Capital expenditures, net................................. (43,781) (34,468)
Increase in long-term investments......................... (12,750) (22,542)
Proceeds from sale of securities.......................... 107,231 --
Payment of merger and financing costs..................... -- (20,855)
Other, net................................................ 6,221 (4,065)
--------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.......................................... 49,421 (1,379,163)
--------- -----------
Cash flows from financing activities:
Borrowings................................................ -- 1,741,380
Principal payments on long-term obligations............... (252,182) (990,512)
Payment of mandatory tax distribution to LLC partners..... (52,755) --
Proceeds from issuance of LLC shares...................... 401,319 795,025
Repurchase of LLC shares.................................. (7,226) --
Advances to USAi and subsidiaries......................... (457,864) (185,227)
--------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.......................................... (368,708) 1,360,666
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... (38,977) 102,223
Cash and cash equivalents at beginning of period............ 234,903 23,022
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 195,926 $ 125,245
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
COMPANY FORMATION
USANi LLC (the "Company" or "LLC"), a Delaware limited liability company,
was formed on February 12, 1998 and is a subsidiary of Home Shopping Network,
Inc. ("Home Shopping"), which is a subsidiary of USA Networks, Inc. ("USAi"),
formerly known as HSN, Inc. At its formation, USAi and Home Shopping contributed
substantially all of the operating assets and liabilities of Home Shopping to
the Company in exchange for Class A shares in the Company.
On February 12, 1998, USAi acquired USA Networks, a New York general
partnership, consisting of cable television networks, USA Network and The Sci-Fi
Channel ("Networks"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram") and contributed those businesses to the Company (the "Universal
Transaction").
COMPANY BUSINESS
The Company is a holding company, the subsidiaries of which are engaged in
diversified media and electronic commerce businesses.
As of September 30, 1999, the Company engages in three principal areas of
business:
- NETWORKS AND TELEVISION PRODUCTION, which includes Networks and
Studios USA. Networks operates the USA Network and The Sci-Fi
Channel cable networks and Studios USA produces and distributes
television programming.
- ELECTRONIC RETAILING, consisting primarily of the Home Shopping
Network and America's Store, which are engaged in the electronic
retailing business.
- INTERNET SERVICES, which represents the Company's on-line retailing
networks business.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements and Notes thereto
of the Company are unaudited and should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto for the year ended December
31, 1998 contained in the Form S-4 Registration Statement (File No. 333-71305)
for the $500.0 million 6 3/4% Senior Notes.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The interim Condensed
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Form S-4 Registration Statement (File No. 333-71305) for
the fiscal year ended December 31, 1998 for a summary of all significant
accounting policies.
6
<PAGE> 8
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements and notes include the inventory carrying adjustment, program rights
and film cost amortization, sales return accrual and other revenue allowance,
allowances for doubtful accounts, recoverability of intangibles and other
long-lived assets, management's forecast of anticipated revenues from the
distribution of television product in order to evaluate the ultimate
recoverability of film inventory and amortization of program usage.
NOTE 3 -- BUSINESS ACQUISITIONS
UNIVERSAL TRANSACTION
In connection with the Universal Transaction, USAi paid Universal
approximately $4.1 billion in the form of a cash payment of approximately $1.6
billion, a portion of which ($300 million plus interest) was deferred until no
later than June 30, 1998, and an effective 45.8% interest in USAi through shares
of common stock, par value $.01 per share, of USAi (the "Common Stock") and
Class B common stock, par value $.01 per share, of USAi (the "Class B Common
Stock"), and shares ("LLC Shares") of a newly formed limited liability company
("USANi LLC") which are exchangeable (subject to regulatory restrictions) into
shares of Common Stock and Class B Common Stock. At the closing of the Universal
Transaction, USAi contributed its Home Shopping business to USANi LLC, a
subsidiary of USAi. Simultaneously with this transaction, the remaining
1,178,322 shares of Class B Common Stock were issued in accordance with Liberty
Media Corporation's ("Liberty") contingent right to receive such shares as part
of USAi's merger with Home Shopping in 1996.
