<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
USA NETWORKS, INC.
(Exact name of registrant as specified in its charter)
------------------------
COMMISSION FILE NO. 0-20570
<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, 10019
(Address of Registrant's principal executive offices)
(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 / /
As of April 20, 2000, the following shares of the Registrant's capital stock
were outstanding:
<TABLE>
<S> <C>
Common Stock................................................ 298,478,782
Class B Common Stock........................................ 63,033,452
-----------
Total....................................................... 361,512,234
Common Stock issuable upon exchange of outstanding
exchangeable subsidiary equity............................ 361,152,846
-----------
Total outstanding Common Stock, assuming full exchange of
Class B Common Stock and exchangeable subsidiary equity... 722,665,080
===========
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 20, 2000 was $4,159,224,189. For the purpose of the
foregoing calculation only, all directors and executive officers of the
Registrant are assumed to be affiliates of the Registrant.
Assuming the exchange, as of April 20, 2000, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 722,665,080 shares of Common Stock with an
aggregate market value of $13,098,304,575.
All share numbers set forth above give effect to the two-for-one stock split
which became effective on February 24, 2000 for holders of record as of the
close of business on February 10, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
NET REVENUES
Networks and television production........................ $ 378,953 $331,544
Electronic retailing...................................... 379,058 275,510
Ticketing operations...................................... 127,961 99,723
Hotel reservations........................................ 55,263 --
Interactive............................................... 23,063 12,322
Filmed entertainment...................................... 30,307 1,695
Electronic commerce and services.......................... 4,564 3,206
Broadcasting.............................................. 3,634 901
Other..................................................... -- 4,046
---------- --------
Total net revenues...................................... 1,002,803 728,947
Operating costs and expenses:
Cost of sales and services................................ 408,791 248,442
Program costs............................................. 165,864 167,282
Selling and marketing..................................... 126,630 89,703
General and administrative................................ 93,516 66,825
Amortization of non cash distribution and marketing
expense................................................. 763 --
Other operating costs..................................... 23,694 19,161
Amortization of cable distribution fees................... 8,223 6,090
Depreciation and amortization............................. 107,992 70,237
---------- --------
Total operating costs and expenses...................... 935,473 667,740
---------- --------
Operating profit.......................................... 67,330 61,207
Other income (expense):
Interest income........................................... 9,732 10,086
Interest expense.......................................... (18,372) (20,450)
Gain on sale of securities................................ -- 47,300
Gain on sale of subsidiary stock.......................... 3,718 --
Miscellaneous............................................. (4,334) 9,965
---------- --------
(9,256) 46,901
---------- --------
Earnings before income taxes and minority interest........ 58,074 108,108
Income tax expense........................................ (31,505) (26,500)
Minority interest......................................... (45,441) (74,065)
---------- --------
NET EARNINGS (LOSS)....................................... $ (18,872) $ 7,543
========== ========
Basic and diluted earnings (loss) per common share........ $ (.06) $ .02
========== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
1
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 480,449 $ 424,239
Marketable securities, available for sale................... 49,684 --
Accounts and notes receivable, net of allowance of $51,071
and
$41,993, respectively..................................... 512,266 454,341
Inventories, net............................................ 478,093 470,844
Investment held for sale.................................... 18,656 11,512
Other current assets, net................................... 57,472 27,519
---------- ----------
Total current assets...................................... 1,596,620 1,388,455
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 348,687 324,412
Buildings and leasehold improvements........................ 115,184 110,403
Furniture and other equipment............................... 85,384 85,487
Land........................................................ 13,944 16,094
Projects in progress........................................ 39,090 41,438
---------- ----------
602,289 577,834
Less accumulated depreciation and amortization............ (230,000) (221,203)
---------- ----------
372,289 356,631
OTHER ASSETS
Intangible assets, net...................................... 7,001,883 6,831,487
Cable distribution fees, net ($33,532 and $35,181,
respectively, to
related parties).......................................... 149,442 130,988
Long-term investments....................................... 77,182 121,383
Notes and accounts receivable, net of current portion
($2,562 from related parties)............................. 25,428 26,248
Advance to Universal........................................ 151,222 163,814
Inventories, net............................................ 154,103 166,477
Deferred charges and other, net............................. 76,310 67,669
---------- ----------
$9,604,479 $9,253,152
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
2
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 23,432 $ 10,801
Accounts payable, trade..................................... 195,656 188,343
Accounts payable, client accounts........................... 102,680 98,586
Obligations for program rights and film costs............... 292,426 272,945
Amount due under acquisition agreement...................... 43,000 17,500
Cable distribution fees payable ($18,559 and $18,733,
respectively, to related parties)......................... 51,355 43,993
Deferred revenue............................................ 107,420 83,811
Deferred income taxes....................................... 9,893 4,050
Other accrued liabilities................................... 361,396 311,724
---------- ----------
Total current liabilities................................... 1,187,258 1,031,753
LONG-TERM OBLIGATIONS (net of current maturities)........... 575,452 574,979
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 246,321 262,810
OTHER LONG-TERM LIABILITIES................................. 106,251 116,695
DEFERRED INCOME TAXES....................................... 9,768 5,120
MINORITY INTEREST........................................... 4,745,632 4,492,066
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock--$.01 par value; authorized 15,000,000
shares; no shares issued and outstanding.................. -- --
Common stock--$.01 par value; authorized 800,000,000 shares;
issued and outstanding, 273,804,950 and 274,013,418
shares, respectively...................................... 2,738 2,740
Class B--convertible common stock--$.01 par value;
authorized, 200,000,000 shares; issued and outstanding,
63,033,452 shares......................................... 630 630
Additional paid-in capital.................................. 2,848,823 2,830,506
Accumulated deficit......................................... (73,230) (54,358)
Accumulated other comprehensive income...................... 3,801 4,773
Treasury stock.............................................. (43,967) (9,564)
Unearned compensation....................................... -- --
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
---------- ----------
Total stockholders' equity.................................. 2,733,797 2,769,729
---------- ----------
$9,604,479 $9,253,152
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
FROM KEY
CLASS B ACCUM. EXECUTIVE FOR
CONVERTIBLE ADDIT. OTHER COMMON
COMMON COMMON PAID-IN ACCUM. COMP. TREASURY STOCK
TOTAL STOCK STOCK CAPITAL DEFICIT INCOME STOCK ISSUANCE
