<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 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 JUNE 30, 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 July 30, 1999, the following shares of the Registrant's capital stock
were outstanding:
<TABLE>
<S> <C>
Common Stock................................................ 135,507,369
Class B Common Stock........................................ 31,516,726
------------
Total outstanding Common Stock.................... 167,024,095
Common Stock issuable upon exchange of outstanding
exchangeable subsidiary equity............................ 180,576,423
------------
Total outstanding Common Stock, assuming full
exchange of exchangeable subsidiary equity...... 347,600,518
============
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of July 30, 1999 was $4,844,537,672. 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 July 30, 1999, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 347,600,518 shares of Common Stock with an
aggregate market value of $16,663,099,832.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production....... $ 316,612 $ 309,841 $ 648,365 $ 476,003
Electronic retailing..................... 285,122 266,224 560,905 508,420
Ticketing operations..................... 123,888 101,169 226,544 194,404
Hotel reservations....................... 23,018 -- 23,018 --
Internet services........................ 13,424 4,720 25,537 8,533
Filmed entertainment..................... 10,080 3,847 11,775 6,314
Broadcasting............................. 2,449 156 3,350 388
Other.................................... 2,836 17,436 6,882 32,442
---------- --------- ---------- ----------
Total net revenues............... 777,429 703,393 1,506,376 1,226,504
---------- --------- ---------- ----------
Operating costs and expenses:
Cost of sales............................ 227,348 176,295 421,105 340,659
Program costs............................ 149,280 168,785 319,347 258,923
Selling and marketing.................... 132,909 128,729 248,330 232,625
General and administrative............... 110,047 72,144 203,611 136,442
Other operating costs.................... 23,138 24,127 41,742 42,503
Amortization of cable distribution
fees.................................. 6,186 5,044 12,276 10,564
Depreciation and amortization............ 76,800 52,794 147,037 94,543
---------- --------- ---------- ----------
Total operating costs and
expenses....................... 725,708 627,918 1,393,448 1,116,259
---------- --------- ---------- ----------
Operating profit................. 51,721 75,475 112,928 110,245
Other income (expense):
Interest income.......................... 5,263 4,106 15,349 7,710
Interest expense......................... (19,613) (41,676) (40,063) (68,829)
Gain on disposition of broadcast
station............................... -- -- -- 74,940
Gain on sale of securities............... 2,970 -- 50,270 --
Other, net............................... (7,470) (7,035) 2,495 (16,255)
---------- --------- ---------- ----------
(18,850) (44,605) 28,051 (2,434)
---------- --------- ---------- ----------
Earnings before income taxes and minority
interest................................. 32,871 30,870 140,979 107,811
Income tax expense......................... (13,855) (17,461) (40,355) (56,173)
Minority interest.......................... (28,732) (16,449) (102,797) (20,747)
---------- --------- ---------- ----------
NET EARNINGS (LOSS)........................ $ (9,716) $ (3,040) $ (2,173) $ 30,891
========== ========= ========== ==========
Basic earnings (loss) per common share..... $ (.06) $ (.02) $ (.01) $ .24
========== ========= ========== ==========
Diluted earnings (loss) per common share... $ (.06) $ (.02) $ (.01) $ .16
========== ========= ========== ==========
</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>
- ----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 256,725 $ 445,356
Accounts and notes receivable, net of allowance of $33,159
and $20,610, respectively................................. 450,810 372,111
Inventories, net............................................ 419,093 421,570
Investment held for sale.................................... 31,352 --
Other current assets, net................................... 40,421 28,501
---------- ----------
Total current assets.............................. 1,198,401 1,267,538
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 260,108 249,539
Buildings and leasehold improvements........................ 103,177 100,339
Furniture and other equipment............................... 57,017 40,105
---------- ----------
420,302 389,983
Less accumulated depreciation and amortization............ (193,262) (168,727)
---------- ----------
227,040 221,256
Land........................................................ 16,126 16,044
Projects in progress........................................ 39,876 18,130
---------- ----------
283,042 255,430
OTHER ASSETS
Intangible assets, net...................................... 6,592,841 6,342,646
Cable distribution fees, net ($38,478 and $39,650,
respectively, to related parties)......................... 100,886 100,416
Long-term investments....................................... 52,571 63,365
Notes and accounts receivable, net of current portion
($1,980 and $3,356, respectively, from related parties)... 33,526 48,532
Advance to Universal........................................ 199,737 --
Inventories, net............................................ 159,751 151,828
Deferred charges and other, net ($4,673 and $4,357,
respectively, from related parties)....................... 93,176 97,347
---------- ----------
$8,713,931 $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>
- ----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 137,731 $ 36,538
Accounts payable, trade..................................... 158,259 186,690
Accounts payable, client accounts........................... 101,292 70,817
Obligations for program rights and film costs............... 220,469 184,583
Deferred revenue............................................ 85,078 45,619
Amounts due under acquisition agreements.................... 51,500 --
Royalty payable to Universal................................ 38,509 --
Cable distribution fees payable ($18,663 and $18,633,
respectively, to related parties)......................... 27,782 44,588
Deferred income taxes....................................... 28,584 17,269
Other accrued liabilities................................... 245,799 276,675
---------- ----------
Total current liabilities......................... 1,095,003 862,779
LONG-TERM OBLIGATIONS, net of current....................... 751,500 775,683
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 339,817 409,956
OTHER LONG-TERM LIABILITIES................................. 90,274 73,682
MINORITY INTEREST........................................... 3,773,201 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 131,471,584 and 127,272,032
shares, respectively...................................... 1,315 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.................................. 2,679,774 2,594,043
Accumulated deficit......................................... (28,900) (26,727)
Unrealized gain in available for sale securities............ 24,746 10,353
Foreign currency translation................................ (1,976) (1,501)
Treasury stock.............................................. (5,573) --
Unearned compensation....................................... (567) (1,353)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
---------- ----------
Total stockholders' equity........................ 2,664,136 2,571,405
---------- ----------
$8,713,931 $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 loss for the six months
ended June 30, 1999........... (2,173) -- -- -- (2,173) -- --
Increase in unrealized gains in
available for sale
securities.................... 14,393 -- -- -- -- 14,393 --
Foreign currency translation.... (475) -- -- -- -- -- (475)
----------
Comprehensive income........ 11,745
----------
Issuance of common stock upon
exercise of stock options....... 22,732 35 -- 22,697 -- -- --
Income tax benefit related to
stock options exercised......... 36,516 -- -- 36,516 -- -- --
Issuance of stock in connection
with October Films/PFE
Transaction..................... 23,558 6 -- 23,552 -- -- --
Issuance of stock in connection
with an acquisition............. 2,967 1 -- 2,966 -- -- --
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........................... 506 -- -- -- -- -- --
---------- ------ ---- ---------- -------- ------- -------
BALANCE AT JUNE 30, 1999......... $2,664,136 $1,315 $315 $2,679,774 $(28,900) $24,746 $(1,976)
========== ====== ==== ========== ======== ======= =======
<CAPTION>
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 loss for the six months
ended June 30, 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......... -- -- --
Issuance of stock in connection
with October Films/PFE
Transaction..................... -- -- --
Issuance of stock in connection
with an acquisition............. -- -- --
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........................... -- 506 --
------- ------- -------
BALANCE AT JUNE 30, 1999......... $(5,573) $ (567) $(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>
