<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 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 MARCH 31, 1999
COMMISSION FILE NUMBER 0-20570
USA NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2712887
(State or other jurisdiction of (I.R.S. Employer
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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
As of April 30, 1999, the following shares of the Registrant's capital
stock were outstanding:
<TABLE>
<S> <C>
Common Stock................................................ 130,021,822
Class B Common Stock........................................ 31,516,726
-----------
Total outstanding Common Stock............................ 161,538,548
Common Stock issuable upon exchange of outstanding
exchangeable
subsidiary equity......................................... 173,185,547
-----------
Total outstanding Common Stock, assuming full exchange of
exchangeable subsidiary equity............................ 334,724,095
===========
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 30, 1999 was $3,730,495,738. For the purpose of the
foregoing calculation only, all directors and executive officers of the
Registrant are assumed to be affiliates of the Registrant.
Assuming the exchange, as of April 30, 1999, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 334,724,095 shares of Common Stock with an
aggregate market value of $12,510,313,051.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
---------- ----------
(In thousands, except per
share data)
<S> <C> <C>
NET REVENUES
Networks and television production........................ $ 331,753 $ 166,162
Electronic retailing...................................... 275,783 242,196
Ticketing operations...................................... 102,656 93,235
Internet services......................................... 12,113 3,813
Broadcasting.............................................. 901 12,051
Other..................................................... 5,741 5,654
---------- ----------
Total net revenues..................................... 728,947 523,111
---------- ----------
Operating costs and expenses:
Cost of sales............................................. 193,757 164,364
Program costs............................................. 170,067 90,138
Selling and marketing..................................... 115,421 103,894
General and administrative................................ 93,564 64,482
Other operating costs..................................... 18,604 18,195
Depreciation and amortization............................. 76,327 47,268
---------- ----------
Total operating costs and expenses..................... 667,740 488,341
---------- ----------
Operating profit....................................... 61,207 34,770
Other income (expense):
Interest income........................................... 10,086 3,604
Interest expense.......................................... (20,450) (27,153)
Gain on disposition of broadcast station.................. -- 74,940
Gain on sale of securities................................ 47,300 --
Other, net................................................ 9,965 (9,220)
---------- ----------
46,901 42,171
---------- ----------
Earnings before income taxes and minority interest........ 108,108 76,941
Income tax expense........................................ (26,500) (38,712)
Minority interest......................................... (74,065) (4,298)
---------- ----------
NET EARNINGS................................................ $ 7,543 $ 33,931
========== ==========
Basic earnings per common share........................... $ .05 $ .28
========== ==========
Diluted earnings per common share......................... $ .04 $ .17
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 508,827 $ 445,356
Accounts and notes receivable, net of allowance of $27,914
and $20,610, respectively................................. 368,176 372,111
Inventories, net............................................ 414,693 421,570
Investment held for sale.................................... 30,386 --
Other current assets, net................................... 49,053 28,501
---------- ----------
Total current assets.............................. 1,371,135 1,267,538
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 247,468 233,991
Buildings and leasehold improvements........................ 101,608 100,339
Furniture and other equipment............................... 52,516 55,653
---------- ----------
401,592 389,983
Less accumulated depreciation and amortization............ (182,465) (168,727)
---------- ----------
219,127 221,256
Land........................................................ 16,087 16,044
Projects in progress........................................ 24,233 18,130
---------- ----------
259,447 255,430
OTHER ASSETS
Intangible assets, net...................................... 6,316,467 6,342,646
Cable distribution fees, net ($40,127 and $39,650,
respectively, to related parties)......................... 101,307 100,416
Long-term investments....................................... 52,149 63,365
Notes and accounts receivable, net of current portion
($1,250 and $3,356, respectively, from related parties)... 46,694 48,532
Inventories, net............................................ 149,603 151,828
Deferred income taxes....................................... 38,389 40,282
Deferred charges and other, net............................. 61,394 57,065
---------- ----------
$8,396,585 $8,327,102
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
<S> <C> <C>
- ----------------------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 42,387 $ 36,538
Accounts payable, trade..................................... 126,398 186,690
Accounts payable, client accounts........................... 93,266 70,817
Obligations for program rights and film costs............... 199,547 184,583
Cable distribution fees payable ($18,738 and $18,633,
respectively, to related parties)......................... 28,543 44,588
Deferred income taxes....................................... 21,435 17,269
Other accrued liabilities................................... 341,360 322,294
---------- ----------
Total current liabilities......................... 852,936 862,779
LONG-TERM OBLIGATIONS, net.................................. 762,640 775,683
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 391,260 409,956
OTHER LONG-TERM LIABILITIES................................. 72,612 73,682
MINORITY INTEREST........................................... 3,703,819 3,633,597
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 15,000,000
shares; no shares issued and outstanding.................. -- --
Common stock -- $.01 par value; authorized 800,000,000
shares; issued and outstanding 128,625,105 and 127,272,032
shares, respectively...................................... 1,286 1,273
Class B -- convertible common stock -- $.01 par value;
authorized, 200,000,000 shares; issued and outstanding,
31,516,726 shares......................................... 315 315
Additional paid-in capital.................................. 2,621,145 2,594,043
Accumulated deficit......................................... (19,184) (26,727)
Unrealized gain in available for sale securities............ 23,779 10,353
Foreign currency translation................................ (2,632) (1,501)
Treasury stock.............................................. (5,573) --
Unearned compensation....................................... (820) (1,353)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
---------- ----------
Total stockholders' equity................................ 2,613,318 2,571,405
---------- ----------
$8,396,585 $8,327,102
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B
CONVERTIBLE ADDITIONAL FOREIGN
COMMON COMMON PAID-IN ACCUMULATED UNREALIZED CURRENCY
TOTAL STOCK STOCK CAPITAL DEFICIT GAINS TRANSLATION
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999......... $2,571,405 $1,273 $315 $2,594,043 $ (26,727) $ 10,353 $(1,501)
Comprehensive income:
Net earnings for the three months
ended March 31, 1999.............. 7,543 -- -- -- 7,543 -- --
Increase in unrealized gains in
available for sale securities..... 13,426 -- -- -- -- 13,426 --
Foreign currency translation....... (1,131) -- -- -- -- -- (1,131)
----------
Comprehensive income.............. 19,838
----------
Issuance of common stock upon
exercise of stock options......... 12,169 13 -- 12,156 -- -- --
Income tax benefit related to stock
options exercised................. 14,946 -- -- 14,946 -- -- --
Purchase of Treasury Stock in
connection with Stock Repurchase
Program........................... (4,938) -- -- -- -- -- --
Cancellation of employee equity
program........................... (355) -- -- -- -- -- --
Amortization of unearned
compensation related to stock
options and equity participation
plans............................. 253 -- -- -- -- -- --
---------- ------ ---- ---------- --------- -------- -------
BALANCE AT MARCH 31, 1999.......... $2,613,318 $1,286 $315 $2,621,145 $ (19,184) $ 23,779 $(2,632)
========== ====== ==== ========== ========= ======== =======
- --------------------------------------------------------------------------
Note
Receivable
from Key
Executive
for
Common
Treasury Unearned Stock
Stock Compensation Issuance
- --------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1999......... -- $(1,353) $(4,998)
Comprehensive income:
Net earnings for the three months
ended March 31, 1999.............. -- -- --
Increase in unrealized gains in
available for sale securities..... -- -- --
Foreign currency translation....... -- -- --
Comprehensive income..............