The Investment Agreement, as amended and restated as of December 18, 1997,
among USAi, Home Shopping, Universal and Liberty, a subsidiary of AT&T
Corporation (the "Investment Agreement"), relating to the Universal Transaction
also contemplated that, on or prior to June 30, 1998, USAi and Liberty would
complete a transaction involving a $300 million cash investment, plus an
interest factor, by Liberty in USAi through the purchase of Common Stock or LLC
Shares. The transaction closed on June 30, 1998 with Liberty making a cash
payment of $308.5 million in exchange for 15,000,000 LLC shares.
The following unaudited pro forma condensed combined financial information
for the nine months ended September 30, 1998, is presented to show the results
of the Company, as if the Universal Transaction had occurred as of January 1,
1998. The pro forma results include certain adjustments, including increased
amortization related to goodwill and other intangibles, changes in programming
and film costs amortization and an increase in interest expense, and are not
necessarily indicative of what the results would have been had the transactions
actually occurred on the aforementioned dates.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS)
<S> <C>
Net revenues............................................... $1,705,553
Net earnings............................................... $ 78,831
</TABLE>
NOTE 4 -- LONG-TERM OBLIGATIONS
On February 12, 1998, the Company entered into an Unsecured Senior Credit
Facility, which included a $750.0 million Tranche A Term Loan maturing on
December 31, 2002. In November 1998, in conjunction with the offering of $500.0
million 6 3/4% Senior Notes, the Company permanently repaid $500.0 million of
the
7
<PAGE> 9
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Tranche A Term Loan. In September 1999, the Company permanently repaid the
remaining balance. In conjunction with the September 1999 repayment, the Company
wrote off deferred financing costs of $0.6 million.
NOTE 5 -- CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999:
During the nine months ended September 30, 1999, the Company acquired
post-production equipment through a capital lease totaling $2.5 million.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
ACQUISITION OF USA NETWORKS AND STUDIOS USA
Acquisition price......................................... $4,115,531
Less: Amount paid in cash................................. (1,300,983)
----------
Total Non-Cash Consideration.............................. $2,814,548
==========
Components of Non-Cash Consideration:
Deferred purchase price liability......................... $ 300,000
Issuance of Common Shares and Class B Shares.............. 277,898
Issuance of USANi LLC Shares.............................. 2,236,650
----------
$2,814,548
==========
Exchange of Minority Interest in USANi LLC for Deferred
Purchase Price Liability.................................. $ 304,636
==========
</TABLE>
During the nine months ended September 30, 1998, the Company acquired
computer equipment through a capital lease totaling $15.5 million.
NOTE 6 -- INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------- -------------------------
INVENTORIES CONSIST OF: CURRENT NONCURRENT CURRENT NONCURRENT
----------------------- -------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..... $ 67,237 $ 41,799 $ 98,082 $ 61,310
In process and unreleased....... 33,740 8,591 138 --
Programming costs, net of
amortization.................... 166,539 99,905 151,192 88,983
Merchandise held for sale......... 155,995 -- 162,315 --
Other............................. -- 1,243 -- --
-------- -------- -------- --------
Inventories, net........ $423,511 $151,538 $411,727 $150,293
======== ======== ======== ========
</TABLE>
The Company estimates that approximately 90% of unamortized film costs at
September 30, 1999 will be amortized within the next three years.
NOTE 7 -- PROGRAM RIGHTS AND FILM COSTS
As of September 30, 1999, the liability for program rights, representing
future payments to be made under program contract agreements amounted to $485.4
million. Annual payments required are approximately
8
<PAGE> 10
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
$54.9 million for the remainder of 1999, $207.6 million in 2000, $108.4 million
in 2001, $66.7 million in 2002, $27.8 million in 2003 and $20.0 million in 2004
and thereafter. Amounts representing interest are $59.1 million and the present
value of future payments is $426.3 million.
As of September 30, 1999, the liability for film costs amounted to $114.0
million. Annual payments required are approximately $15.9 million for the
remainder of 1999, $55.0 million in 2000, $25.1 million in 2001, $13.0 million
in 2002 and $5.0 million in 2003.