- ------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................... $ (2,173) $ 30,891
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 147,037 94,543
Amortization of cable distribution fees................... 12,276 10,564
Amortization of program rights and film costs............. 270,530 226,998
Gain on disposition of broadcast station.................. -- (74,940)
Gain on sale of securities................................ (50,270) --
Minority interest......................................... 102,797 20,747
Non-cash stock compensation............................... 2,187 2,064
Changes in current assets and liabilities:
Accounts receivable.................................... (4,571) (80,500)
Inventories............................................ (18,421) (27,472)
Accounts payable....................................... (12,071) 69,570
Accrued liabilities.................................... 7,860 57,418
Payment for program rights and film costs................. (265,512) (233,662)
Increase in cable distribution fees....................... (12,746) (1,140)
Other, net................................................ 12,697 46,230
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 189,620 141,311
----------- -----------
Cash flows from investing activities:
Acquisition of Universal Transaction, net of cash
acquired............................................... -- (1,297,233)
Acquisitions, net of cash acquired........................ (162,183) (85,555)
Capital expenditures, net................................. (52,665) (36,932)
Advance to Universal...................................... (200,000) --
Recoupment of advance to Universal........................ 1,343 --
Increase in long-term investments......................... (12,150) (10,178)
Proceeds from long-term notes receivable.................. 3,691 813
Proceeds from disposition of broadcast station............ -- 80,000
Investment of broadcast station proceeds.................. -- (33,825)
Proceeds from sale of securities.......................... 61,080 --
Other, net................................................ (2,384) (20,855)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............. (363,268) (1,403,765)
----------- -----------
Cash flows from financing activities:
Borrowings................................................ -- 1,641,380
Principal payments on long-term obligations............... (15,472) (771,772)
Purchase of Treasury Stock................................ (4,938) --
Payment of mandatory tax distribution to LLC partners..... (28,830) --
Proceeds from issuance of common stock.................... 34,732 414,145
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES...................................... (14,508) 1,283,753
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... (475) (1,457)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (188,631) 19,842
Cash and cash equivalents at beginning of period............ 445,356 116,036
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 256,725 $ 135,878
=========== ===========
</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 1 -- 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 3.
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 3.
On May 10, 1999, the Company acquired the assets of two entities which
operate Hotel Reservations Network (the "Hotel Reservations Network
Transaction") -- See Note 3.
On May 28, 1999 the Company acquired October Films, Inc. ("October Films"),
in which Universal owned a majority interest, and the domestic film distribution
and development business of Universal previously operated by Polygram Filmed
Entertainment, Inc. ("PFE") (the "October Films/PFE Transaction") -- See Note 3.
As of June 30, 1999, the Company engages in seven 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.
- HOTEL RESERVATIONS, consisting of Hotel Reservations Network, a leading
consolidator of hotel rooms for resale in the consumer market in the
United States.
- INTERNET SERVICES, which represents the Company's on-line retailing
networks business and local city guide business.
- FILMED ENTERTAINMENT, which primarily represents the Company's domestic
theatrical film distribution and production businesses.
- BROADCASTING, which owns and operates television stations.
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. Certain amounts in the Condensed Consolidated Financial Statements for
the quarter and six months ended June 30, 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
6
<PAGE> 8
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 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.
HOTEL RESERVATIONS REVENUE RECOGNITION
Revenue related to the sale of hotel rooms is recognized at the conclusion
of the customer's stay at the hotel.
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 and film 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 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. 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 Network Inc.
("Holdco") in 1996.
The Investment Agreement, as amended and restated as of December 18, 1997,
among the Company, Holdco, 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, 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.
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.
7
<PAGE> 9
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
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".
HOTEL RESERVATIONS NETWORK TRANSACTION
On May 10, 1999, the Company completed the acquisition of the assets of two
entities which operate Hotel Reservations Network, a leading consolidator of
hotel rooms for resale in the consumer market 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. Through August 4, 1999, the Company paid $25
million pursuant to these contingent payment arrangements. The transaction has
been accounted for under the purchase method of accounting. The purchase price,
including the initial contingent payments for the year ended December 31, 1999,
which management has determined are probable of occurance, has been
preliminarily allocated to the assets acquired and liabilities assumed based on
their respective fair values at the date of purchase. The unallocated excess of
acquisition costs over net assets acquired of $201.0 million has been
preliminarily allocated to goodwill, which is being amortized over 10 years.
OCTOBER FILMS/PFE TRANSACTION
In connection with the acquisition of October Films, Inc., as of May 28,
1999, the Company issued 300,000 shares of Common Stock to Universal and paid
cash consideration of approximately $12 million to October Films shareholders
(other than Universal) for total consideration of $23.6 million. In addition,
the Company assumed $83.2 million outstanding debt under October Films' credit
agreement. To fund the cash consideration portion of the transaction, Universal
purchased from USAi 300,000 additional shares of Common Stock at $40.00 per
share.
8
<PAGE> 10
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Also on May 28, 1999, USAi acquired from Universal the domestic film
distribution and development business previously operated by PFE and PFE's
domestic video and specialty video businesses. The acquisition included 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. In
connection with the transaction, USAi agreed to assume certain liabilities
related to the PFE businesses acquired. In addition, USAi advanced $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 which were not
acquired in the transaction. The advance is repaid as revenues are received
under the distribution agreement and, in any event, will be repaid in full at
maturity. Through June 30, 1999, approximately $1 million had been offset
against the advance.
The October Films/PFE Transaction has been accounted for under the purchase
method of accounting. The purchase price has been preliminarily allocated to the
assets acquired and liabilities assumed based on their respective fair values at
the date of purchase. The unallocated excess of acquisition costs over net
assets acquired of $90.8 million has been preliminarily allocated to goodwill,
which is being amortized over 40 years.
The following unaudited pro forma condensed combined financial information
for the quarter and six month periods ended June 30, 1999 and 1998, is presented
to show the results of the Company as if the Universal Transaction, the
Ticketmaster Transaction, the CitySearch Transaction, the sale of SF
Broadcasting (see Note 8), the Hotel Reservations Network Transaction and the
October Films/PFE Transaction all occurred at the beginning of the periods
presented. 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>
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues..................................... $804,496 $711,509 $1,561,364 $1,405,593
Net earnings (loss).............................. (9,322) (12,448) (7,032) 12,889
Basic earnings (loss) per common share........... $ (.06) $ (.09) $ (.04) $ .07
======== ======== ========== ==========
Diluted earnings (loss) per common share......... $ (.06) $ (.09) $ (.04) $ .06
======== ======== ========== ==========
</TABLE>
NOTE 4 -- CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 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 common stock for all the outstanding stock
of City Auction, for a total value of $27.2 million.