---------- -------- ----------- ---------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999........................ $2,769,729 $2,740 $630 $2,830,506 $(54,358) $4,773 $ (9,564) $(4,998)
Comprehensive income:
Net loss for the three
months ended March 31,
2000...................... (18,872) -- -- -- (18,872) -- -- --
Decrease in unrealized gains
in available for sale
securities................ (910) -- -- -- -- (910) -- --
Foreign currency
translation............... (62) -- -- -- -- (62) -- --
----------
Comprehensive loss........ (19,844)
----------
Issuance of common stock upon
exercise of stock options... 5,788 10 -- 5,778 -- -- -- --
Income tax benefit related to
stock options exercised..... 3,846 -- -- 3,846 -- -- -- --
Issuance of stock in
connection with other
transactions................ 8,697 4 -- 8,693 -- -- -- --
Purchase of treasury stock in
connection with stock
repurchase program.......... (34,419) (16) -- -- -- -- (34,403) --
-- -- -- -- -- -- --
---------- ------ ---- ---------- -------- ------ -------- -------
BALANCE AT MARCH 31, 2000..... $2,733,797 $2,738 $630 $2,848,823 $(73,230) $3,801 $(43,967) $(4,998)
========== ====== ==== ========== ======== ====== ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ (18,872) $ 7,543
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 107,992 70,237
Amortization of cable distribution fees................... 8,223 6,090
Amortization of program rights and film costs............. 164,572 161,254
Amortization of non-cash distribution and marketing
costs................................................... 763 --
Amortization of deferred financing costs and non-cash
interest................................................ 935 --
Deferred income taxes..................................... (3,151) (459)
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 4,658 126
Gain on sale of subsidiary stock.......................... (3,718) --
Gain on sale of securities................................ -- (47,300)
Non-cash interest income.................................. (2,482) --
Non-cash stock compensation............................... 3,131 1,386
Minority interest......................................... 45,441 74,065
Changes in current assets and liabilities:
Accounts receivable....................................... (27,217) 10,111
Inventories............................................... 21,677 (10,854)
Accounts payable.......................................... 632 (33,873)
Accrued liabilities and deferred revenue.................. 57,835 (4,441)
Payment for program rights and film costs................. (191,511) (162,335)
Increase in cable distribution fees....................... (18,591) (6,981)
Other, net................................................ 7,549 (4,146)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 157,866 60,423
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (21,594) (4,421)
Capital expenditures...................................... (26,790) (15,472)
Recoupment of advance to Universal........................ 15,074
Advance to Styleclick for promissory note................. (5,000) --
Increase in long-term investments and notes receivable.... 962 (11,384)
Purchase of marketable securities......................... (49,684) --
Proceeds from sale of securities.......................... -- 58,110
Proceeds from long-term notes receivable.................. -- 3,691
Payment of merger and financing costs..................... (881) --
Other, net................................................ (2,004) (1,950)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..... (89,917) 28,574
--------- ---------
Cash flows from financing activities:
Borrowings................................................ 19,514 --
Principal payments on long-term obligations............... (17,012) (7,780)
Purchase of treasury stock................................ (34,419) (4,938)
Payment of mandatory tax distribution to LLC partners..... (68,065) (28,830)
Proceeds from sale of subsidiary stock.................... 89,976 --
Proceeds from issuance of common stock and LLC shares..... 5,788 17,153
Other, net................................................ (7,459) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................... (11,677) (24,395)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................. (62) (1,131)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 56,210 63,471
Cash and cash equivalents at beginning of period.......... 424,239 445,356
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 480,449 $ 508,827
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
USA Networks, Inc. (the "Company" or "USAi") is a holding company, the
subsidiaries of which are engaged in diversified media and electronic commerce
businesses.
On May 10, 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities 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 March 31, 2000, the Company engages in eight principal areas of
business:
- NETWORKS AND TELEVISION PRODUCTION, which includes Networks and Studios
USA. Networks operates the USA Network and 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.com, 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.
- INTERACTIVE, which includes Internet Shopping Network, the Company's
online retailing networks business, and local city guide business.
- ELECTRONIC COMMERCE & SERVICES, which primarily represents the Company's
customer and e-care businesses.
- FILMED ENTERTAINMENT, which primarily represents the Company's domestic
theatrical film distribution and production businesses.
- BROADCASTING, which owns and operates television stations.
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USAi's common stock and Class B common stock, payable in the form of a
dividend to stockholders of record as of the close of business on February 10,
2000. The 100% stock dividend was paid on February 24, 2000. All share data and
earnings per share amounts presented have been adjusted to reflect this stock
split.
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 twelve months ended
December 31, 1999. Certain amounts in the Condensed
6
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Consolidated Financial Statements for the quarter ended March 31, 1999 have been
reclassified to conform to the 2000 presentation.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The interim Condensed
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (the "1999 Form 10-K") for a summary of all significant
accounting policies.
NOTE 3--BUSINESS ACQUISITIONS
HOTEL RESERVATIONS NETWORK TRANSACTION
On May 10, 1999, the Company completed its acquisition of substantially all
of the assets and the assumption of substantially all of the liabilities 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 assets
acquired and liabilities assumed comprise Hotel Reservations Network, Inc.
("HRN"), a wholly owned subsidiary of USAi. The initial purchase price was
$149.2 million, net of a working capital adjustment of $0.8 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. The purchase price was paid in the form of a cash payment of
$145.0 million on May 11, 1999 and a promissory note of $5.0 million which was
paid on January 30, 2000 and which bore interest at 4.75% per annum. In
addition, the Company paid $50.0 million related to HRN's performance during the
year ended December 31, 1999.
Furthermore, in conjunction with HRN's initial public offering (see below),
USAi issued to the sellers the number of shares of HRN class A common stock
equal to 10% of the aggregate value of the equity of HRN immediately prior to a
transaction, as defined. USAi issued the sellers approximately 4.9 million
shares of HRN class A common stock valued at $78.4 million. Pursuant to an
amendment of the asset purchase agreement with the sellers of HRN's predecessor
business entered into in contemplation of the initial public offering, HRN
agreed to issue HRN class A common stock to the sellers in exchange for
releasing the obligation to make additional performance-based payments covering
the twelve month periods ending March 31, 2001 and 2002. HRN issued the sellers
approximately 5.1 million shares of HRN class A common stock valued at
$81.6 million. The contingent payment for the twelve month period ending
March 31, 2000 is currently being finalized and is estimated to be approximately
$43.0 million. This estimated amount is reflected as a liability and resulted in
additional goodwill which will be amortized over the remaining life of the
goodwill.