Issuance of common stock upon
exercise of stock options......... -- -- --
Income tax benefit related to stock
options exercised................. -- -- --
Purchase of Treasury Stock in
connection with Stock Repurchase
Program........................... (4,938) -- --
Cancellation of employee equity
program........................... (635) 280 --
Amortization of unearned
compensation related to stock
options and equity participation
plans............................. -- 253 --
---------- ------- -------
BALANCE AT MARCH 31, 1999.......... (5,573) $ (820) $(4,998)
========== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 7,543 $ 33,931
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 70,237 41,658
Amortization of cable distribution fees................... 6,090 5,610
Amortization of program rights and film costs............. 161,254 78,238
Deferred income taxes..................................... (459) 4,064
Equity in losses of unconsolidated affiliates............. 126 5,788
Gain on disposition of broadcast station.................. -- (74,940)
Gain on sale of securities................................ (47,300) --
Non-cash stock compensation............................... 1,386 500
Minority interest......................................... 74,065 4,298
Changes in current assets and liabilities:
Accounts receivable..................................... 10,111 (28,252)
Inventories............................................. (10,854) (2,129)
Accounts payable........................................ (33,873) 19,519
Accrued liabilities..................................... (4,441) 63,683
Payment for program rights and film costs................. (162,335) (84,329)
Increase in cable distribution fees....................... (6,981) (1,089)
Other, net................................................ (4,146) (6,576)
--------------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 60,423 59,974
--------------- ---------
Cash flows from investing activities:
Acquisition of Universal Transaction, net of cash
acquired................................................ -- (1,297,233)
Acquisitions, net of cash acquired........................ (4,421) (17,520)
Capital expenditures, net................................. (15,472) (19,002)
Increase in long-term investments......................... (11,384) (12,472)
Proceeds from long-term notes receivable.................. 3,691 813
Proceeds from disposition of broadcast station............ -- 80,000
Investment of broadcast station proceeds.................. -- (80,000)
Proceeds from sale of securities.......................... 58,110 --
Other, net................................................ (1,950) (19,920)
--------------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.......................................... 28,574 (1,365,334)
--------------- ---------
Cash flows from financing activities:
Borrowings................................................ -- 1,499,380
Principal payments on long-term obligations............... (7,780) (149,502)
Purchase of Treasury Stock................................ (4,938) --
Payment of mandatory tax distribution to LLC partners..... (28,830) --
Proceeds from issuance of common stock.................... 17,153 1,637
--------------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.......................................... (24,395) 1,351,515
--------------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................. (1,131) --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 63,471 46,155
Cash and cash equivalents at beginning of period............ 445,356 116,036
--------------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 508,827 $ 162,191
=============== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- COMPANY HISTORY AND BASIS OF PRESENTATION
COMPANY HISTORY
USA Networks, Inc., formerly HSN, Inc. (the "Company" or "USAi") is a
holding company, the subsidiaries of which are engaged in diversified media and
electronic commerce businesses.
In July 1997, the Company acquired a controlling interest in Ticketmaster
Group, Inc. ("Ticketmaster"). On June 24, 1998, the Company completed its
acquisition of Ticketmaster in a tax-free merger, pursuant to which each
outstanding share of Ticketmaster common stock not owned by the Company was
exchanged for 1.126 shares of USAi common stock. See Note C.
On February 12, 1998, the Company 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 the Company changed its name to USA Networks, Inc. (the
"Universal Transaction"). See Note C.
As of March 31, 1999, the Company engages in five 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.
- TICKETING OPERATIONS, which primarily represents Ticketmaster, the
leading provider of automated ticketing services in the United States,
and Ticketmaster Online, Ticketmaster's exclusive agent for online
ticket sales.
- INTERNET SERVICES, which represents the Company's on-line retailing
networks business and local city guide business.
- BROADCASTING, which owns and operates television stations.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements 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.
Certain amounts in the Condensed Consolidated Financial Statements for the
quarter ended March 31, 1998 have been reclassified to conform to the 1999
presentation.
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 B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "1998 Form 10-K") for a summary of all significant
accounting policies.
6
<PAGE> 8
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and voting-controlled subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Investments in which the Company owns a 20%, but not in excess of a 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. All other investments
are accounted for using the cost method. The Company periodically evaluates the
recoverability of investments recorded under the cost method and recognizes
losses if a decline in value is determined to be other than temporary.
EARNINGS PER SHARE
Basic earnings per share ("Basic EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share ("Diluted EPS") reflects the
potential dilution that could occur if stock options and other commitments to
issue common stock were exercised resulting in the issuance of common stock that
would share in the earnings of the Company.
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, sales return
accrual, allowance 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 C -- 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 the Company through
shares of common stock, par value $.01 per share, of the Company (the "Common
Stock") and Class B common stock, par value $.01 per share, of the Company (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 Electronic retailing
business to USANi LLC, a subsidiary of USAi.
The Investment Agreement, as amended and restated as of December 18, 1997,
among the Company, Home Shopping Network, Inc. ("Holdco"), Universal and Liberty
Media Corporation, a subsidiary of AT&T Corporation ("Liberty") (the "Investment
Agreement"), relating to the Universal Transaction also contemplated that, on or
prior to June 30, 1998, the Company and Liberty would complete a transaction
involving a $300 million cash investment, plus an interest factor, by Liberty in
the Company 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.
7
<PAGE> 9
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS -- (CONTINUED)
TICKETMASTER TRANSACTION
In connection with the Ticketmaster tax-free merger, as of June 24, 1998,
the Company issued 15,967,200 shares of Common Stock to the public shareholders
of Ticketmaster and converted 3.6 million options to acquire Ticketmaster common
stock into options to acquire Common Stock for a total consideration of $467.7
million. The acquisition of the controlling interest in Ticketmaster in 1997 and
the tax-free merger are collectively referred to as the "Ticketmaster
Transaction."