On May 28, 1999, in connection with the October Films/PFE Transaction, the
Company issued 300,000 shares of Common Stock, with a value of $11.6 million.
On June 14, 1999, TMCS completed its acquisition of Match.com, Inc.,
("Match"), an Internet personals company. In connection with the acquisition,
TMCS issued 1,924,777 shares of its common stock to the former owners of Match
representing a total purchase price of approximately $45.0 million.
During the six months ended June 30, 1999, the Company acquired
post-production equipment through a capital lease totaling $2.1 million.
9
<PAGE> 11
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 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.............................. $ 199,576
===========
</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 six months ended June 30, 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 represented the remaining contingently
issuable shares in connection with the 1996 merger of the Company with Home
Shopping Network, Inc.
In connection with the acquisition of the remaining interest in
Ticketmaster, the Company issued 15,967,200 shares of Common Stock.
NOTE 5 -- INVENTORIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1999 1998
--------------------- ---------------------
INVENTORIES CONSIST OF: CURRENT NONCURRENT CURRENT NONCURRENT
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization............... $ 92,844 $ 62,083 $ 98,082 $ 61,310
Completed or in process and unreleased.... 31,241 12,035 138 --
Programming costs, net of amortization...... 131,224 85,633 156,789 90,518
Inventories held for sale................... 162,343 -- 165,212 --
Other....................................... 1,441 -- 1,349 --
-------- -------- -------- --------
Total.................................. $419,093 $159,751 $421,570 $151,828
======== ======== ======== ========
</TABLE>
The Company estimates that approximately 90% of unamortized film costs at
June 30, 1999 will be amortized within the next three years.
10
<PAGE> 12
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 6 -- SAVOY SUMMARIZED FINANCIAL INFORMATION
The Company has not presented separate financial statements and other
disclosures concerning Savoy Pictures Entertainment, Inc. ("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>
- -----------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
SUMMARIZED OPERATING INFORMATION 1999 1998
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net revenue............................................ $3,073 $31,656
Operating expenses..................................... 3,201 32,663
Operating loss......................................... (128) (1,007)
Net income (loss)...................................... 2,120 (3,340)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION 1999 1998
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Current assets......................................... $ 12,902 $ 24,115
Non-current assets..................................... 137,142 132,937
Current liabilities.................................... 12,195 12,596
Non-current liabilities................................ 43,800 52,532
</TABLE>
The June 30, 1998 amounts include the operations of SF Broadcasting, the
assets of which were sold on July 16, 1998.
NOTE 7 -- PROGRAM RIGHTS AND FILM COSTS
As of June 30, 1999, the liability for program rights, representing future
payments to be made under program contract agreements amounted to $462.8
million. Annual payments required are $101.6 million in 1999, $141.4 million in
2000, $80.6 million in 2001, $52.4 million in 2002, $36.6 million in 2003 and
$50.2 million in 2004 and thereafter. Amounts representing interest are $35.1
million and the present value of future payments is $427.7 million.
As of June 30, 1999, the liability for film costs amounted to $132.6
million. Annual payments are $45.6 million in 1999 and $87.0 million 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 June 30, 1999, the unrecorded commitments amounted to $868.3 million. Annual
commitments are $48.7 million for the remainder of 1999, $153.6 million in 2000,
$183.9 million in 2001, $167.6 million in 2002, $117.5 million in 2003 and
$197.0 million in 2004 and thereafter.
NOTE 8 -- 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
owned and operated four television stations.
11
<PAGE> 13
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- INVESTMENTS
During the quarter and six months ended June 30, 1999, the Company
recognized gains of $3.0 million and $50.3 million, respectively, from 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 during the
third quarter of 1999. The Company intends to sell the securities during the
third quarter of 1999. Based on the closing price of the underlying securities,
the fair value of the hedge as of June 30, 1999 reflects a loss of $11.7
million, which is offset by the unrealized gain on the fair value of the
security from the date the hedge transaction was entered.
NOTE 10 -- INDUSTRY SEGMENTS
For the quarter and six months ended June 30, 1999, the Company operated
principally in seven industry segments: Networks and television production,
Electronic retailing, Ticketing operations, Hotel reservations, Internet
services, Filmed entertainment and Broadcasting. 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.
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. The Hotel reservations segment was
formed on May 10, 1999 in conjunction with the acquisition of Hotel Reservations
Network, a leading consolidator of hotel rooms for resale in the United States.
The Internet services segment represents the Company's on-line retailing
networks business and local city guide business. The Filmed entertainment
segment represents USA Films, which consists of domestic theatrical film
distribution and production businesses which were acquired May 28, 1999, and
Savoy. The Broadcasting segment includes the operations of broadcast television
stations in twelve markets that principally transmit Home Shopping Network
programming. Through July 16, 1998, Other included the operations of SF
Broadcasting, the owner of network-affiliated television stations.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenue
Networks and television production....... $316,612 $309,841 $ 648,365 $ 476,003
Electronic retailing..................... 285,122 266,224 560,905 508,420
Ticketing operations..................... 123,888 101,169 226,544 194,404
Hotel reservations....................... 23,018 -- 23,018 --
Internet services........................ 13,424 4,720 25,537 8,533
Filmed entertainment..................... 10,080 3,847 11,775 6,314
Broadcasting............................. 2,449 156 3,350 388
Other.................................... 2,836 17,436 6,882 32,442
-------- -------- ---------- ----------
$777,429 $703,393 $1,506,376 $1,226,504
======== ======== ========== ==========
</TABLE>
12
<PAGE> 14
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Operating profit (loss)
Networks and television production....... $ 77,154 $ 57,317 $ 157,869 $ 85,189
Electronic retailing..................... 25,826 24,275 46,888 39,449
Ticketing operations..................... 11,847 6,239 16,356 11,802
Hotel reservations....................... 659 -- 659 --
Internet services........................ (36,334) (3,778) (61,339) (6,388)
Filmed entertainment..................... (439) 1,522 (640) 1,068
Broadcasting............................. (13,705) (6,513) (25,087) (10,234)
Other.................................... (13,287) (3,587) (21,778) (10,641)
-------- -------- ---------- ----------
$ 51,721 $ 75,475 $ 112,928 $ 110,245
======== ======== ========== ==========
</TABLE>
NOTE 11 -- 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
Home Shopping Network, Inc. ("Holdco") through USANi LLC. USANi LLC is a
co-obligor of the Notes and Holdco 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. Full financial statements of
Holdco, a non-wholly owned Guarantor, are presented in a separate filling. The
following are summarized unaudited statements setting forth certain financial
information concerning the Guarantors and Non-Guarantor Subsidiaries as of and
for the three and six months ended June 30, 1999 (in thousands).