Unrecorded commitments for program rights consist of programs for which the
license period has not yet begun or the program is not yet available to air. As
of September 30, 1999, the unrecorded commitments amounted to $687.6 million.
Annual commitments are $10.0 million for the remainder of 1999, $92.9 million in
2000, $139.6 million in 2001, $134.5 million in 2002, $109.0 million in 2003 and
$201.6 million in 2004 and thereafter.
NOTE 8 -- NOTES OFFERING AND GUARANTEES
On November 23, 1998, the Company issued $500.0 million 6 3/4% Senior Notes
due 2005 (the "Notes" and "Notes Offering") with USAi, as joint and several
co-obligors. The Notes are jointly and severally guaranteed by substantially all
subsidiaries of the Company and certain wholly and non-wholly owned subsidiaries
of USAi, including Home Shopping.
Full financial statements of the Guarantors have not been included because,
pursuant to their respective guarantees, the Guarantors are jointly and
severally liable with respect to the Notes. Management does not believe that the
information contained in full financial statements of the Guarantors would be
material to investors. See the USAi September 30, 1999 consolidated financial
statements filed on Form 10-Q for summarized statements setting forth certain
financial information concerning Guarantor and Non-Guarantor Subsidiaries.
NOTE 9 -- INDUSTRY SEGMENTS
For the three and nine months ended September 30, 1999 and 1998, the
Company operated principally in three industry segments: Networks and television
production, Electronic retailing and Internet services. The Networks and
television production segment consists of the cable networks USA Network and The
Sci-Fi Channel and Studios USA, which produces and distributes television
programming, which were acquired on February 12, 1998. The Electronic retailing
segment consists of Home Shopping Network and America's Store, which are engaged
in the sale of merchandise through electronic retailing. The Internet services
segment represents the Company's on-line retailing networks business.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues
Networks and television
production................... $307,360 $281,302 $ 955,725 $ 757,305
Electronic retailing............ 281,946 258,038 842,851 766,458
Internet services............... 5,551 5,934 18,402 14,467
Other........................... -- 3,144 6,882 9,959
-------- -------- ---------- ----------
$594,857 $548,418 $1,823,860 $1,548,189
======== ======== ========== ==========
</TABLE>
9
<PAGE> 11
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 9 -- INDUSTRY SEGMENTS -- CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating profit (loss)
Networks and television
production................... $ 65,028 $ 43,187 $ 222,897 $ 128,376
Electronic retailing............ 19,908 17,551 53,460 42,873
Internet services............... (10,541) (4,317) (29,541) (10,705)
Other........................... (6,347) (6,160) (20,475) (12,672)
-------- -------- ---------- ----------
$ 68,048 $ 50,261 $ 226,341 $ 147,872
======== ======== ========== ==========
</TABLE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
USANi LLC (the "Company" or "LLC") is a holding company, the subsidiaries
of which are engaged in diversified media and electronic commerce businesses.
On February 12, 1998, USAi acquired USA Networks, a New York general
partnership, consisting of cable television networks, USA Network and The Sci-Fi
Channel ("Networks"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram") (the "Universal Transaction").
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW DEVELOPMENTS, NEW
MERCHANDISING STRATEGIES AND SIMILAR MATTERS. A VARIETY OF FACTORS COULD CAUSE
THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE
ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE COMPANY'S
FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE
OPERATIONS, PERFORMANCE, DEVELOPMENT AND RESULTS OF THE COMPANY'S BUSINESS
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: MATERIAL ADVERSE CHANGES IN
ECONOMIC CONDITIONS IN THE MARKETS SERVED BY THE COMPANY; FUTURE REGULATORY
ACTIONS AND CONDITIONS IN THE COMPANY'S OPERATING AREAS; COMPETITION FROM
OTHERS; SUCCESSFUL INTEGRATION OF THE COMPANY'S DIVISIONS' MANAGEMENT
STRUCTURES; PRODUCT DEMAND AND MARKET ACCEPTANCE; THE ABILITY TO PROTECT
PROPRIETARY INFORMATION AND TECHNOLOGY OR TO OBTAIN NECESSARY LICENSES ON
COMMERCIALLY REASONABLE TERMS; AND OBTAINING AND RETAINING KEY EXECUTIVES AND
EMPLOYEES.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter and nine months ended
September 30, 1999, compared with the quarter and nine months ended September
30, 1998. The operations for the quarter and nine months ended September 30,
1998, consist of the operations of Home Shopping and, since February 12, 1998,
the results of USA Networks and Studios USA. Reference should also be made to
the unaudited Condensed Consolidated Financial Statements included herein.