The acquisition has been accounted for under the purchase method of
accounting. The purchase price, including the initial contingent payments of
$50 million for the year ended December 31, 1999, the stock issued to the
sellers in conjunction with the initial public offering, and the estimated
contingent payment for the twelve months ended March 31, 2000 has been allocated
to the assets acquired and
7
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
liabilities assumed based on their respective fair values at the date of
purchase, resulting in goodwill of approximately $403.3 million which is being
amortized over a ten year life.
On March 1, 2000, HRN completed an initial public offering for approximately
6.2 million shares of its class A common stock, resulting in net cash proceeds
of approximately $90.0 million. At the completion of the offering, USAi owned
approximately 70.6% of the outstanding shares of HRN. USAi recorded a gain
related to the initial public offering of approximately $3.7 million in the
three months ended March 31, 2000.
OCTOBER FILMS/PFE TRANSACTION
In connection with the acquisition of October Films, Inc., as of May 28,
1999, the Company issued 600,000 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. To fund the
cash consideration portion of the transaction, Universal purchased from USAi
600,000 additional shares of Common Stock at $20.00 per share. In addition, the
Company assumed $83.2 million of outstanding debt under October Films' credit
agreement which was repaid from cash on hand on August 20, 1999.
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
$200.0 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 March 31, 2000, approximately
$58.0 million had been offset against the advance and $9.2 million of interest
had accrued.
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 $164.7 million has been allocated to goodwill, which is being
amortized over 20 years.
The following unaudited pro forma condensed consolidated financial
information for the three months ended March 31, 1999, is presented to show the
results of the Company, as if the Hotel Reservations Network Transaction and the
October Films/ PFE Transaction had occurred on January 1, 1999. 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
8
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
interest expense, and are not necessarily indicative of what the results would
have been had the transactions actually occurred on January 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net revenues.............................................. $756,868
Net earnings.............................................. 1,282
Basic and diluted earnings (loss) per common share........ $ --
</TABLE>
NOTE 4--STOCK-BASED WARRANTS
In January 2000, HRN entered into an exclusive affiliate distribution and
marketing agreement with Travelocity and issued to Travelocity a performance
warrant at the completion of the initial public offering. The performance
warrant is subject to vesting based on achieving certain performance targets. If
the performance warrant becomes fully vested and exercisable it will entitle the
holder to acquire 2,447,955 shares of HRN class A common stock at the initial
public offering price. The Company also entered into other exclusive affiliate
distribution and marketing agreements and issued 1,428,365 warrants to purchase
HRN class A common stock at the initial public offering price at the completion
of the public offering.
All stock warrants were accounted for in accordance with EITF 96-18. In
relation to warrants to purchase 1,428,365 shares of class A common stock, the
Company recorded an asset of approximately $14.7 million based on the fair
market value of the warrants at the initial public offering price of $16.00 per
share. The asset will be amortized ratably as non-cash distribution and
marketing expense over the terms of the exclusive affiliation agreements, which
range from two to five years.
The performance warrant, which will be subject to vesting based on the
achievement of defined performance targets will be valued at the time the award
is probable of being earned. The portion of the value related to the completed
term of the related affiliation agreement will be expensed, and the remaining
non-cash deferred distribution and marketing expense will be amortized over the
remaining term of the affiliation agreement. The value of such related warrants
may be subject to adjustment until such time that the warrant is nonforfeitable,
fully vested and exercisable.
NOTE 5--INVESTMENTS
During the quarter ended March 31, 1999, the Company recognized a pre-tax
gain of $47.3 million on the sale of securities in a publicly traded entity.
NOTE 6--STOCKHOLDERS' EQUITY
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USAi's common stock and Class B common stock, payable in the form of a
dividend to stockholders of record as of the close of business on February 10,
2000. The 100% stock dividend was paid on February 24, 2000.
9
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2000:
On January 31, 2000, TMCS completed its acquisition of 2b Technology, Inc.
("2b"), by issuing approximately 458,000 shares of TMCS Class B Common Stock for
all the outstanding stock of 2b, for a total value of approximately
$16.9 million.
As of January 1, 2000, the Company presents the operations of HOT Germany,
an electronic retailer operating principally in Germany, on a consolidated
basis, whereas its investment in HOT Germany was previously accounted for under
the equity method of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
For the three months ended March 31, 2000, interest accrued on the
$200.0 million advance to Universal amounted to $2.5 million.
For the three months ended March 31, 2000, the Company incurred non-cash
distribution and marketing expense of $0.8 million.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 1999:
On March 29, 1999, TMCS completed its acquisition of City Auction, Inc.
("City Auction"), a person-to-person online auction community, by issuing
approximately 800,000 shares of TMCS Class B Common Stock for all the
outstanding stock of City Auction, for a total value of $27.2 million.
During the quarter ended March 31, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.5 million.
NOTE 8--INDUSTRY SEGMENTS
For the three months ended March 31, 2000, the Company operated principally
in eight industry segments: Networks and television production, Electronic
retailing, Ticketing operations, Hotel reservations, Interactive, Filmed
entertainment, Electronic commerce and services and Broadcasting. The Networks
and television production segment consists of the cable networks USA Network and
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
consumer market in the United States. The Interactive 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 Electronic commerce and services segment primarily
represents the Company's customer and e-care businesses. The Broadcasting
segment includes the
10
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--INDUSTRY SEGMENTS (CONTINUED)
operations of broadcast television stations in twelve markets that principally
transmit Home Shopping Network programming.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Networks and television production.................. $ 378,953 $331,544
Electronic retailing................................ 379,058 275,510
Ticketing operations................................ 127,961 99,723
Hotel reservations.................................. 55,263 --
Interactive......................................... 23,063 12,322
Filmed entertainment................................ 30,307 1,695
Electronic commerce and services.................... 4,564 3,206
Broadcasting........................................ 3,634 901
Other............................................... -- 4,046
---------- --------
$1,002,803 $728,947
========== ========
Operating profit (loss)
Networks and television production.................. $ 110,787 $ 81,270
Electronic retailing................................ 36,378 21,340
Ticketing operations................................ 17,065 8,203
Hotel reservations.................................. 866 --
Interactive......................................... (64,489) (29,531)
Filmed entertainment................................ 88 (201)
Electronic commerce and services.................... (6,216) (150)
Broadcasting........................................ (14,769) (11,382)
Corporate and other................................. (12,380) (8,342)
---------- --------
$ 67,330 $ 61,207
========== ========
</TABLE>
The Company operates principally within the United States.