CITYSEARCH TRANSACTION
On September 28, 1998, pursuant to an Amended and Restated Agreement and
Plan of Reorganization among CitySearch, Inc. ("CitySearch"), the Company,
Ticketmaster and certain of its subsidiaries, the Company merged the online
ticketing operations of Ticketmaster ("Ticketmaster Online") into a subsidiary
of CitySearch, a publisher of local city guides on the Web (the "CitySearch
Merger"), to create Ticketmaster Online-CitySearch, Inc. ("TMCS"). The Company
had acquired Ticketmaster Online as part of the Ticketmaster Transaction and
allocated to Ticketmaster Online a total of $154.8 million of the goodwill
resulting from the Ticketmaster Transaction. The CitySearch Merger was accounted
for using the "reverse purchase" method of accounting, pursuant to which
Ticketmaster Online was treated as the acquiring entity for accounting purposes,
and the portion of the assets and liabilities of CitySearch acquired were
recorded at their respective fair values under the purchase method of
accounting.
Prior to the CitySearch Merger, the Company owned approximately 11.8% of
CitySearch, which it had purchased for total consideration of $23.0 million.
Pursuant to the CitySearch Merger, the Company acquired 50.7% of CitySearch in
exchange for an effective 35.2% interest in Ticketmaster Online. The total
purchase price for the acquisition of the additional CitySearch interest was
approximately $120.8 million, substantially all of which was allocated to
goodwill.
In connection with the CitySearch Merger, the Company purchased 1,997,502
TMCS shares pursuant to a Tender Offer, which was completed on November 3, 1998,
representing an additional 3.1% interest in CitySearch, for total consideration
of $17.3 million. Following the completion of the Tender Offer, the Company
beneficially owned approximately 67.9% of TMCS outstanding shares.
On December 8, 1998, TMCS completed an initial public offering of 8,050,000
shares of its common stock (the "CitySearch IPO"), which generated proceeds of
$105.0 million. In connection with the CitySearch IPO, the Company recognized a
gain of $41.1 million. The CitySearch Merger, the Tender Offer and the
CitySearch IPO are referred to as the "CitySearch Transaction".
The following unaudited pro forma condensed consolidated financial
information for the three months ended March 31, 1998, is presented to show the
results of the Company as if the Universal Transaction, Ticketmaster
Transaction, including significant acquisitions by Ticketmaster, the CitySearch
Transaction and the sale of SF Broadcasting (see Note H) 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.
8
<PAGE> 10
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998
------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net revenues....................................... $671,747
Net earnings....................................... 25,021
Basic earnings per common share.................... $ .16
========
Diluted earnings per common share.................. $ .10
========
</TABLE>
NOTE D -- CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE QUARTER ENDED
MARCH 31, 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.............................. $ 122,711
===========
</TABLE>
As of March 1, 1998, the 5 7/8% Convertible Subordinated Debentures were
converted to 7,499,022 shares of Common Stock.
During the quarter ended March 31, 1998, the Company acquired computer
equipment through a capital lease totaling $15.5 million.
In connection with the Universal Transaction, the Company issued 1,178,322
Class B Common Stock to Liberty, which represents the remaining contingently
issuable shares in connection with the Merger.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE QUARTER ENDED MARCH 31,
1999:
On March 29, 1999, TMCS completed its acquisition of City Auction, Inc.
("City Auction"), a person-to-person online auction community, by issuing
approximately 800,000 shares of its Class B common stock for all the outstanding
stock of City Auction, for a total value of $27.2 million.
During the quarter ended March 31, 1999, the Company acquired
post-production equipment through a capital lease totaling $2.0 million.
9
<PAGE> 11
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE E -- INVENTORIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
--------------------- ---------------------
INVENTORIES CONSIST OF CURRENT NONCURRENT CURRENT NONCURRENT
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization............... $ 86,259 $ 58,773 $ 98,082 $ 61,310
In process and unreleased................. 2,996 -- 138 --
Programming costs, net of amortization...... 157,309 90,830 156,789 90,518
Merchandise held for sale................... 166,401 -- 165,212 --
Other....................................... 1,728 -- 1,349 --
-------- -------- -------- --------
Total............................. $414,693 $149,603 $421,570 $151,828
======== ======== ======== ========
</TABLE>
The Company estimates that approximately 90% of unamortized film costs
(including amounts allocated under purchase accounting) at March 31, 1999 will
be amortized within the next three years.
NOTE F -- SAVOY SUMMARIZED FINANCIAL INFORMATION
The Company has not presented separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy Debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------------------
SUMMARIZED OPERATING INFORMATION 1999 1998
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net revenue............................................ $1,695 $ 14,286
Operating expenses..................................... 1,763 15,028
Operating loss......................................... (68) (742)
Net income (loss)...................................... 1,073 (1,590)
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION 1999 1998
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Current assets......................................... 14,282 24,115
Non-current assets..................................... 134,252 132,937
Current liabilities.................................... 11,638 12,596
Non-current liabilities................................ 43,895 52,532
</TABLE>
The March 31, 1998 amounts include the operations of SF Broadcasting, the
assets of which were sold on July 16, 1998.
10
<PAGE> 12
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE G -- PROGRAM RIGHTS AND FILM COSTS
As of March 31, 1999, the liability for program rights, representing future
payments to be made under program contract agreements amounted to $514.3
million. Annual payments required are $159.7 million in 1999, $139.4 million in
2000, $76.3 million in 2001, $51.3 million in 2002, $36.6 million in 2003 and
$51.0 million in 2004 and thereafter. Amounts representing interest are $35.9
million and the present value of future payments is $478.4 million.
As of March 31, 1999, the liability for film costs amounted to $112.4.
Annual payments are $47.4 in 1999 and $65.0 in 2000.
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 March 31, 1999, the unrecorded commitments amounted to $728.6 million. Annual
commitments are $55.9 million for the remainder of 1999, $125.6 million in 2000,
$157.3 million in 2001, $133.9 million in 2002, $82.2 million in 2003 and $173.7
million in 2004 and thereafter.
NOTE H -- BROADCAST STATION TRANSACTIONS
On January 20, 1998, the Company consummated the sale of its Baltimore
television station for $80.0 million resulting in a gain of $74.9 million during
the first quarter of 1998.
On July 16, 1998, the Company sold the assets of SF Broadcasting, which
owns and operates four television stations.
NOTE I -- INVESTMENTS
During the quarter ended March 31, 1999, the Company recognized a gain of
$47.3 million on the sale of securities in a publicly traded entity.