The Universal Transaction resulted in significant increases in net
revenues, operating costs and expenses and other income (expense) for the nine
months ended September 30, 1999 when compared to 1998.
NET REVENUES
For the quarter ended September 30, 1999, revenues increased $46.4 million,
or 8.5%, to $594.9 million from $548.5 million compared to 1998 primarily due to
increases of $26.1 million and $23.9 million from the Networks and television
production and Electronic retailing businesses, respectively. The increase in
Networks
10
<PAGE> 12
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
and television production resulted principally from higher affiliate and
advertising revenues due to higher ratings and subscriber levels. The increase
in Electronic retailing is due to increased sales volume and continuity
(off-air) sales.
For the nine months ended September 30, 1999, revenues increased $275.7
million, or 17.8%, to $1.82 billion from $1.55 billion compared to 1998
primarily due to increases of $198.4 million and $76.4 million from the Networks
and television production business and the Electronic retailing businesses,
respectively. On a proforma basis, revenues increased $118.3 million, or 6.9%,
as 1998 proforma revenue was $1.71 billion.
OPERATING COSTS AND EXPENSES
For the quarter ended September 30, 1999, total operating costs and
expenses, including depreciation and amortization, increased $28.7 million, or
5.8% to $526.8 million from $498.1 million compared to 1998 primarily due to
increased costs of $21.6 million and $5.8 million from the Electronic retailing
and Internet services businesses, respectively. The increase in Electronic
retailing resulted primarily from higher sales volume and higher merchandising
personnel costs. The increase in Internet services relates to increased costs to
maintain and enhance services; costs incurred to develop a new electronic
commerce site, FirstJewelry.com, which was launched in September 1999; and
increased costs of shipping product due to an expanded product mix. The
increases were partially offset by lower advertising and promotion costs for
Internet services.
For the nine months ended September 30, 1999, total operating costs and
expenses increased $197.2 million, or 14.1%, to $1.60 billion from $1.40 billion
compared to 1998, primarily due to increased costs of $103.9 million, $65.8
million and $22.8 million from the Networks and television production,
Electronic retailing and Internet services businesses, respectively. On a
proforma basis, total operating costs and expenses increased $67.0 million, or
4.4%, as 1998 proforma total operating costs and expenses was $1.53 billion.
OTHER INCOME (EXPENSE), NET
For the quarter and nine months ended September 30, 1999, interest expense,
net decreased $8.6 million and $35.0 million, respectively, compared to 1998,
primarily due to lower borrowing levels as a result of the repayment of bank
debt in the fourth quarter of 1998 and in 1999 from the proceeds of equity
transactions involving Universal and Liberty Media Corporation ("Liberty"). In
addition, lower interest rates resulted in decreased interest expense.
For the quarter ended September 30, 1999, other, net totaled $0.8 million
of expense compared to $3.6 million of expense in 1998. For the nine months
ended September 30, 1999, other, net totaled $0.9 million of income compared to
$16.3 million of expense in 1998 primarily due to the reversal of equity losses
in the quarter ended March 31, 1999 which were recorded in 1998 as a result of
the Universal Transaction. Other expense in 1999 relates primarily to losses on
investments accounted for under the equity method.
In the quarter and nine months ended September 30, 1999, the Company
realized gains of $39.5 million and $89.7 million, respectively, from the sale
of securities.
INCOME TAXES
As a limited liability Company, the Company is not subject to federal or
state income taxes, but rather the LLC partners are responsible for taxes
related to the earnings attributable to each partner. The Company is subject to
unincorporated business tax in New York City.