13
<PAGE> 15
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AS OF
JUNE 30, 1999
Current assets................... $ 1,829 $ 789,252 $ 407,320 $ -- $1,198,401
Property and equipment, net...... -- 217,589 65,453 -- 283,042
Goodwill and other intangible
assets, net.................... 76,836 5,350,073 1,266,818 -- 6,693,727
Investments in subsidiaries...... 2,616,913 742,834 -- (3,359,747) --
Other assets..................... 199,737 315,290 23,734 -- 538,761
---------- ---------- ---------- ----------- ----------
Total assets................ $2,895,315 $7,415,038 $1,763,325 $(3,359,747) $8,713,931
========== ========== ========== =========== ==========
Current liabilities.............. $ 18,313 $ 661,559 $ 415,131 $ -- $1,095,003
Long-term debt, less current
portion........................ -- 707,951 43,549 -- 751,500
Other liabilities................ 212,866 83,273 133,952 -- 430,091
Minority interest................ -- 3,628,545 144,656 -- 3,773,201
Interdivisional equity........... -- 2,333,710 1,026,037 (3,359,747) --
Stockholders' equity............. 2,664,136 -- -- -- 2,664,136
---------- ---------- ---------- ----------- ----------
Total liabilities and
shareholders' equity...... $2,895,315 $7,415,038 $1,763,325 $(3,359,747) $8,713,931
========== ========== ========== =========== ==========
OPERATING RESULTS FOR THE QUARTER
ENDED JUNE 30, 1999
Revenue.......................... $ -- $ 607,988 $ 169,441 $ -- $ 777,429
Operating expenses............... (4,843) (536,140) (184,725) -- (725,708)
Interest expense, net............ (3,037) (11,304) (9) -- (14,350)
Gain on sale of securities....... -- 2,970 -- -- 2,970
Other income (expense), net...... 4,890 (17,492) 10,022 (4,890) (7,470)
Income tax expense............... (6,726) (1,255) (5,874) -- (13,855)
Minority interest................ -- (38,834) 10,102 -- (28,732)
---------- ---------- ---------- ----------- ----------
Net earnings (loss).............. $ (9,716) $ 5,933 $ (1,043) $ (4,890) $ (9,716)
========== ========== ========== =========== ==========
OPERATING RESULTS FOR THE SIX
MONTHS
ENDED JUNE 30, 1999
Revenue.......................... $ -- $1,220,777 $ 285,599 $ -- $1,506,376
Operating expenses............... (7,298) (1,070,441) (315,709) -- (1,393,448)
Interest income (expense), net... (4,761) (20,378) 425 -- (24,714)
Gain on sale of securities....... -- 50,270 -- -- 50,270
Other income (expense), net...... 36,347 (7,994) 10,489 (36,347) 2,495
Income tax expense............... (26,461) (3,138) (10,756) -- (40,355)
Minority interest................ -- (120,630) 17,833 -- (102,797)
---------- ---------- ---------- ----------- ----------
Net earnings (loss).............. $ (2,173) $ 48,466 $ (12,119) $ (36,347) $ (2,173)
========== ========== ========== =========== ==========
</TABLE>
14
<PAGE> 16
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA FOR THE SIX MONTHS
ENDED JUNE 30, 1999
Cash flows from operating
activities..................... $ (28,395) $ 193,187 $ 24,828 $ -- $ 189,620
Cash flows from investing
activities..................... (372,285) 3,846 5,171 -- (363,268)
Cash flows from financing
activities..................... 400,680 (414,710) (478) -- (14,508)
Effect of exchange rate changes
on cash and cash equivalents... -- -- (475) -- (475)
Cash at the beginning of the
period......................... -- 253,468 191,888 -- 445,356
---------- ---------- ---------- ----------- ----------
Cash at the end of the period.... $ -- $ 35,791 $ 220,934 $ -- $ 256,725
========== ========== ========== =========== ==========
</TABLE>
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
for the three and six months ended June 30, 1998 (in thousands).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS FOR THE
QUARTER
ENDED JUNE 30, 1998
Revenue......................... $ -- $ 580,441 $ 122,952 $ -- $ 703,393
Operating expenses.............. 52 (511,807) (116,163) -- (627,918)
Interest expense, net........... 570 (33,251) (4,889) -- (37,570)
Other income (expense), net..... 9,421 (15,902) 8,867 (9,421) (7,035)
Income tax expense.............. (13,083) (1,263) (3,115) -- (17,461)
Minority interest............... -- (16,389) (60) -- (16,449)
-------- --------- --------- ------- ---------
Net earnings (loss)............. $ (3,040) $ 1,829 $ 7,592 $(9,421) $ (3,040)
======== ========= ========= ======= =========
</TABLE>
15
<PAGE> 17
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS FOR THE SIX
MONTHS ENDED JUNE 30, 1998
Revenue......................... $ -- $ 992,702 $ 233,802 $ -- $ 1,226,504
Operating expenses.............. (3,402) (889,187) (223,670) -- (1,116,259)
Interest expense, net........... (302) (51,104) (9,713) -- (61,119)
Gain on disposition of broadcast
stations...................... -- 74,940 -- -- 74,940
Other income (expense), net..... 80,708 (19,676) 6,852 (84,139) (16,255)
Income tax expense.............. (46,113) (3,908) (6,152) -- (56,173)
Minority interest............... -- (21,710) 963 -- (20,747)
-------- ----------- ----------- -------- -----------
Net earnings (loss)............. $ 30,891 $ 82,057 $ 2,082 $(84,139) $ 30,891
======== =========== =========== ======== ===========
CASH FLOW DATA FOR THE SIX
MONTHS ENDED JUNE 30, 1998
Cash flows from operating
activities.................... $ 55,834 $ 43,905 $ 41,572 $ -- $ 141,311
Cash flows from investing
activities.................... (59,413) (1,315,909) (28,443) -- (1,403,765)
Cash flows from financing
activities.................... 3,537 1,392,534 (112,318) -- 1,283,753
Effect of exchange rate changes
on cash and cash
equivalents................... -- -- (1,457) -- (1,457)
Cash at the beginning of the
period........................ 42 14,093 101,901 -- 116,036
-------- ----------- ----------- -------- -----------
Cash at the end of the period... $ -- $ 134,623 $ 1,255 $ -- $ 135,878
======== =========== =========== ======== ===========
</TABLE>
NOTE 12 -- SUBSEQUENT EVENT
On July 19, 1999, TMCS entered into an agreement to acquire certain assets
associated with the entertainment city guide ("A&E") portion of Sidewalk.com web
site ("Sidewalk") from the Microsoft Corporation ("Microsoft"). TMCS also
entered into a four year distribution agreement with Microsoft pursuant to which
TMCS will become the exclusive provider of local city guide content on the
Microsoft Network ("MSN") and TMCS's internet personals Web sites will become
the premier provider of personal content to MSN. In addition, TMCS and Microsoft
entered into additional cross-promotional arrangements. The transaction is
expected to close during the third quarter of 1999 following regulatory
approval. In connection with these transactions, TMCS agreed to issue 7,000,000
shares of its common stock and two warrants to purchase an aggregate of
4,500,000 shares of its common stock. The first warrant has an initial exercise
price of $30 per share, which adjusts downward by $1/16 for each $1/16 increase
in the price of the TMCS common stock over $30 at the time the warrant is
exercised. The second warrant for 1,500,000 shares has a fixed exercise price of
$60 per share of TMCS common stock.