NOTE 9--SAVOY SUMMARIZED FINANCIAL INFORMATION
The Company has not prepared separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy Debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
11
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--SAVOY SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................... $1,605 $1,695
Operating expenses...................................... 615 1,763
Operating income........................................ 990 (68)
Net income (loss)....................................... 545 1,073
</TABLE>
SUMMARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets........................................ $ 191 $ 191
Non-current assets.................................... 146,313 150,236
Current liabilities................................... 10,580 12,273
Non-current liabilities............................... 39,036 39,081
</TABLE>
NOTE 10--NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION
On November 23, 1998, the Company and USANi LLC as co-issuers completed an
offering of $500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In
May 1999, the Old Notes were exchanged in full for $500.0 million of new 6 3/4%
Senior Notes due 2005 (the "Notes") that have terms that are substantially
identical to the Old Notes. Interest is payable on the Notes on May 15 and
November 15 of each year, commencing May 15, 1999. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of the
Company, including Holdco, a non-wholly owned, direct subsidiary of the Company,
and all of the subsidiaries of USANi LLC (other than subsidiaries that are,
individually and in the aggregate, inconsequential to USANi LLC on a
consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the
Subsidiary Guarantors (other than Holdco) (the "Wholly Owned Subsidiary
Guarantors") are wholly owned, directly or indirectly, by the Company or USANi
LLC, as the case may be.
The following tables present condensed consolidating financial information
for the three months ended March 31, 2000 and 1999 for: (1) the Company on a
stand-alone basis, (2) Holdco on a stand-alone basis, (3) USANi LLC on a
stand-alone basis, (4) the combined Wholly Owned Subsidiary Guarantors
(including Wholly Owned Subsidiary Guarantors that are wholly owned subsidiaries
of USANi LLC), (5) the combined non-guarantor subsidiaries of the Company
(including the non-guarantor subsidiaries of USANi LLC (collectively, the
"Non-Guarantor Subsidiaries")), and (6) the Company on a consolidated basis.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities
12
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION (CONTINUED)
Exchange Act of 1934 because the Company's management has determined that the
information contained in such documents would not be material to investors.
As of and for the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets................ $ -- $ -- $ 200,097 $ 871,305 $ 525,218 $ -- $ 1,596,620
Property and equipment net.... -- -- 24,889 249,985 97,415 -- 372,289
Goodwill and other intangible
assets, net................. 75,264 -- -- 5,277,614 1,798,447 -- 7,151,325
Investment in subsidiaries.... 2,681,416 2,044,117 5,201,180 19,717 -- (9,946,430) --
Other assets.................. 101,555 -- $ -- 305,494 77,196 -- 484,245
---------- ---------- ---------- ----------- ---------- ------------ -----------
Total assets.................. $2,858,235 $2,044,117 $5,426,166 $6,724,115 $2,498,276 $(9,946,430) $ 9,604,479
========== ========== ========== =========== ========== ============ ===========
Current liabilities........... $ -- $ -- $ -- $ 788,003 $ 399,255 $ -- $ 1,187,258
Long-term debt, less current
portion..................... -- -- 518,105 3,230 54,117 -- 575,452
Other liabilities............. 124,438 -- 311,715 93,553 281,719 (449,085) 362,340
Minority interest............. -- -- -- 259,657 525,136 3,960,839 4,745,632
Interdivisional equity........ -- -- -- 5,579,672 1,238,049 (6,817,721) --
Stockholders' equity.......... 2,733,797 2,044,117 4,596,346 -- -- (6,640,463) 2,733,797
---------- ---------- ---------- ----------- ---------- ------------ -----------
Total liabilities and
shareholders' equity........ $2,858,235 $2,044,117 $5,426,166 $6,724,115 $2,498,276 $(9,946,430) $ 9,604,479
========== ========== ========== =========== ========== ============ ===========
Revenue....................... $ -- $ -- $ -- $ 709,455 $ 293,348 $ -- $ 1,002,803
Operating expenses............ (3,393) -- (8,835) (596,304) (326,941) -- (935,473)
Interest expense, net......... (4,500) -- 4,125 (7,300) (965) -- (8,640)
Other income (expense), net... (12,321) 36,813 137,180 (3,007) (1,855) (157,426) (616)
Provision for income taxes.... 1,342 -- (27,351) (1,480) (4,016) -- (31,505)
Minority interest............. -- -- -- (69,162) 23,721 -- (45,441)
---------- ---------- ---------- ----------- ---------- ------------ -----------
Net (loss) income............. $ (18,872) $ 36,813 $ 105,119 $ 32,202 $ (16,708) $ (157,426) $ (18,872)
========== ========== ========== =========== ========== ============ ===========
Cash flows from operations.... $ (6,614) $ -- $ 3,891 $ 140,294 $ 20,295 $ -- $ 157,866
Cash flows used in investing
activities.................. 2,656 -- (6,061) $ (15,682) $ (70,830) -- (89,917)
Cash flows from financing
activities.................. 3,958 -- (14,613) (126,591) 125,569 -- (11,677)
Effect of exchange rate....... -- -- -- -- (62) -- (62)
Cash at the beginning of the
period...................... -- -- 276,678 (26,004) 173,565 -- 424,239
---------- ---------- ---------- ----------- ---------- ------------ -----------
Cash at the end of the
period...................... $ -- $ -- $ 259,895 $ (27,983) $ 248,537 $ -- $ 480,449
========== ========== ========== =========== ========== ============ ===========
</TABLE>
13
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION (CONTINUED)
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... 0 0 0 612,789 116,158 0 728,947
Operating expenses............ (2,455) 0 (5,159) (529,142) (130,984) 0 (667,740)
Interest expenses, net........ (1,724) 0 (4,564) (4,510) 434 0 (10,364)
Other income (expense), net... 10,121 56,462 243,067 56,798 467 (309,650) 57,265
Provision for income taxes.... 1,601 0 (21,898) (1,883) (4,320) 0 (26,500)
Minority interest............. 0 0 (77,492) (4,304) 7,731 0 (74,065)
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net (loss) income............. 7,543 56,462 133,954 129,748 (10,514) (309,650) 7,543
========== ========== ========== ========== ========== =========== ==========
Cash flow from (used in)
operations.................. (9,789) 0 (2,812) 92,162 (19,138) 0 60,423
Cash flow provided (used in)
investing activities........ 0 0 (10,620) 40,316 (1,122) 0 28,574
Cash flow from financing
activities.................. 9,789 0 184,302 (236,173) 17,687 0 (24,395)
Effect of exchange rate....... 0 0 0 0 (1,131) 0 (1,131)
Cash at beginning of period... 0 0 151,160 102,308 191,888 0 445,356
---------- ---------- ---------- ---------- ---------- ----------- ----------
Cash at end of period......... 0 0 322,030 (1,387) 188,184 0 508,827
========== ========== ========== ========== ========== =========== ==========
</TABLE>
NOTE 11--SUBSEQUENT EVENTS
ACQUISITION OF PRECISION RESPONSE CORPORATION
On April 5, 2000, the Company acquired Precision Response Corp. ("PRC") in a
stock-for-stock transaction, issuing 24.3 million shares of USAi common stock
valued at approximately $705 million in exchange for all outstanding equity of
PRC.