In March 1999, the Company entered into a series of financial instruments
to hedge the value of the Company's investment in securities of a publicly
traded entity. This hedge establishes a floor and ceiling for the value of these
securities and is intended to minimize the impact of market fluctuations until
the Company sells these securities. The hedge instruments expire in the third
quarter of 1999, which is within the period the Company expects to sell the
securities. The fair value of the hedge as of March 31, 1999 approximates the
carrying value.
NOTE J -- INDUSTRY SEGMENTS
For the quarter ended March 31, 1999, the Company operated principally in
five industry segments: Networks and television production, Electronic
retailing, Ticketing operations, Internet services and Broadcasting. Networks
and television production consists of the cable networks USA Network and The
Sci-Fi Channel and Studios USA, which produces and distributes television
programming. 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 Ticketing operations segment provides automated
ticketing services primarily in the United States. Internet services represents
the Company's on-line retailing networks business and local city guide business.
The Broadcasting segment includes the operations of 12 broadcast television
stations which principally transmit Home Shopping Network programming. Through
July 16, 1998, the broadcasting segment included the operations of SF
Broadcasting, the owner of network-affiliated television stations.
11
<PAGE> 13
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE J -- INDUSTRY SEGMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Networks and television production........................ $331,753 $166,162
Electronic retailing...................................... 275,783 242,196
Ticketing operations...................................... 102,656 93,235
Internet services......................................... 12,113 3,813
Broadcasting.............................................. 901 12,051
Other..................................................... 5,741 5,654
-------- --------
$728,947 $523,111
======== ========
Operating profit (loss)
Networks and television production........................ $ 80,715 $ 27,872
Electronic retailing...................................... 21,063 15,174
Ticketing operations...................................... 4,507 5,563
Internet services......................................... (25,005) (2,610)
Broadcasting.............................................. (11,382) (3,721)
Other..................................................... (8,691) (7,508)
-------- --------
$ 61,207 $ 34,770
======== ========
</TABLE>
NOTE K -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
On November 23, 1998, the Company completed an offering of $500.0 million
6 3/4% Senior Notes due 2005 (the "Notes" and "Notes Offering"). Interest is
payable on the Notes on May 15 and November 15 of each year, commencing May 15,
1999.
The Company is a holding company that has no operating assets or
operations. Certain of the Company's indirectly owned subsidiaries are held by
Holdco through USANi LLC. USANi LLC is a co-obligor of the Notes and Home
Shopping is a guarantor. Substantially all of the significant subsidiaries of
Holdco and USANi LLC and substantially all of the significant wholly owned
subsidiaries of the Company (principally subsidiaries engaged in the
broadcasting and ticketing operations) have jointly and severally guaranteed the
Company's and USANi LLC's indebtedness (the "Guarantors") under the Notes.
Certain subsidiaries of the Company, Holdco and USANi LLC (the "Non-Guarantor
Subsidiaries") do not guarantee such indebtedness.
Full financial statements of the Guarantors and Non-Guarantor Subsidiaries
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 separate full
financial statements of the wholly owned Guarantors or Non-Guarantor
Subsidiaries would be material to investors, except for information regarding
Holdco. The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
as of and for the three months ended March 31, 1999 (in thousands).
12
<PAGE> 14
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE K -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
- -- (CONTINUED)
<TABLE>
<CAPTION>
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Current assets................................ $ 2,024 $1,045,476 $ 323,635 $ -- $1,371,135
Property and equipment, net................... -- 198,486 60,961 -- 259,447
Goodwill and other intangible assets, net..... 77,359 5,389,530 950,885 -- 6,417,774
Investments in subsidiaries................... 2,614,467 763,362 -- (3,377,829) --
Other assets.................................. -- 294,428 53,801 -- 348,229
---------- ---------- ---------- ----------- ----------
Total assets.............................. $2,693,850 $7,691,282 $1,389,282 $(3,377,829) $8,396,585
========== ========== ========== =========== ==========
Current liabilities........................... $ -- $ 647,937 $ 204,999 $ -- $ 852,936
Long-term debt, less current portion.......... -- 719,131 43,509 -- 762,640
Other liabilities............................. 80,532 163,503 219,837 -- 463,872
Minority interest............................. -- 3,568,276 135,543 -- 3,703,819
Interdivisional equity........................ -- 2,592,435 785,394 (3,377,829) --
Stockholders' equity.......................... 2,613,318 -- -- -- 2,613,318
---------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.................... $2,693,850 $7,691,282 $1,389,282 $(3,377,829) $8,396,585
========== ========== ========== =========== ==========
Revenue....................................... $ -- $ 612,789 $ 116,158 $ -- $ 728,947
Operating expenses............................ (2,455) (534,301) (130,984) -- (667,740)
Interest expense, net......................... (1,724) (9,074) 434 -- (10,364)
Gain on sale of securities.................... -- 47,300 -- -- 47,300
Other income (expense), net................... 31,457 9,498 467 (31,457) 9,965
Provision for income taxes.................... (19,735) (1,883) (4,882) -- (26,500)
Minority interest............................. -- (81,796) 7,731 -- (74,065)
---------- ---------- ---------- ----------- ----------
Net (loss) income............................. $ 7,543 $ 42,533 $ (11,076) $ (31,457) $ 7,543
========== ========== ========== =========== ==========
Cash flows from operations.................... $ (9,789) $ 89,350 $ (19,138) $ -- $ 60,423
Cash flows used in investing
from activities............................. -- 29,696 (1,122) -- 28,574
Cash flows used in financing activities....... 9,789 (51,871) 17,687 -- (24,395)
Effect of exchange rate changes on cash and
cash equivalents............................ -- -- (1,131) -- (1,131)
Cash at the beginning of the period........... -- 253,468 191,888 -- 445,356
---------- ---------- ---------- ----------- ----------
Cash at the end of the period................. $ -- $ 320,643 $ 188,184 $ -- $ 508,827
========== ========== ========== =========== ==========
</TABLE>
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
for the three months ended March 31, 1998 (in thousands).
13
<PAGE> 15
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE K -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
- -- (CONTINUED)
<TABLE>
<CAPTION>
NON-GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
- -----------------------------------
Revenue............................ $ -- $ 412,262 $ 110,849 $ -- $ 523,111
Operating expenses................. (3,453) (377,355) (107,533) -- (488,341)
Interest expense, net.............. (872) (17,853) (4,824) (23,549)
Gain on disposition of broadcast -- 74,940 -- -- 74,940
stations.........................
Other income (expense), net........ 71,286 (2,458) (2,015) (76,033) (9,220)
Provision for income taxes......... (33,030) (2,645) (3,037) -- (38,712)
Minority interest.................. -- (5,321) 1,023 -- (4,298)
-------- --------- --------- -------- -----------
Net (loss) income.................. $ 33,931 $ 81,570 $ (5,537) $(76,033) $ 33,931
======== ========= ========= ======== ===========
Cash flows from operations......... $(39,540) $ 94,979 $ 4,535 $ -- $ 59,974
Cash flows used in investing -- (1,356,125) (9,209) (1,365,334)
activities.......................