16
<PAGE> 18
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 Network, Inc. ("Holdco") and USANi LLC, which are non-wholly owned
subsidiaries of USAi, 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 consists of USA Network and The Sci-Fi Channel cable
television networks, and Universal Studios, Inc.'s domestic television
production and distribution businesses from Universal Studios, Inc.
("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 (the "CitySearch Transaction").
In May 1999, the Company acquired the assets of two entities which operate
Hotel Reservations Network (the "Hotel Reservations Network Transaction"), a
leading consolidator of hotel rooms for resale in the consumer market in the
United States. Also in May 1999, the Company acquired October Films, Inc. and
the domestic film distribution and development business of Universal which was
previously operated by Polygram Filmed Entertainment (the "October
Films/Polygram Transaction"). In connection with these transactions, the Company
established the Hotel reservations and Filmed entertainment business segments.
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
Ticketmaster Transaction, the CitySearch Transaction, the Hotel Reservations
Network Transaction and the
17
<PAGE> 19
October Films/PFE 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.
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, the CitySearch Transaction, the Hotel
Reservations Network Transaction and the October Films/PFE 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 and six months ended June
30, 1999, compared with the quarter and six months ended June 30, 1998. The
operations for the quarter and six months ended June 30, 1999 reflect Home
Shopping, Savoy, USA Broadcasting, Ticketmaster, USA Networks and Studios USA
and since May 11, 1999 and May 28, 1999, respectively, the results of Hotel
Reservations Network and USA Films. The operations for the quarter and six
months ended June 30, 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. Reference should also be made to the unaudited
Condensed Consolidated Financial Statements included herein.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 VS. QUARTER AND SIX MONTHS ENDED JUNE
30, 1998
The Universal Transaction, the Ticketmaster Transaction, the CitySearch
Transaction, the Hotel Reservation Network Transaction and the October Films/
PFE 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 when comparing year to date
information for 1999 to 1998, and accordingly, no significant discussion of
these fluctuations is presented.
NET REVENUES
For the quarter ended June 30, 1999, revenues increased $74.0 million
compared to 1998 primarily due to increases of $28.9 million, $23.0 million,
$22.7 million and $18.9 million from the USA Network and The Sci-Fi Channel,
Hotel reservations, Ticketing operations and Electronic retailing businesses,
respectively. The increases were partially offset by decreases of $22.1 million
from Studios USA due to fewer deliveries of network product, fewer pilots
produced and increased usage of internally produced series for which revenue
recognition is deferred until aired on USA Network and the Sci-Fi Channel, and
$13.5 million due to the sale of SF Broadcasting in July 1998.
For the six months ended June 30, 1999, revenues increased $279.9 million
compared to 1998 primarily due to increases of $172.4 million, $52.5 million,
$32.1 million and $23.0 million from the Networks and television production,
Electronic retailing, Ticketing operations and Hotel reservations businesses,
respectively, partially offset by a decrease of $25.3 million due to the sale of
SF Broadcasting in July 1998.
OPERATING COSTS AND EXPENSES
For the quarter ended June 30, 1999, total operating costs and expenses
increased $97.8 million compared to 1998 primarily due to increases of $41.3
million, $22.4 million, $17.3 million and $17.1 million from the Internet
services, Hotel reservations, Electronic retailing and Ticketing operations
businesses, respectively. A significant portion of the increase in Internet
services is due to amortization expense as a result of the CitySearch
Transaction. Increases in Electronic retailing and Ticketing operations are
related to increased revenues and increased amortization expense resulting from
the Ticketmaster merger respectively.
For the six months ended June 30, 1999, total operating costs and expenses
increased $277.2 million compared to 1998 primarily due to increases of $99.7
million, $72.0 million, $45.0 million, $27.6 million and
18
<PAGE> 20
$22.4 million from the Networks and television production, Internet services,
Electronic retailing, Ticketing operations and Hotel reservations businesses,
respectively. A significant portion of the increase in Internet services is due
to amortization expense as a result of the CitySearch Transaction. Increases in
Ticketing operations resulted from an increase in amortization of goodwill from
the Ticketmaster Transaction.
OTHER INCOME (EXPENSE), NET
For the quarter and six months ended June 30, 1999, interest expense, net
decreased $23.2 million and $36.4 million, respectively, 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 Media Corporation, a subsidiary of
AT&T Corporation ("Liberty") during 1998. In addition, the conversion of the
Convertible Subordinated Debentures to equity as of March 1, 1998 and lower
interest rates resulted in decreased interest expense.
For the six months ended June 30, 1999, other, net totaled $2.5 million of
income compared to an expense of $16.3 million in 1998 primarily due to the
reversal of equity losses in the quarter ended March 31, 1999 which were
previously recorded as a result of the Universal Transaction.
INCOME TAXES
The Company pays income taxes based on the earnings of its consolidated
subsidiaries and its allocation of earnings from its ownership in USANi LLC. The
Company's effective tax rate for the quarter and six months ended June 30, 1999
is higher than the statutory rate as a result of non-deductible goodwill and
other acquired intangible assets and state income taxes.
MINORITY INTEREST
For the quarter and six months ended June 30, 1999, minority interest
primarily represents Universal's and Liberty's ownership interest in USANi LLC,
Liberty's ownership interest in Holdco and the public's ownership interest in
TMCS.
For the quarter and six months ended June 30, 1998, minority interest
primarily represents Universal's ownership interest in USANi LLC for the period
February 12 through June 30, 1998, Liberty's ownership interest in Holdco, Fox
Broadcasting Company's 50% ownership interest in SF Broadcasting and the
public's ownership interest in Ticketmaster from the beginning of the respective
periods to June 24, 1998.
PRO FORMA QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 VS. PRO FORMA QUARTER AND
SIX MONTHS ENDED JUNE 30, 1998
The following unaudited pro forma operating results of the Company for the
quarter and six months ended June 30, 1999 and 1998 presents combined results of
operations as if the Universal Transaction, Ticketmaster Transaction, sale of
the assets of SF Broadcasting, the CitySearch Transaction, the Hotel
Reservations Network Transaction and the October Films/PFE Transaction all
occurred at the beginning of the periods presented.