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On January 25, 2000, USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, announced an agreement to form a new
company by merging Internet Shopping Network ("ISN") and Styleclick.com. The new
company, which will be named Styleclick, Inc., will own and operate the combined
properties of Styleclick.com Inc. and ISN. Under the terms of the agreement,
USAi will also invest $40 million in cash, contribute $10 million in dedicated
media, and will receive warrants to purchase additional shares of the new
company. Upon both the closing of the transaction and on a fully diluted basis,
USAi will own approximately 75% of the new company and Styleclick.com
stockholders will own approximately 25%. In the interim, USAi has agreed to
extend a $10 million bridge loan to Styleclick.com. As of March 31, 2000, the
amount outstanding under the loan is $5.0 million. The transaction is expected
to close in the second quarter of 2000.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS 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
Holdco and USANi LLC, and manages the businesses held by USANi LLC in
substantially the same manner as they would be if USAi held them directly
through wholly owned subsidiaries.
In May 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of two entities which operate Hotel
Reservations Network ("HRN") (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 ("USA Films") (the "October
Films/PFE Transaction"). In connection with these transactions, the Company
established the Hotel reservations and Filmed entertainment business segments.
On March 1, 2000, Hotel Reservations Network completed an initial public
offering. The Hotel Reservation Network's class A common stock is quoted on the
Nasdaq Stock Market under the symbol "ROOM".
EBITDA
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is defined as operating profit plus depreciation, amortization of
intangibles, amortization of cable distribution fees and non-cash distribution
and marketing expense. 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, we have augmented our media and electronic
commerce businesses by acquiring and developing several new businesses. As a
result, the changes resulting from the Hotel Reservations Network transaction
and the October Films/PFE transaction should be considered when comparing the
results of operations for the three months ended March 31, 2000 to March 31,
1999. 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.
15
<PAGE>
The pro forma information is not necessarily indicative of the revenues and
cost of revenues which would have actually been reported had the Hotel
Reservations Network transaction and the October Films/ PFE transaction occurred
at the beginning of January 1, 1999, nor is it necessarily indicative of future
results.
Reference should be made to the Consolidated Financial Statements and
Summary Financial Data included herein.
CONSOLIDATED RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 VS. QUARTER ENDED MARCH 31, 1999
The Hotel Reservations Network transaction, the October Films/ PFE
transaction and the consolidation of electronic retailing operations in Germany
as of January 1, 2000, resulted in increases in net revenues, operating costs
and expenses, other income (expense), minority interest and income taxes.
However, no significant discussion of these fluctuations is presented.
NET REVENUES
For the three months ended March 31, 2000, revenues increased by
$273.9 million, or 37.6%, to $1.0 billion from $728.9 million in 1999 primarily
due to increases of $103.5 million, $55.3 million, $47.4 million, $28.6 million
and $28.2 million from the Electronic retailing, Hotel reservations, Networks
and television production, Filmed entertainment, and Ticketing operations
businesses, respectively.
OPERATING COSTS AND EXPENSES
For the three months ended March 31, 2000, operating expenses increased by
$267.7 million, or 40.1%, to $935.5 million from $667.7 million in 1999,
primarily due to increases of $83.1 million, $47.5 million, $26.4 million,
$20.7 million, $20.6 and $18.1 million from the Electronic retailing, Hotel
reservations, Filmed entertainment, Ticketing operations, Interactive and
Networks and television production businesses, respectively.
OTHER INCOME (EXPENSE)
For the three months ended March 31, 2000, net interest expense decreased by
$1.7 million, compared to 1999 primarily due to lower borrowing levels as a
result of the repayment of bank debt in 1999 from the proceeds of equity
transactions involving Universal and Liberty Media Corporation, a subsidiary of
AT&T Corporation ("Liberty").
In the three months ended March 31, 2000, the Company realized a gain of
$3.7 million related to the initial public offering of its subsidiary, HRN. In
the three months ended March 31, 1999, the Company realized gains of
$47.3 million related to the sale of securities and $10.4 million from the
reversal of equity losses which were recorded in 1998 as a result of the
Universal transaction.
INCOME TAXES
USAi's effective tax rate of 54.2% for the three months ended March 31, 2000
was higher than the statutory rate due to the impact of non-deductible goodwill,
no tax benefits for consolidated subsidiary losses which are not included in the
Company's consolidated tax returns taxable income and state income taxes.
MINORITY INTEREST
For the three months ended March 31, 2000, minority interest primarily
represented Universal's and Liberty's ownership interest in USANi LLC, Liberty's
ownership interest in Holdco, the public's ownership in TMCS, and the public's
ownership interest in HRN since February 25, 2000.