Cash flows from financing 39,540 1,305,013 6,962 -- 1,351,515
activities.......................
Cash at the beginning of the -- (81,123) 197,159 -- 116,036
period...........................
-------- --------- --------- -------- -----------
Cash at the end of the period...... $ -- $ (37,256) $ 199,447 $ -- $ 162,191
======== ========= ========= ======== ===========
</TABLE>
NOTE L -- PENDING TRANSACTIONS
OCTOBER FILMS/POLYGRAM
On April 7, 1999, USAi announced that it had entered into an agreement to
acquire October Films, Inc., in which Universal owns a majority interest. In the
merger, October Films shareholders (other than Universal) will receive aggregate
consideration equal to $12 million in cash. Universal will receive 300,000
shares of USAi's common stock for its interest. To fund the cash consideration
portion of the transaction, Universal has also agreed to purchase from USAi
300,000 additional shares of USAi's common stock at $40.00 per share.
USAi also announced on April 7, 1999 an agreement to acquire from Universal
the domestic film distribution and development business previously operated by
Polygram Filmed Entertainment ("PFE") and PFE's domestic video and specialty
video businesses. The acquisition includes PFE's domestic production assets such
as Interscope Communications and Propaganda Films, as well as the following
distribution assets: PolyGram Video, Polygram Filmed Entertainment Canada,
Gramercy Pictures, and PolyGram Films. The acquisition of the above assets is
referred to as the "PFE Transaction".
In connection with the transaction, USAi has agreed to assume certain
liabilities related to the PFE businesses being acquired. In addition, USAi will
advance $200 million to Universal pursuant to an eight year, full recourse,
interest-bearing note in connection with a distribution agreement pursuant to
which USAi will distribute, in the U.S. and Canada, certain Polygram theatrical
films not being acquired. The advance will be repaid as revenues are received
under the distribution agreement and, in any event, will be repaid in full at
maturity. Both the October Films and PFE transactions are subject to the receipt
of required government approvals and other customary conditions. The
transactions are expected to close in second quarter of 1999.
HOTEL RESERVATIONS NETWORK
On May 10, 1999, the Company completed the acquisition of the assets of two
entities which operate Hotel Reservations Network, the leading consolidator of
hotel rooms in the United States. The purchase price was $150 million plus
contingent payments based on operating performance during the year ended
December 31, 1999 and for the twelve month periods ended March 31, 2000, 2001
and 2002.
14
<PAGE> 16
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE M -- SUBSEQUENT EVENT
LYCOS
On February 8, 1999, USAi and USANi LLC, Lycos, Inc. ("Lycos"),
Ticketmaster Online-CitySearch, Inc. ("TMCS"), USA Interactive Inc. ("Newco")
and two wholly owned subsidiaries of Newco entered into agreements relating to
the combination of Lycos, TMCS and certain of USAi's assets in an entity to be
controlled by USAi. On May 12, 1999, the parties jointly announced that they had
agreed by mutual consent to terminate these agreements. The agreement
terminating the transaction requires Lycos to pay $25.5 million to USAi and $9.5
million to TMCS if prior to July 15, 1999 Lycos enters into an agreement with
respect to, or, under certain circumstances, becomes subject to, certain
acquisition proposals. In addition, subject to certain exceptions, USAi and TMCS
each has agreed that until July 15, 1999 it will not acquire Lycos stock or make
any proposals to acquire Lycos.
15
<PAGE> 17
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
USAi is a holding company, with subsidiaries engaged in diversified media
and electronic commerce businesses. USAi adopted its present corporate structure
as part of the Universal transaction. USAi maintains control and management of
Home Shopping and USANi LLC, and manages the businesses held by USANi LLC in
substantially the same manner as they would be if USAi held them directly
through wholly owned subsidiaries.
In July 1997, USAi acquired a controlling interest in Ticketmaster. On June
24, 1998, USAi completed its acquisition of Ticketmaster in a tax-free merger.
The acquisition of the controlling interest and the tax-free merger are referred
to as the "Ticketmaster Transaction."
USAi completed the Universal transaction on February 12, 1998. In the
Universal transaction, USAi acquired USA Networks, a New York general
partnership, which consisted of USA Network and The Sci-Fi Channel cable
television networks, and Universal Studios, Inc.'s domestic television
production and distribution businesses from Universal, and changed its name to
USA Networks, Inc.
In September 1998, USAi merged Ticketmaster Online into a subsidiary of
CitySearch, Inc., a publisher of local city guides on the Web, to create
Ticketmaster Online-CitySearch.
EBITDA
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is defined as operating profit plus depreciation and amortization.
EBITDA is presented here as a management tool and as a valuation methodology for
companies in the media, entertainment and communications industries. EBITDA does
not purport to represent cash provided by operating activities. EBITDA should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
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.
TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
During the past three years, the Company augmented its media and electronic
commerce businesses by acquiring and developing several new businesses. As a
result, the following changes should be considered when comparing the results of
operations and financial position. These include the Universal transaction, the
acquisition of a controlling interest in Ticketmaster in July 1997, the
subsequent tax-free merger in June 1998, and the CitySearch Transaction. The
acquisitions caused a significant increase in net revenues, operating costs and
expenses and operating profit. To enhance comparability, the discussion of
consolidated results of operations is supplemented, where appropriate, with
separate pro forma financial information that gives effect to the above
transactions as if they had occurred at the beginning of the respective periods
presented.
16
<PAGE> 18
The pro forma information is not necessarily indicative of the revenues and
cost of revenues which would have actually been reported had the Universal
transaction, the Ticketmaster transaction, and the CitySearch Transaction
occurred at the beginning of the respective periods, nor is it necessarily
indicative of future results.
A. CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter ended March 31, 1999,
compared with the quarter ended March 31, 1998. The operations for the quarter
ended March 31, 1998, consist of the operations of Home Shopping, Savoy, SF
Broadcasting and USA Broadcasting and, since February 12, 1998, the results of
USA Networks and Studios USA while the operations for the quarter ended March
31, 1999 reflect Home Shopping, Savoy, USA Broadcasting, Ticketmaster, USA
Networks and Studios USA. Reference should also be made to the unaudited
Condensed Consolidated Financial Statements included herein.