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, 1999 and 1998, nor are they necessarily
indicative of future results of operations.
19
<PAGE> 21
USA NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
NET REVENUES:
Networks and television production....... $316,612 $309,841 $ 648,365 $ 633,367
Electronic retailing..................... 285,122 266,224 560,905 508,420
Ticketing operations..................... 123,888 101,169 226,544 194,404
Hotel reservations....................... 37,798 14,282 60,719 23,333
Filmed entertainment..................... 22,367 7,498 29,062 23,251
Internet services........................ 13,424 8,427 25,537 15,331
Broadcasting............................. 2,449 156 3,350 388
Other.................................... 2,836 3,912 6,882 7,099
-------- -------- ---------- ----------
Total net revenues............... 804,496 711,509 1,561,364 1,405,593
Operating costs and expenses:
Cost of sales............................ 248,563 191,101 462,747 374,641
Program costs............................ 149,280 168,785 319,347 346,606
Selling and marketing.................... 132,909 103,560 248,330 200,156
General and administrative............... 112,861 64,595 211,770 127,307
Other operating costs.................... 23,138 58,836 41,742 116,005
Amortization of cable distribution
fees.................................. 6,186 5,044 12,276 10,564
Depreciation and amortization............ 79,527 70,552 155,532 143,918
-------- -------- ---------- ----------
Total operating costs and
expenses....................... 752,464 662,473 1,451,744 1,319,197
-------- -------- ---------- ----------
Operating profit................. $ 52,032 $ 49,036 $ 109,620 $ 86,396
======== ======== ========== ==========
EBITDA........................... $137,745 $124,632 $ 277,428 $ 240,878
======== ======== ========== ==========
</TABLE>
For the quarter ended June 30, 1999, pro forma revenues for the Company
increased $93.0 million, or 13.1%, to $804.5 million from $711.5 million
compared to pro forma 1998. For the quarter ended June 30, 1999, pro forma cost
of revenues and other costs, excluding depreciation and amortization, increased
$79.9 million, or 13.6%, to $666.8 million from $586.9 million compared to pro
forma 1998.
For the six months ended June 30, 1999, pro forma revenues for the Company
increased $155.8 million, or 11.1%, to $1.56 billion from $1.41 billion compared
to pro forma 1998. For the six months ended June 30, 1999, pro forma cost of
revenues and other costs, excluding depreciation and amortization, increased
$119.2 million, or 10.2%, to $1.28 billion from $1.16 billion compared to pro
forma 1998.
For the quarter ended June 30, 1999, pro forma EBITDA increased $13.1
million, or 10.5%, to $137.7 million from $124.6 million compared to pro forma
1998. For the six months ended June 30, 1999, pro forma EBITDA increased $36.5
million, or 15.2%, to $277.4 million from $240.9 million compared to pro forma
1998.
The following discussion provides an analysis of the aforementioned
increases in pro forma 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 June 30, 1999 increased by $6.8 million,
or 2.2%, to $316.6 million from $309.8 million compared to 1998. The increase
primarily resulted from an increase in advertising revenues due to higher
ratings at USA Network and a significant increase in advertising revenues and
affiliate revenues due to higher ratings and an increase in subscribers of The
Sci-Fi Channel. The increases were partially offset by lower revenue at Studios
USA due to fewer deliveries of network product, fewer pilots produced and
increased usage of
20
<PAGE> 22
internally produced series for which revenue recognition is deferred until aired
on USA Network and The Sci-Fi Channel.
Net revenues for the six months ended June 30, 1999 increased by $15.0
million, or 2.4%, to $648.4 million from $633.4 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 due to higher ratings
and subscribers partially offset by fewer deliveries of network product, fewer
pilots produced 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 for the quarter ended June 30, 1999
decreased by $14.3 million, or 6.4%, to $211.1 million from $225.4 million. The
decrease resulted primarily from lower overhead and marketing costs in both the
networks and the television production business, lower television production and
higher usage of internally produced product, partially offset by higher
programming costs at The Sci-Fi Channel.
Cost of revenues and other costs for the six months ended June 30, 1999
decreased by $31.1 million, or 6.7%, to $433.9 million from $465.0 million. The
decrease resulted primarily from lower overhead and marketing costs, lower
television production and increased usage of internally produced product.
EBITDA for the quarter ended June 30, 1999 increased $21.1 million, or
25.0%, to $105.5 million from $84.4 million compared to pro forma 1998. EBITDA
for the six months ended June 30, 1999 increased $46.1 million, or 27.4%, to
$214.5 million from $168.4 million compared to pro forma 1998.
Electronic retailing
Net revenues for the quarter ended June 30, 1999 increased by $18.9
million, or 7.1%, to $285.1 million from $266.2 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 higher
revenues on Home Shopping en Espanol, which was launched on March 30, 1998. The
increases were partially offset by a planned decrease in the mail order
business.
Net revenues for the six months ended June 30, 1999 increased by $52.5
million, or 10.3%, to $560.9 million from $508.4 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, higher revenues
on Home Shopping en Espanol and revenues from Short Shopping which began in
September 1998. The increases were partially offset by a planned decrease in the
mail order business.
Cost of revenues and other costs for the quarter ended June 30, 1999
increased by $15.1 million, or 6.7%, to $239.0 million from $223.9 million. This
increase resulted primarily from higher sales (gross margin decreased to 38.8%
in 1999 compared to 39.4% in 1998) 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.
Cost of revenues and other costs for the six months ended June 30, 1999
increased by $40.2 million, or 9.3%, to $473.8 million from $433.6 million. This
increase resulted primarily from higher sales (gross margin decreased to 38.8%
in 1999 compared to 39.3% in 1998) 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 June 30, 1999 increased $3.8 million, or 9.0%,
to $46.1 million from $42.3 million compared to 1998. EBITDA for the six months
ended June 30, 1999 increased $12.3 million, or 16.4%, to $87.1 million from
$74.8 million compared to 1998.
21
<PAGE> 23
Ticketing operations
Net revenues for the quarter ended June 30, 1999 increased by $22.7
million, or 22.5%, to $123.9 million from $101.2 million compared to 1998. The
increase resulted from a substantial increase in the number of tickets sold and
higher revenue per ticket. Revenues were also impacted by a significant increase
in the number of tickets (1.9 million additional tickets) sold on-line.
Net revenues for the six months ended June 30, 1999 increased by $32.1
million, or 16.5%, to $226.5 million from $194.4 million compared to 1998. The
increase resulted from a substantial increase in the number of tickets sold and
higher revenue per ticket. Revenues were also impacted by a significant increase
in the number of tickets (3.1 million additional tickets) sold on-line.
Cost of revenues and other costs for the quarter ended June 30, 1999
increased by $9.8 million, or 11.4%, to $95.8 million from $86.0 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 and
start-up costs which were incurred in the quarter ended June 30, 1998 related to
the launch of ticketing operations in Northern California and South America.