16
<PAGE>
PRO FORMA QUARTER ENDED MARCH 31, 2000
VS. PRO FORMA QUARTER ENDED MARCH 31, 1999
The following unaudited pro forma operating results of USAi present combined
results of operations as if the Hotel Reservations Network transaction and the
October Films/ PFE transaction all had occurred on January 1, 1999 and reflect
the consolidation of HOT Germany operating results as if voting control was
obtained on January 1, 1999.
The unaudited combined condensed pro forma statements of operations of USAi
are presented below 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, nor are they
necessarily indicative of future results of operations.
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
NET REVENUES:
Networks and television production..................... $ 378,953 $331,544
Electronic retailing................................... 379,058 311,867
Ticketing operations................................... 127,961 99,723
Hotel reservations..................................... 55,263 22,921
Interactive............................................ 23,063 12,322
Filmed entertainment................................... 30,307 6,695
Electronic commerce and services....................... 4,564 3,206
Broadcasting and other................................. 3,634 4,947
--------- --------
Total net revenues................................. 1,002,803 793,225
Operating costs and expenses:
Cost related to revenues............................... 574,655 404,780
Other costs and expenses............................... 243,840 244,859
Amortization of non cash distribution and marketing
expense.............................................. 763 --
Amortization of cable distribution fees................ 8,223 6,090
Depreciation and amortization.......................... 107,992 82,272
--------- --------
Total operating costs and expenses................. 935,473 738,001
--------- --------
Operating profit................................... $ 67,330 $ 55,224
========= ========
EBITDA............................................. $ 184,308 $143,586
========= ========
</TABLE>
Net revenues for the three months ended March 31, 2000 increased by
$209.6 million, or 26.4%, to $1.0 billion from $793.2 million in 1999. Cost
related to revenues and other costs and expenses for the three months ended
March 31, 2000 increased by $168.9 million, or 26%, to $818.5 million from
$649.6 million in 1999. EBITDA for the three months ended March 31, 2000
increased by $40.7 million, or 28.4%, to $184.3 million from $143.6 million in
1999.
The following discussion provides an analysis of the pro forma revenues and
costs related to revenues and other costs and expenses by significant business
segment.
NETWORKS AND TELEVISION PRODUCTION
Net revenues for the three months ended March 31, 2000 increased by
$47.4 million, or 14.3%, to $378.9 million from $331.5 million in 1999. The
increase primarily resulted from an increase in advertising revenues at USA
Network and a significant increase in advertising revenues and affiliate
revenues at Sci-Fi Channel due to an increase in subscribers and higher ratings.
Revenue of Studios USA also increased due to increased revenues from one-hour
dramas and talk shows offset by fewer network pick-ups for comedy productions.
17
<PAGE>
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $18.1 million, or 8.2%, to $240.2 million from
$222.1 million in 1999. This increase resulted primarily from marketing and
development costs.
EBITDA for the three months ended March 31, 2000 increased by
$29.3 million, or 26.8%, to $138.8 million from $109.5 million in 1999.
ELECTRONIC RETAILING
Net revenues for the three months ended March 31, 2000 increased by
$67.2 million, or 21.5%, to $379.1 million from $311.9 million in 1999. The
increase primarily resulted from Home Shopping Network's core domestic business,
which generated increased sales of $47.9 million. Also, core international
business increased $19.3 million due primarily to operations in Germany, which
generated increased revenue of $17.7 million. Total units shipped increased by
6.5% to 8.2 million units compared to 7.7 million units in 1999. The increase in
net revenues also reflected a decrease in the return rate to 21.4% from 22.8% in
1999.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $50.4 million, or 18.9%, to $317.2 million
from $266.8 million in 1999. The increase resulted primarily from higher sales
volume.
EBITDA for the three months ended March 31, 2000 increased by
$16.8 million, or 37.2%, to $61.9 million from $45.1 million in 1999.
TICKETING OPERATIONS
Net revenues for the three months ended March 31, 2000 increased by
$28.2 million, or 28.3%, to $127.9 million from $99.7 million in 1998. The
increase resulted from an increase of 14.1% in the number of tickets sold,
including an increase in the percentage of tickets sold online to 20.5% from
8.7% in 1999, and an increase in revenue per ticket to $4.96 from $4.18 in 1999.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $20.4 million, or 25.4%, to $100.6 million
from $80.2 million in 1999. The increase resulted primarily from higher
ticketing operations costs as a result of higher ticketing volume and increased
secondary commissions.
EBITDA for the three months ended March 31, 2000 increased by $7.9 million,
or 40.3%, to $27.4 million from $19.5 million in 1999.
INTERACTIVE
Net revenues for the three months ended March 31, 2000 increased by
$10.7 million, or 87.2%, to $23.1 million from $12.3 million in 1999. The
increase primarily resulted from an increase in online city guide and
sponsorship revenue of $11.2 million, or 192%, due to expansion into new cities
and expansion into the online personals business.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $20.6 million, or 71.9%, to $49.2 million from
$28.6 million in 1999. The increase resulted primarily from increased costs of
city guide revenue, costs to expand the local city guides into new markets and
costs related to the online personal business.
EBITDA loss for the three months ended March 31, 2000 increased by
$9.8 million, or 60.4%, to $26.1 million from $16.3 million in 1999.
HOTEL RESERVATIONS
Net revenues for the three months ended March 31, 2000 increased by
$32.4 million, or 141.1%, to $55.3 million from $22.9 million in 1999. The
increase resulted from expansion of affiliate marketing programs, an increase in
the number of hotels for existing cities and expansion into 9 new cities in the
three months ended March 31, 2000, which is an 81% increase over the comparable
prior year period.
18
<PAGE>
Internet generated sales for the three months ended March 31, 2000 increased to
91% in 2000 from 69% in 1999.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $27.6 million, or 141.4%, to $47.1 million
from $19.5 million in 1999. The increase in costs is primarily due to increased
sales, including an increased percentage of revenue attributable to affiliate
and travel agent sales (for which commissions are paid), increased credit card
charge backs, and increased staffing levels and systems to support increased
operations, partially offset by lower telephone and telephone operator costs due
to the increase in Internet-related bookings.
EBITDA for the three months ended March 31, 2000 increased by $4.8 million,
or 139.4%, to $8.2 million from $3.4 million in 1999.