QUARTER ENDED MARCH 31, 1999 VS. QUARTER ENDED MARCH 31, 1998
The Universal Transaction, the Ticketmaster Transaction and the CitySearch
Transaction resulted in significant increases in net revenues, operating costs
and expenses, other income (expense) and income taxes and will continue to
materially impact the Company's operations for the remainder of 1999 when
compared to 1998, and accordingly, no significant discussion of these
fluctuations is presented.
NET REVENUES
For the quarter ended March 31, 1999, revenues increased $205.8 million
compared to 1998 primarily due to increases of $165.6 million and $33.6 million
from the Networks and television production business and Electronic retailing,
respectively.
OPERATING COSTS AND EXPENSES
For the quarter ended March 31, 1999, total operating costs and expenses
increased $179.4 million compared to 1998 primarily due to increases of $112.7
million, $17.8 million and $10.5 million from the Networks and television
production business, Internet services and Ticketing operations, respectively. A
significant portion of the increase in Internet services is due to the
CitySearch Transaction and the increase in Ticketing operations resulted from an
increase in amortization of goodwill from the tax-free merger.
OTHER INCOME (EXPENSE), NET
For the quarter ended March 31, 1999, interest expense, net decreased $13.2
million compared to 1998 primarily due to lower borrowing levels as a result of
the repayment of bank debt from proceeds of the sale of the assets of SF
Broadcasting and equity transactions involving Universal and Liberty during
1998. In addition, the conversion of the Convertible Subordinated Debentures to
equity as of March 1, 1998 and lower interest rates lowered interest expense.
For the quarter ended March 31, 1999, other, net totaled $10.0 million
income compared to an expense of $9.2 million in 1998 primarily due to the
reversal of equity losses which were previously recorded as a result of the
Universal Transaction.
INCOME TAXES
The Company's effective tax rate, calculated after deducting the effects of
USANi LLC minority interest, of 86.6% for the quarter ended March 31, 1999 is
higher than the statutory rate as a result of non-deductible goodwill and other
acquired intangible assets and state income taxes. The effective rate was lower
than it would have been due to the effects of the gain on the sale of securities
which occurred in the quarter ended March 31, 1999.
17
<PAGE> 19
MINORITY INTEREST
For the quarter ended March 31, 1999, minority interest primarily
represents Universal's and Liberty's ownership interest in USANi LLC, Liberty's
ownership interest in Home Shopping and the public's ownership interest in TMCS.
For the quarter ended March 31, 1998, minority interest primarily
represents Universal's ownership interest in USANi LLC for the period February
12 through March 31, 1998, Liberty's ownership interest in Home Shopping, Fox
Broadcasting Company's 50% ownership interest in SF Broadcasting and the
public's ownership interest in Ticketmaster.
QUARTER ENDED MARCH 31, 1999 VS. PRO FORMA QUARTER
ENDED MARCH 31, 1998
The following unaudited pro forma operating results of the Company for the
quarter ended March 31, 1998 presents combined results of operations as if the
Universal Transaction, Ticketmaster Transaction, sale of the assets of SF
Broadcasting and the merger of Ticketmaster Online and CitySearch had occurred
on January 1, 1998.
The Unaudited Combined Condensed Pro Forma Statements of Operations are
presented for illustrative purposes only and are not necessarily indicative of
the results of operations that would have actually been reported had any of the
transactions occurred as of January 1, 1998, nor are they necessarily indicative
of future results of operations.
USA NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
PRO
ACTUAL FORMA
-------- --------
NET REVENUES:
Networks and television production........................ $331,753 $323,526
Electronic retailing...................................... 275,783 242,196
Ticketing operations...................................... 102,656 93,235
Internet Services......................................... 12,113 6,904
Broadcasting.............................................. 901 --
Other..................................................... 5,741 5,886
-------- --------
Total net revenues................................ 728,947 671,747
Operating costs and expenses:
Cost of sales............................................. 193,757 165,976
Program costs............................................. 170,067 177,822
Selling and marketing..................................... 115,421 112,381
General and administrative................................ 93,564 82,378
Other operating costs..................................... 18,604 19,038
Depreciation and amortization............................. 76,327 72,473
-------- --------
Total operating costs and expenses................ 667,740 630,068
-------- --------
Operating profit.................................. $ 61,207 $ 41,679
======== ========
EBITDA...................................................... $137,534 $114,152
======== ========
</TABLE>
For the quarter ended March 31, 1999, revenues for the Company increased
$57.2 million, or 8.5%, to $728.9 million from $671.7 million compared to pro
forma 1998. For the quarter ended March 31, 1999, cost of revenues and other
costs, excluding depreciation and amortization, increased $33.8 million, or
6.1%, to $591.4 million from $557.6 million compared to pro forma 1998.
18
<PAGE> 20
For the quarter ended March 31, 1999, EBITDA increased $23.4 million, or
20.5%, to $137.5 million from $114.1 million compared to pro forma 1998.
The following discussion provides an analysis of the aforementioned
increases in revenues and costs of revenues and other costs, excluding
depreciation and amortization, by significant business segment.
Networks and Television Production
Net revenues for the quarter ended March 31, 1999 increased by $8.3
million, or 2.6%, to $331.8 million from $323.5 million compared to 1998. The
increase primarily resulted from an increase in advertising revenues and
affiliate revenues at USA Network and The Sci-Fi Channel and increased
deliveries of and advertising revenue from first run product at the television
production business. The increase was partially offset by fewer deliveries of
network product and an increased usage of internally produced series for which
revenue recognition is deferred until aired on USA Network and The Sci-Fi
Channel.
Cost of revenues and other costs decreased by $16.7 million, or 7.0%, to
$222.9 million from $239.6 million. The decrease resulted primarily from lower
overhead and marketing costs, the sale of first run product at higher margins
and increased usage of internally produced product.
EBITDA for the quarter ended March 31, 1999 increased $25.0 million, or
29.8%, to $108.9 million from $83.9 million compared to pro forma 1998.
Electronic Retailing
Net revenues for the quarter ended March 31, 1999 increased by $33.6
million, or 13.9%, to $275.8 million from $242.2 million compared to 1998. The
increase resulted from higher revenues on both the Home Shopping Network and
America's Store services, higher continuity (or off-air) sales and the launch of
Home Shopping en Espanol on March 30, 1998. The increases were partially offset
by a planned decrease in the mail order business.
Cost of revenues and other costs increased by $25.1 million, or 12.0%, to
$234.8 million from $209.7 million. This increase resulted primarily from higher
sales (gross margin increased to 38.3% in 1999 compared to 38.2% in 1998),
severance costs and higher merchandising personnel costs. Also contributing to
the increase in costs was cost of sales of Home Shopping en Espanol and costs
associated with developing the Company's Short Shopping concept.
EBITDA for the quarter ended March 31, 1999 increased $8.5 million, or
26.1%, to $41.0 million from $32.5 million compared to 1998.