11
<PAGE> 13
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The operating results and capital resources and liquidity requirements of
USAi, Home Shopping Network, Inc. ("Holdco") and USANi LLC are dependent on each
other. The investment agreement, among Universal Studios, Inc. ("Universal"),
Liberty Media Corporation, a subsidiary of AT&T Corporation, ("Liberty"), USAi
and Holdco requires that no less frequently than monthly, (1) all cash generated
by entities not owned by USANi LLC be transferred to USANi LLC and (2) any cash
needs by entities not owned by USANi LLC be funded by USANi LLC. In addition,
USAi and USANi LLC are jointly and severally obligated under the $500.0 million
6 3/4% Senior Notes due 2005 (the "Notes").
Net cash provided by operating activities was $280.3 million for the nine
months ended September 30, 1999 compared to $120.7 million for the nine months
ended September 30, 1998. These cash proceeds were used to pay for capital
expenditures of $43.8 million, to make principal payments on long-term
obligations of $252.2 million, to make mandatory tax distribution payments to
LLC partners of $52.8 million, including $23.9 million to USAi, and to provide
funding to USAi. USANi LLC generated cash proceeds of $107.2 million from the
sale of securities in a publicly traded entity during the nine months ended
September 30, 1999.
Under the investment agreement, transfers of cash between USAi and USANi
LLC are evidenced by a demand note and accrue interest at USANi LLC's borrowing
rate under the existing credit agreement. Certain transfers of funds between
Holdco, USANi LLC and USAi are not evidenced by a demand note and do not accrue
interest, primarily relating to the establishment of the operations of USANi LLC
and capital contributions from USAi into USANi LLC. During the nine months ended
September 30, 1999, net transfers from USANi LLC to USAi totaling approximately
$452.7 million, including $371.4 million related to the Hotel Reservations
Network Transaction and the October Films/PFE Transaction, $46.8 million to fund
the operations of USAi's television broadcast operations, $98.6 million to repay
a portion of the outstanding borrowings assumed in the October Films/PFE
Transaction and $22.5 million to fund the operations of USA Films. Funds were
also transferred to USAi to purchase shares of treasury stock. These amounts
were offset by $69.5 million and $40.0 million of funds transferred to USANi LLC
from the Ticketing operations business and the Hotel reservations business,
respectively.
On February 12, 1998, USAi and USANi LLC, as borrower, entered into the
credit agreement which provides for a $1.6 billion credit facility. The credit
facility was used to finance the Universal Transaction and to refinance USAi's
then-existing $275.0 million revolving credit facility. The credit facility
consists of (1) a $600.0 million revolving credit facility with a $40.0 million
sub-limit for letters of credit, (2) a $750.0 million Tranche A Term Loan and,
(3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and the
Tranche B Term Loan have been permanently repaid as of September 30, 1999, as
described below. The revolving credit facility expires on December 31, 2002.
In 1999 the Company permanently repaid the Tranche A Term Loan in the
amount of $250.0 million from cash on hand, including payments of $237.5 million
in September 1999. On November 23, 1998, USAi and USANi LLC completed an
offering of the Notes. Proceeds received from the sale of the Notes together
with available cash were used to repay and permanently reduce $500.0 million of
the Tranche A Term Loan. On August 5, 1998, USANi LLC permanently repaid the
Tranche B Term Loan in the amount of $250.0 million from cash on hand.
The existing credit facility is guaranteed by substantially all of USAi's
material subsidiaries. The interest rate on borrowings under the existing credit
facility is tied to an alternate base rate or the London InterBank Rate, in each
case, plus an applicable margin. As of September 30, 1999, there was $599.4
million available for borrowing after taking into account outstanding letters of
credit.
Under the investment agreement relating to the Universal transaction, USAi
has granted to Universal and Liberty preemptive rights with respect to future
issuances of USAi's common stock and Class B common
12
<PAGE> 14
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
stock. These preemptive rights generally allow Universal and Liberty the right
to maintain an ownership percentage in USAi equal to the ownership percentage
that entity held, on a fully converted basis, immediately prior to the issuance.
In July 1999, Universal and Liberty exercised their preemptive rights, resulting
in total cash proceeds to the company of $362.6 million. Universal purchased 7.4
million of USANi LLC shares and Liberty purchased 3.6 million shares of USAi
common stock.