FILMED ENTERTAINMENT
Net revenues for the three months ended March 31, 2000 increased by
$23.6 million, or 352.7%, to $30.3 million from $6.7 million in 1999. The
increase resulted primarily from increased theatrical, foreign and television
revenues of $7.4 million, home entertainment video of $13.8 million and
distribution fees of $3.1 million from the distribution of product for
Universal. Revenues also include revenue generated from the distribution of
films from the Savoy library.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $20.4 million or 263.4%, to $28.1 million from
$7.7 million in 1999 due to the amortization of costs of increased theatrical
releases and costs related to the home entertainment.
EBITDA for the three months ended March 31, 2000 increased by $3.2 million
to $2.2 million from a loss of $1.0 million in 1999.
ELECTRONIC COMMERCE AND SERVICES
Net revenues for the three months ended March 31, 2000 increased by
$1.4 million, or 42.4%, to $4.6 million compared to $3.2 million in 1999. The
increase resulted from an increase in ECS teleservices of $0.7 million and Short
Shopping of $0.6 million.
Cost related to revenues and other costs and expenses for the three months
ended March 31, 2000 increased by $6.7 million, or 201.8%, to $10.1 million from
$3.4 million in 1999. The increase resulted primarily from start-up costs
incurred to launch the business initiatives.
EBITDA loss for the three months ended March 31, 2000 increased by
$5.4 million, to $5.6 million from $0.2 million in 1999.
BROADCASTING
Net revenues increased by $2.7 million, or 303.3%, to $3.6 million from
$0.9 million in 1999 due to increased advertising revenue at the television
station in the Miami/Ft. Lauderdale market and the launch of stations in the
Dallas and Atlanta markets in November 1999. Cost related to revenue increased
by $5.3 million, due to increased program costs and operating expenses. An
increased loss is expected in the broadcasting segment in 2000 as costs are
incurred to launch more local television stations.
OTHER
Other revenue relates to a business that was sold in 1999, which resulted in
decreased revenue of $4.0 million compared to 1999.
19
<PAGE>
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $157.9 million for the three
months ended March 31, 2000 compared to $60.4 million for the three months ended
March 31, 1999. These cash proceeds and available cash and borrowings were used
to pay for acquisitions of $21.6 million, to make capital expenditures of
$26.8 million, and to make mandatory tax distribution payments to the LLC
partners of $68.1 million.
On February 12, 1998, USAi and USANi LLC, as borrower, entered into a credit
agreement that provided for a $1.6 billion credit facility. $1.0 billion was
permanently repaid in prior years. The $600.0 million revolving credit facility
expires on December 31, 2002. As of March 31, 2000, there was $599.0 million
available for borrowing after taking into account outstanding letters of credit.
On March 1, 2000, HRN completed an initial public offering for approximately
6.2 million shares of its class A common stock, resulting in net cash proceeds
of approximately $90.0 million. USAi recorded a gain related to the initial
public offering of approximately $3.7 million in the three months ended
March 31, 2000.
Pursuant to an agreement between USAi and HRN, USAi made a contingent
payment of $12.5 million in the three months ended March 31, 2000. Furthermore,
USAi is required to make a contingent cash payment to the sellers of the two
entities which operated HRN based on the results of HRN for the twelve month
period ending March 31, 2000, which payment is expected to be paid around
June 2000. The amount is estimated to be approximately $43.0 million. The
obligation for contingent payments for the twelve month periods ending
March 31, 2001 and 2002 was released by the sellers in exchange for 5.1 million
shares of HRN common stock.
USAi implemented its plan to disaffiliate its television stations in the
Miami/Ft. Lauderdale, Dallas and the Atlanta markets in prior years. USAi has
incurred and will continue to incur expenditures to develop programming for
these stations, which during the development and transitional stage, may not be
offset by sufficient advertising revenues. 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.
On February 29, 2000, the Company made a mandatory tax distribution payment
to Universal and Liberty in the amount of $68.1 million.
In connection with the 1999 acquisition of Universal's domestic film
distribution and development business previously operated by PFE and PFE's
domestic video and specialty video businesses transaction, USAi advanced
$200.0 million to Universal in 1999 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, 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 March 31, 2000,
approximately $58.0 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 20 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 three
months ended March 31, 2000, the Company purchased 1,500,000 shares of its
common stock for aggregate consideration of $34.4 million.
20
<PAGE>
On April 5, 2000, the Company acquired Precision Response Corp. ("PRC") in a
stock-for-stock transaction, issuing 24.3 million shares of USAi common stock in
exchange for all outstanding equity of PRC.
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. On May 3, 2000,
Liberty notified USAi of its intention to exercise its preemptive right for
approximately 7.9 million shares related principally to the PRC transaction,
which will result in proceeds of approximately $179.1 million to USAi.
On January 25, 2000, USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, announced an agreement to form a new
company by merging Internet Shopping Network ("ISN") and Styleclick.com. The new
company, which will be named Styleclick, Inc., will own and operate the combined
properties of Styleclick.com Inc. and ISN. Under the terms of the agreement,
USAi will also invest $40 million in cash, contribute $10 million in dedicated
media, and will receive warrants to purchase additional shares of the new
company. Upon both the closing of the transaction and on a fully diluted basis,
USAi will own approximately 75% of the new company and Styleclick.com
stockholders will own approximately 25%. In the interim, USAi has agreed to
extend a $10 million bridge loan to Styleclick.com. As of March 31, 2000, the
amount outstanding under the loan is $5.0 million. The transaction is expected
to close in the second quarter of 2000.
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 may be higher than current amounts.
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 three months ended March 31, 2000, USAi did not pay any cash
dividends, and none are permitted under USAi's existing credit facility. USAi's
subsidiaries have no material restrictions on their ability to transfer amounts
to fund USAi's operations.
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.
ITEM 2(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's short-term investment portfolio and issuance
of debt. The Company does not use derivative
21
<PAGE>
financial instruments in its investment portfolio. The Company has a prescribed
methodology whereby it invests its excess cash in debt instruments of government
agencies and high quality corporate issuers. To further mitigate risk, the vast
majority of the securities have a maturity date within 60 days. The portfolio is
reviewed on a periodic basis and adjusted in the event that the credit rating of
a security held in the portfolio has deteriorated.
At March 31, 2000, the Company's outstanding debt approximated
$599 million, substantially all of which is fixed rate obligations. If market
rates decline, the Company runs the risk that the related required payments on
the fixed rate debt will exceed those based on the current market rate.