Ticketing Operations
Net revenues for the quarter ended March 31, 1999 increased by $9.4
million, or 10.1%, to $102.6 million from $93.2 million compared to 1998. The
increase resulted from a substantial increase in the number of tickets sold and
a slightly higher revenue per ticket. Revenues were also impacted by a
significant increase in the number of tickets (1.2 million additional tickets)
sold on-line.
Cost of revenues and other costs increased by $3.5 million, or 4.5%, to
$82.8 million from $79.3 million. This increase resulted primarily from higher
ticketing operation costs as a result of higher ticketing revenue, partially
offset by a reduction in overhead costs.
EBITDA for the quarter ended March 31, 1999 increased $5.9 million, or
42.3%, to $19.8 million from $13.9 million compared to 1998.
Internet Services
Net revenues for the quarter ended March 31, 1999 increased by $5.2
million, or 75.4%, to $12.1 million from $6.9 million in 1998. The increase
resulted from an increase in registered users to USAi's primary online retailing
service, First Auction, which was partially offset by the shut down of another
service during 1998, and an increase in online city guide revenue of 87.8%.
19
<PAGE> 21
Cost of revenues and other costs for the quarter ended March 31, 1999
increased by $11.1 million, or 66.9%, to $27.8 million from $16.7 million in
1998. The increase resulted primarily from increased costs to maintain and
enhance the Internet services and increased advertising and promotion costs. An
increased loss is expected for the remainder of 1999 as new sites are rolled
out.
EBITDA loss for the quarter ended March 31, 1999 increased by $5.9 million,
or 60.9% to $15.7 million from $9.8 million in 1998.
Broadcasting and Other
Net revenues include revenue generated from the distribution of films from
the Savoy library acquired as a result of the Savoy Merger and revenues of $.9
million generated at the television station in the Miami/ Ft. Lauderdale market.
Other costs related to revenues and other costs and expenses include costs
to generate the Savoy revenues, corporate expenses and $7.0 million of cost for
the Miami/Ft. Lauderdale station. A significant increase in losses's is expected
in the broadcasting segment in 1999 as costs are incurred to launch more local
television stations.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $60.4 million for the quarter
ended March 31, 1999. These cash proceeds were used to pay for capital
expenditures of $15.5 million and USAi to make long-term investments totaling
$11.4 million. In addition, the Company sold securities in a publicly traded
entity which generated cash proceeds of $58.1 million.
On February 12, 1998, USAi and USANi LLC, as borrower, entered into a
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. 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 revolving credit facility and the Tranche A Term Loan mature
on December 31, 2002.
On November 23, 1998, USAi completed an offering of $500.0 million 6 3/4%
Senior Notes due 2005 (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. 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 March 31, 1999 and as of May 7, 1999, there was $243.7 million in
outstanding borrowings under the Tranche A Term Loan and, under the revolving
credit portion of the credit facility, $599.9 million was available for
borrowing after taking into account outstanding letters of credit. As of March
31, 1999, the interest rate on loans outstanding under the Tranche A Term Loan
was 5.75%.
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 stock. These preemptive
rights generally allow Universal and Liberty the right to maintain an ownership
percentage equal to the ownership percentage that entity held, on a fully
converted basis, immediately prior to the issuance. In addition, Universal had
certain mandatory purchase obligations with respect to USAi's common stock or
USANi LLC shares issued with respect to the conversion of the Home Shopping
Debentures and the Ticketmaster tax-free merger. All of the events for which
Universal had mandatory purchase obligations have occurred.
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
20
<PAGE> 22
its 50% interest in the venture. Accordingly, during the quarter ended March 31,
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 its Internet businesses and the roll-out of new television
stations, future capital expenditures are projected to be higher than current
amounts.
USAi implemented its plan to disaffiliate its television station in the
Miami/Ft. Lauderdale market in June 1998. USAi has incurred and will continue to
incur expenditures to develop programming for this station, which during the
development and transitional stage, may not be offset by sufficient advertising
revenues. USAi plans to transition additional broadcasting stations to the new
format in 1999. USAi believes that the process of disaffiliation can be
successfully managed so as not to have a material adverse effect but rather to
maximize the value of the broadcasting stations. In connection with the launch
of the local television stations, the Company is in the process of building a
production center in California to serve the stations. The total capital cost
should not exceed $25 million.
On July 30, 1998, USAi announced that its Board of Directors authorized a
stock repurchase program of up to 10 million shares of USAi's outstanding common
stock over the next 12 months, on the open market or in negotiated transactions.
The amount and timing of purchases, if any, will depend on market conditions and
other factors, including USAi's overall capital structure. Funds for these
purchases will come from cash on hand or borrowings under the credit facility.
During the first quarter of 1999, the Company purchased 150,000 shares of
treasury stock for $4.9 million.
On March 1, 1999, the Company made a mandatory tax distribution payment to
Universal and Liberty in the amount of $28.8 million.
On April 7, 1999, USAi announced that it had entered into an agreement to
acquire October Films, Inc., in which Universal owns a majority interest. In the
merger, October Films shareholders (other than Universal) will receive aggregate
consideration equal to $12 million in cash. Universal will receive 300,000
shares of USAi's common stock for its interest. To fund the cash consideration
portion of the transaction, Universal has also agreed to purchase from USAi
300,000 additional shares of USAi's common stock at $40.00 per share. As part of
the transaction, the Company will guarantee half of the outstanding balance
under October Films' credit agreement, which as of May 7, 1999 had total
outstanding of $92 million.
USAi also announced on April 7, 1999 an agreement to acquire from Universal
the domestic film distribution and development business previously operated by
Polygram Filmed Entertainment ("PFE") and PFE's domestic video and specialty
video businesses. In connection with the transaction, USAi has agreed to assume
certain liabilities related to the PFE businesses being acquired. In addition,
USAi will advance $200 million to Universal pursuant to an eight year, full
recourse, interest-bearing note in connection with a distribution agreement
pursuant to which USAi will distribute, in the U.S. and Canada, certain Polygram
theatrical films not being acquired. The advance will be repaid as revenues are
received under the distribution agreement and, in any event, will be repaid in
full at maturity. Both the October Films and PFE transactions are subject to the
receipt of required government approvals and other customary conditions. The
transactions are expected to close in the second quarter of 1999.
On May 10, 1999, the Company completed the acquisition of the assets of two
entities which operate Hotel Reservations Network, the leading consolidator of
hotel rooms in the United States. The purchase price was $150 million plus
contingent payments based on operating performance during the year ended
December 31, 1999 and for the twelve month periods ended March 31, 2000, 2001
and 2002.