Cost of revenues and other costs for the six months ended June 30, 1999
increased by $13.3 million, or 8.1%, to $178.6 million from $165.3 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 June 30, 1999 increased $12.9 million, or
85.3%, to $28.1 million from $15.2 million compared to 1998. EBITDA for the six
months ended June 30, 1999 increased $18.8 million, or 64.7%, to $47.9 million
from $29.1 million compared to 1998.
Hotel reservations
Net revenues for the quarter ended June 30, 1999 increased by $23.5
million, or 164.7%, to $37.8 million from $14.3 million compared to 1998. Net
revenues for the six months ended June 30, 1999 increased by $37.4 million, or
160.2%, to $60.7 million from $23.3 million compared to 1998. The increases
resulted from a substantial increase in the number of rooms booked and expansion
into new cities.
Cost of revenues and other costs for the quarter ended June 30, 1999
increased by $19.9 million, or 162.0%, to $32.1 million from $12.2 million. This
increase resulted primarily from higher room costs as a result of a greater
number of rooms sold.
Cost of revenues and other costs for the six months ended June 30, 1999
increased by $31.7 million, or 157.4%, to $51.9 million from $20.2 million.
EBITDA for the quarter ended June 30, 1999 increased $3.7 million, or
181.0%, to $5.7 million from $2.0 million compared to 1998. EBITDA for the six
months ended June 30, 1999 increased $5.6 million, or 177.9%, to $8.8 million
from $3.2 million compared to 1998.
Internet services
Net revenues for the quarter ended June 30, 1999 increased by $5.0 million,
or 59.3%, to $13.4 million from $8.4 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 85.6%.
Net revenues for the six months ended June 30, 1999 increased by $10.2
million, or 66.6%, to $25.5 million from $15.3 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 86.6%.
Cost of revenues and other costs for the quarter ended June 30, 1999
increased by $19.3 million, or 100.2%, to $38.5 million from $19.2 million in
1998. The increase resulted primarily from increased costs to maintain and
enhance the Internet services, the costs incurred to develop a new electronic
commerce site to be launched in the
22
<PAGE> 24
third quarter of 1999, increased costs of shipping product as First Auction
expanded its product mix, the expansion of local city guides into ten new
markets and increased advertising and promotion costs.
Cost of revenues and other costs for the six months ended June 30, 1999
increased by $30.4 million, or 84.8%, to $66.3 million from $35.9 million in
1998. The increase resulted primarily from increased costs to maintain and
enhance the Internet services and increased advertising and promotion costs.
EBITDA loss for the quarter ended June 30, 1999 increased by $14.3 million,
or 132.2% to $25.1 million from $10.8 million in 1998. EBITDA loss for the six
months ended June 30, 1999 increased by $20.2 million, or 98.3% to $40.8 million
from $20.6 million in 1998. An increased loss is expected for the remainder of
1999 as new local city guide sites are rolled out.
Filmed entertainment
Net revenues for the six months ended June 30, 1999 include theatrical
releases of $10.7 million, video of $9.6 million and sales of foreign rights of
$2.7 million, as well as revenues generated from the distribution of films from
the Savoy library.
Net revenues for the six months ended June 30, 1998 include theatrical
releases of $7.9 million related mainly to one production, home video of $5.3
million and revenues of $6.3 million from the distribution of films from the
Savoy library.
Broadcasting
Net revenues represent amounts generated at the television station in the
Miami/Ft. Lauderdale market.
A significant increase in losses is expected in the broadcasting segment
for the remainder of 1999 as costs are incurred to launch more local television
stations.
Other
Other includes the actual results from a business sold in the second
quarter of 1999. Costs are related to these revenues and corporate expenses.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $189.6 million for the six
months ended June 30, 1999 compared to $141.3 million for the six months ended
June 30, 1998. These cash proceeds and available cash and borrowings were used
to pay for acquisitions of $162.2 million, capital expenditures of $52.7 million
and long-term investments totaling $12.2 million and to make principal payments
on long-term obligations of $15.5 million and mandatory tax distribution
payments to LLC partners of $28.8 million. Furthermore, USAi transferred $200.0
million to Universal under an interest bearing note related to the October
Films/PFE Transaction, of which $199.7 is outstanding at June 30, 1999. The
Company generated cash proceeds of $61.1 million from the sale of securities in
a publicly traded entity during the six months ended June 30, 1999.
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 June 30, 1999 and as of July 31, 1999, there was $237.5 million in
outstanding borrowings under the Tranche A Term Loan, no borrowings under the
revolving credit portion of the credit facility, and $599.1 million was
23
<PAGE> 25
available for borrowing after taking into account outstanding letters of credit.
As of June 30, 1999, the interest rate on loans outstanding under the Tranche A
Term Loan was 5.79%.
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 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 six months ended June 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 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, including the station in the Dallas market in November 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 $25.0
million, of which $11.5 million was incurred as of June 30, 1999.
On March 1, 1999, the Company made a mandatory tax distribution payment to
Universal and Liberty in the amount of $28.8 million.
On May 10, 1999, the Company completed the acquisition of the assets of two
entities which operate Hotel Reservations Network, a leading consolidator of
hotel rooms for resale in the consumer market in the United States. The purchase
price was $150.0 million plus contingent payments based on operating performance
during the year ended December 31, 1999 and during the twelve month periods
ended March 31, 2000, 2001 and 2002. Actual operating performance is measured
against targeted performance for the defined periods to arrive at the contingent
payments. Through August 4, 1999, the Company paid $25.0 million pursuant to
these contingent payment arrangements.
On May 28, 1999, the Company completed its acquisition of October Films,
Inc. The Company issued 300,000 shares of USAi common stock to Universal and
paid cash consideration of $12.0 million to October Films shareholders (other
than Universal) for total consideration of $23.6 million. To fund the cash
consideration portion of the transaction, Universal purchased from USAi 300,000
additional shares of USAi common stock at $40.00 per share. As part of the
transaction, the Company assumed the outstanding balance under October Films'
credit agreement, which totaled $83.2 million as of June 30, 1999. The balance
is due in May 2000.
Also on May 28, 1999, USAi acquired from Universal the domestic film
distribution and development business previously operated by PFE and PFE's
domestic video and specialty video businesses. The acquisition included 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 agreed to assume certain liabilities
related to the PFE businesses acquired. In addition, USAi advanced $200.0
million to Universal pursuant to an eight year, full recourse, interest-bearing
note in connection with a distribution agreement, under which USAi will
distribute, in the United States and Canada,
24
<PAGE> 26
certain Polygram Filmed Entertainment, Inc. theatrical films that were not
acquired in the transaction. The advance is repaid as revenues are received
under the distribution agreement and, in any event, will be repaid in full at
maturity. Through June 30, 1999, approximately $1 million has been offset
against the advance.