As part of the Universal transaction, USAi entered into a joint venture
agreement relating to the development of international general entertainment
television channels, including international versions of USA Network, The Sci-Fi
Channel and Universal's action/adventure channel, 13th Street. USAi has elected
to have Universal buy out its 50% interest in the venture. Accordingly, during
the nine months ended September 30, 1999 USANi LLC reversed amounts previously
recorded for its share of losses of the joint venture.
USAi anticipates that it will need to invest working capital towards the
development and expansion of its overall operations. Due primarily to the
expansion of the Internet business future capital expenditures are projected to
be higher than current amounts.
On March 1, 1999, the Company made a mandatory tax distribution payment to
the LLC partners in the amount of $52.8 million, including $23.9 million to
USAi. Under the terms of the investment agreement, USAi loaned that amount back
to USANi LLC.
In management's opinion, available cash, internally generated funds and
available borrowings will provide sufficient capital resources to meet the
Company's foreseeable needs.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by its computerized
information systems.
Although assessment of non-critical systems is an ongoing process, the
Company has substantially completed its detailed assessment of all of its
information technology and non-information technology hardware and software to
assess the scope of its year 2000 issue. The Company has potential exposure in
technological operations within its sole control and in technological operations
which are dependent in some way on one or more third parties. The Company
believes that it has identified all significant technological areas within its
control. The Company has ongoing communications with significant vendors and
customers to confirm their plans to become Year 2000 compliant and is assessing
any possible risk to or effects on its operations.
The Company believes that, with respect to technological operations which
are dependent on third parties, the significant areas of potential risk are the
ability of satellite and cable operators to receive the signal transmission of
USA Network, The Sci-Fi Channel and the Home Shopping Network and America's
Store services and the ability of banks and credit card processors to process
credit card transactions. Remediation and testing of critical systems that were
not Year 2000 compliant is substantially complete as of the end of October 1999.
The Company believes that the total costs associated with the Year 2000
assessment, remediation, implementation and testing will not exceed $10 million
of which approximately $8 million has been spent through October 31, 1999. This
amount is exclusive of capital expenditures that have either been made or are
currently planned to be made to replace existing hardware and software systems,
all as part of its ongoing efforts to upgrade its infrastructure and systems.
Accordingly, based on existing information, the Company believes that the
costs of addressing potential problems will not have a material adverse effect
on its financial position, results of operations or cash flows. However, if the
Company, its customers or vendors were unable to resolve the issues in a timely
manner, it
13
<PAGE> 15
USANI LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
could result in a material adverse effect on its financial position, results of
operations or cash flows. The Company has devoted and plans to continue to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
During the second quarter of 1999, the Company developed contingency plans
in the event it does not successfully complete all phases of its Year 2000
program for each of its significant operating divisions.
SEASONALITY
The Company's businesses are subject to the effects of seasonality.
Networks and television production revenues are influenced by advertiser
demand and the seasonal nature of programming, and generally peak in the spring
and fall.
The Company believes seasonality impacts its Electronic retailing segment
but not to the same extent it impacts the retail industry in general.
14
<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in various other lawsuits either as plaintiff or
defendant. In the opinion of management, the ultimate outcome of these various
lawsuits should not have a material impact on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K.
None.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USANi LLC
(Registrant)
<TABLE>
<S> <C>
Dated November 15, 1999 /s/ BARRY DILLER
- --------------------------- --------------------------------------------------------
Barry Diller
Chairman of the Board and
Chief Executive Officer
Dated November 15, 1999 /s/ VICTOR A. KAUFMAN
- --------------------------- --------------------------------------------------------
Victor A. Kaufman
Office of the Chairman,
Chief Financial Officer
(Principal Financial Officer)
Dated November 15, 1999 /s/ MICHAEL P. DURNEY
- --------------------------- --------------------------------------------------------
Michael P. Durney
Vice President, Controller
(Chief Accounting Officer)
</TABLE>
16
<PAGE> 18
USANI LLC
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
17
<PAGE> 19
USANI LLC
18
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