In management's opinion, available cash, internally generated funds and
available borrowings will provide sufficient capital resources to meet USAi's
foreseeable needs.
During the quarter ended March 31, 1999, USAi did not pay any cash
dividends, and none are permitted under the existing credit facility.
21
<PAGE> 23
OTHER MATTERS
USAi is currently working to resolve the potential impact of the year 2000
on the processing of date-sensitive information by USAi's computerized
information systems.
Although assessment of non-critical systems is an ongoing process, USAi 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. USAi has potential exposure in technological
operations within the sole control of USAi and in technological operations which
are dependent in some way on one or more third parties. USAi believes that it
has identified all significant technological areas within its control. USAi 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 USAi's operations.
USAi 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 of critical systems that are not Year 2000
compliant is nearly complete. USAi expects its Year 2000 assessment,
remediation, implementation and testing to be completed by the end of the second
quarter of 1999, except for some of its systems at Home Shopping Network and
Ticketmaster which are scheduled to be completed by September and October 1999,
respectively.
It is not possible at this time to predict with any reasonable certainty
the total cost to address all Year 2000 issues. However, USAi believes that the
total costs associated with the Year 2000 assessment, remediation,
implementation and testing will not exceed $10 million of which approximately $5
million has been spent through April 30, 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 USAi's
ongoing efforts to upgrade its infrastructure and systems.
Accordingly, based on existing information, USAi believes that the costs of
addressing potential problems will not have a material adverse effect on USAi's
financial position, results of operations or cash flows. However, if USAi, its
customers or vendors were unable to resolve the issues in a timely manner, it
could result in a material adverse effect on USAi's financial position, results
of operations or cash flows. USAi plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
USAi is currently focusing its efforts on identification and remediation of
its Year 2000 exposures and has not yet developed contingency plans in the event
it does not successfully complete all phases of its Year 2000 program. USAi is
currently examining its status and will continue to examine its status to
determine whether such plans are necessary.
SEASONALITY
USAi'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.
USAi believes seasonality impacts its Electronic Retailing segment but not
to the same extent it impacts the retail industry in general.
Ticketing Operations revenues are occasionally impacted by fluctuation in
the availability of events for sale to the public.
22
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Federal Trade Commission Matter previously reported in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 Form 10-K"), effective April 29, 1999, Home Shopping Network settled the
Federal Trade Commission's claims that it had violated the consent order. The
FTC filed a complaint in Federal District Court in Tampa, Florida and entered a
consent decree, under which Home Shopping Network paid a civil penalty of $1.1
million and was enjoined from violating the consent order. The settlement did
not constitute an admission of wrongdoing by Home Shopping Network.
In the Urban Broadcasting litigation, previously reported in the Company's
1998 Form 10-K, a trial was held on April 5-7, 1999. At the conclusion of
Urban's case, the court ruled that Urban's evidence be struck and that judgment
be entered in favor of Home Shopping Club LP, USAi and USA Station Group of
Virginia, Inc. on all counts of Urban's First Amended Motion for Judgment.
Further, the court ruled that the related chancery action, which had been
consolidated with the law action for trial, be severed for further proceedings
at some future date. A Final Order of Judgment concerning the above rulings was
entered by the court on May 5, 1999. On or about May 3, 1999, Home Shopping Club
LP, USAi and USA Station Group of Virginia, Inc. filed a Motion for Summary
Judgment directed to all remaining counts in the chancery action. A hearing on
that motion is currently set for June 3, 1999.
In the Jovon litigation, previously reported in the Company's 1998 Form
10-K, on February 1, 1999, a status conference was held and the court lifted the
stay and scheduled a summary judgment hearing for April 29, 1999. Thereafter,
the entities controlled by USAi filed an Amended Complaint that named Joseph and
Yvonne Stroud as additional defendants and sought additional equitable relief.
On April 9, 1999, Jovan and the Strouds answered the Amended Complaint and moved
for Summary Judgment. On April 26, 1999, the USAi entities filed a Memorandum in
Opposition to the Motion for Summary Judgment with supporting affidavits and
concurrently moved for a continuance of the hearing on the Motion for Summary
Judgment. On April 29, 1999, a hearing was held on the Motion for Summary
Judgment and the Motion for Continuance. The court has not yet ruled on either
motion.
In the Ticketmaster Shareholder Litigation, previously reported in the
Company's 1998 Form 10-K, on or about March 24, 1999, the plaintiffs in the
California cases filed a request for dismissal with prejudice as to all named
plaintiffs and a request for dismissal without prejudice as to any unnamed
potential class members.
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 adverse 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)
</TABLE>
(b) Forms 8-K
On February 26, 1999, USAi, filed a report on Form 8-K describing the terms
of the agreement among Lycos, Inc., Ticketmaster Online-CitySearch, Inc. and
USAi.
23
<PAGE> 25
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.
USA NETWORKS, INC.
--------------------------------------
(Registrant)
<TABLE>
<C> <S>
Dated May 14, 1999 /s/ BARRY DILLER
---------------------------------------- --------------------------------------------------------
Barry Diller
Chairman of the Board and
Chief Executive Officer
Dated May 14, 1999 /s/ VICTOR A. KAUFMAN
---------------------------------------- --------------------------------------------------------
Victor A. Kaufman
Office of the Chairman,
Chief Financial Officer
(Principal Financial Officer)
Dated May 14, 1999 /s/ MICHAEL P. DURNEY
---------------------------------------- --------------------------------------------------------
Michael P. Durney
Vice President, Controller
(Chief Accounting Officer)
</TABLE>
24
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <C> <S> <C>
</TABLE>
<PAGE> 27
(LOGO USA NETWORKS INC)
FORM 10-Q
For the Quarter Ended
March 31, 1999
<PAGE> 28
(LOGO USA NETWORKS INC)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of USA Networks, Inc. for the quarter ended March 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 508,827
<SECURITIES> 0
<RECEIVABLES> 368,176
<ALLOWANCES> 0
<INVENTORY> 414,693
<CURRENT-ASSETS> 1,371,135
<PP&E> 259,447
<DEPRECIATION> 182,465
<TOTAL-ASSETS> 8,396,585
<CURRENT-LIABILITIES> 852,936
<BONDS> 0
0
0
<COMMON> 1,601
<OTHER-SE> 2,611,717
<TOTAL-LIABILITY-AND-EQUITY> 8,396,585
<SALES> 728,947
<TOTAL-REVENUES> 728,947
<CGS> 363,824
<TOTAL-COSTS> 363,824
<OTHER-EXPENSES> 303,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,450
<INCOME-PRETAX> 108,108
<INCOME-TAX> 26,500
<INCOME-CONTINUING> 7,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,543
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