In July 1999, USAi announced that its Board of Directors authorized the
extension of the Company's stock repurchase program providing for the repurchase
of up to 10 million shares of USAi's 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 Company's credit facility. During the six months
ended June 30, 1999, the Company purchased 150,000 shares of its common stock
for aggregate consideration $4.9 million.
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 six months ended June 30, 1999, USAi did not pay any cash
dividends, and none are permitted under USAi's existing credit facility.
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 substantially complete. USAi expects its Year 2000 assessment,
remediation, implementation and testing to be completed by September 1999,
except for some of its non-critical systems at Ticketmaster which are scheduled
to be completed by October 1999.
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 $8
million has been spent through July 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 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 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, USAi 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.
25
<PAGE> 27
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.
Hotel reservations revenues are influenced by the seasonal nature of
holiday travel in the markets it serves, and has historically peaked in the
fall. As the business expands into new markets, the impact of seasonality is
expected to lessen.
26
<PAGE> 28
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Urban Broadcasting litigation, 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") and the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1999 (the "Company's 1st Quarter Form 10-Q"), on May 17,
1999, Urban filed a Notice of Appeal with the court to appeal the Final Order of
Judgment entered in the at-law action to the Virginia Supreme Court. On June 11,
1999, the Chancery Court entered a Final Order of Decree of Judgment in favor of
Home Shopping Club LP ("HSC"), USA Networks, Inc. and USA Station Group of
Virginia, Inc., which expressly declared that HSC had not breached the
Television Affiliation Agreement between HSC and Urban. On June 11, 1999, Urban
filed a Notice of Appeal with the court to appeal the Final Order of Decree of
Judgment entered in the Chancery action to the Virginia Supreme Court.
In the Jovon litigation, previously reported in the Company's 1998 Form
10-K and the Company's 1st Quarter Form 10-Q, the court granted Jovon's and the
Stroud's Motion for Summary Judgment by Order dated June 1, 1999 and entered an
Order of Summary Final Judgment on June 15, 1999. Thereafter, on July 12, 1999,
the entities controlled by USAi filed a Notice of Appeal with the court to
appeal the Order of Summary Final Judgment to the Court of Appeal for the Second
District of Florida.
In the MovieFone litigation, previously reported in the Company's 1998 Form
10-K, the Ticketmaster affiliate filed a notice of appeal of the court's
decision, including to seek reversal of the rulings regarding successor
liability and violations of the injunction. On May 17, 1999, the Ticketmaster
affiliate posted a bond to stay enforcement of the damage award for violations
of the injunction. Further, on July 9, 1999, the Ticketmaster affiliate filed a
motion for declaratory judgment that it is not in violation of the injunction by
respecting the rights and refusing to interfere with the operation of American
Movie Cinemas, Inc., a third party that is the owner of certain ticketing
software currently maintained by the Ticketmaster affiliate. On July 20, 1999,
MovieFone filed a cross-motion for further contempt sanctions requesting that
the court hold the Ticketmaster affiliate in contempt and award damages based on
MovieFone's allegation that the Ticketmaster affiliate is in violation of the
injunction. The Ticketmaster affiliate denies that it is in violation of the
injunction. The court has set a hearing for September 13, 1999.
On July 22, 1999, a class action entitled Anthony Mason v. Ticketmaster
LLC; Ticketmaster Corporation; Ticketmaster Group, Inc.; Time Consumer Service,
Inc. and John Does 1-10 was filed in the United States District Court for the
Northern District of Illinois. The plaintiff alleges that Ticketmaster engages
in unlawful business practices in connection with offering the "Entertainment
Weekly" to consumers. The complaint, which alleges that Ticketmaster's policies
violate 39 U.S.C. 3009 (mailing of unordered merchandise) and Section 2 of the
Illinois Consumer Fraud and Deceptive Business Practices Act, seeks restitution,
damages, punitive damages and attorney's fees. The time for defendants to answer
has not yet lapsed. Ticketmaster believes that these allegations have no merit.
With regard to the Lycos litigation matter previously reported in the
Company's 1998 Form 10-K, in light of the termination of the Lycos transaction,
the Company believes the claims asserted in those litigations are moot.
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.
27
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
(b) Forms 8-K
On May 12, 1999, USAi filed a report on Form 8-K announcing the termination
of the Lycos transaction.
On July 13, 1999, USAi filed a report on Form 8-K announcing the date of its
1999 annual meeting and the deadline for submitting stockholders proposals
for the 1999 annual meeting.
28
<PAGE> 30
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 August 16, 1999 /s/ BARRY DILLER
---------------------------------------- --------------------------------------------------------
Barry Diller
Chairman of the Board and
Chief Executive Officer
Dated August 16, 1999 /s/ VICTOR A. KAUFMAN
---------------------------------------- --------------------------------------------------------
Victor A. Kaufman
Office of the Chairman,
Chief Financial Officer
(Principal Financial Officer)
Dated August 16, 1999 /s/ MICHAEL P. DURNEY
---------------------------------------- --------------------------------------------------------
Michael P. Durney
Vice President, Controller
(Chief Accounting Officer)
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 256,725
<SECURITIES> 0
<RECEIVABLES> 450,810
<ALLOWANCES> 0
<INVENTORY> 419,093
<CURRENT-ASSETS> 1,198,401
<PP&E> 283,042
<DEPRECIATION> 193,262
<TOTAL-ASSETS> 8,713,931
<CURRENT-LIABILITIES> 1,095,003
<BONDS> 497,077
0
0
<COMMON> 1,630
<OTHER-SE> 2,664,136
<TOTAL-LIABILITY-AND-EQUITY> 8,719,895
<SALES> 777,429
<TOTAL-REVENUES> 777,429
<CGS> 376,628
<TOTAL-COSTS> 376,628
<OTHER-EXPENSES> 349,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,350
<INCOME-PRETAX> 32,871
<INCOME-TAX> 13,855
<INCOME-CONTINUING> (9,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,716)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 256,725
<SECURITIES> 0
<RECEIVABLES> 450,810
<ALLOWANCES> 0
<INVENTORY> 419,093
<CURRENT-ASSETS> 1,198,401
<PP&E> 283,042
<DEPRECIATION> 193,262
<TOTAL-ASSETS> 8,713,931
<CURRENT-LIABILITIES> 1,095,003
<BONDS> 497,077
0
0
<COMMON> 1,630
<OTHER-SE> 2,664,136
<TOTAL-LIABILITY-AND-EQUITY> 8,719,895
<SALES> 1,226,504
<TOTAL-REVENUES> 1,226,504
<CGS> 740,452
<TOTAL-COSTS> 740,452
<OTHER-EXPENSES> 652,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,714
<INCOME-PRETAX> 140,979
<INCOME-TAX> 40,355
<INCOME-CONTINUING> (2,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,173)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