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts business in certain foreign markets. However, the level
of operations in foreign markets is insignificant to the consolidated results.
EQUITY PRICE RISK
The Company has a minimal investment in equity securities of a
publicly-traded Company. This investment, as of March 31, 2000, was considered
available-for-sale, with the unrealized gain deferred as a component of
stockholders' equity. It is not customary for the Company to make investments in
equity securities as part of its investment strategy.
22
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Jovon litigation, previously reported in the Company's 1999
Form 10-K, the briefing of the appeal has been completed.
In the Urban litigation, previously reported in the Company's 1999
Form 10-K, on April 21, 2000, the Virginia Supreme Court denied Urban's petition
for rehearing. On April 20, 2000, Urban filed a motion in U.S. Bankruptcy Court
seeking to have that Court reopen Urban's prior chapter 11 case and clarify
certain factual and legal matters contained within the Court's September 30,
1996 confirmation order. In addition, Amresco Funding Corporation, the entity
that provided Urban with bankruptcy exit financing, has joined in Urban's
motion. The Company believes that Urban and Amresco's bankruptcy motions are
devoid of merit and HSC is in the process of vigorously opposing both motions.
The motions and related oppositions were heard by the Court on May 2, 2000.
In the ETM Entertainment litigation, previously reported in the Company's
1999 Form 10-K, the parties have agreed to a settlement for an amount that will
not have a material adverse effect upon the financial condition of the Company.
Such settlement represents the final resolution of this matter, and accordingly,
it will not be reported in future filings.
In the Ticketmaster Cash Discount litigation entitled ADRIANA GARZA, ET AL.
V. SOUTHWEST TICKETING, INC., D/B/A TICKETRON, TICKETMASTER AND RAINBOW
TICKETMASTER, TICKETMASTER TEXAS MANAGEMENT, TICKETMASTER LLC, TICKETMASTER
GROUP, INC., TICKETMASTER ON-LINE CITYSEARCH, INC. AND THE MAY DEPARTMENT STORES
COMPANY, previously reported in the Company's 1999 Form 10-K, on March 8, 2000,
the federal court granted the plaintiff's motion to remand the case to state
court. Plaintiff filed a motion for partial summary judgment on March 24, 2000
and this is set for a hearing on May 8, 2000. On April 3, 2000, plaintiff
amended her petition. The amended petition includes allegations by the plaintiff
of her desire to represent a class of plaintiffs from the States of Texas,
Oklahoma, Kansas, New York, Florida, Connecticut, Maine, Massachusetts and
Colorado. In addition, plaintiff also stated her desire for the proposed class
to include not only credit card purchasers of tickets at outlets but also credit
card purchasers of tickets over the telephone and the Internet. Plaintiff has
alleged that the potential class includes tens of thousands of persons and goes
back three to six years (depending on the applicable statute of limitations) and
involves damages of tens or hundreds of millions of dollars. Plaintiff filed her
Motion for Class Certification on April 11, 2000. Hearing is scheduled on this
motion on May 17, 2000.
In the Ticketmaster Cash Discount litigation entitled KAREN AND JOE NEWTON
ON BEHALF OF THEMSELVES AND ALL THOSE SIMILARLY SITUATED V. TICKETMASTER LLC,
previously reported in the Company's 1999 Form 10-K, plaintiffs filed a motion
to remand the case to state court, which was denied on March 14, 2000. On
March 14, 2000, Ticketmaster filed a counterclaim asking for a declaration that
its cash discounts did not violate any Texas law or, in the alternative, for a
declaration that Texas law was invalid and unenforceable pursuant to the
Supremacy Clause of the United States Constitution. On March 16, 2000,
plaintiffs filed a motion for statewide class certification. Plaintiffs proposed
a class comprised of credit card purchasers from Texas outlets who had not
received a cash discount. On March 30, 2000, Ticketmaster filed a cross-motion
for certification of a counter-defendant class comprised of the same class
proposed by plaintiffs. On the same date, plaintiffs filed a notice of
withdrawal of their class certification motion as well as a motion to dismiss
the entire case. On April 3, 2000, plaintiffs filed a motion for leave to amend
their complaint to withdraw their original allegations by which they sought to
represent a class. Ticketmaster opposed plaintiffs' motions to amend their
complaint and to dismiss the case. On April 26, 2000, the court entered a
judgment dismissing the case.
In the First Jewelry litigation, previously reported in the Company's 1999
Form 10-K, the parties have settled the litigation between them. Under the
settlement, Internet Shopping Network has obtained from plaintiffs any and all
of the rights asserted by plaintiffs in the name and mark "First Jewellery." The
23
<PAGE>
performance of the Company's obligations under such settlement should not have a
material adverse effect upon the financial condition of the Company. Such
settlement represents the final resolution of this matter, and accordingly, it
will not be reported in future filings.
In the Polygram Filmed Entertainment litigation, previously reported in the
Company's 1999 Form 10-K, the parties are actively discussing settlement of the
dispute, and the Company is hopeful that the entire case will be favorably
resolved shortly. The Company believes that the claims in this matter are not
material to its financial condition, and that full litigation would result
either in complete vindication of the Company's position or a substantial
reduction in the value of the RSVP claims.
On April 12, 2000, USA Cable filed an action entitled USA CABLE V. WORLD
WRESTLING FEDERATION ENTERTAINMENT INC., ET AL., INDEX NO. 17893, in Delaware
Court of Chancery for Newcastle County. USA Cable broadcasts four wrestling
entertainment programs (the "Series") produced by World Wrestling Federation
Enterprises ("WWFE") pursuant to two contracts that expire in September 2000.
The contracts give USA Cable rights of first refusal as to any third-party
offers WWFE intends to accept for future distribution of the Series for the
period subsequent to the expiration of the contracts. On April 3, 2000, WWFE
notified USA Cable that it intended to accept an offer from Viacom Inc. and CBS
Corporation that includes exploitation rights to properties that are beyond the
scope of the rights of first refusal as to the four Series, and includes such
matters as broadcast rights to XFL football programming being developed by WWFE
and a commitment to fund motion picture development. On April 12, 2000, USA
Cable gave notice to WWFE that it was exercising its rights of first refusal as
to the Series upon terms that match the terms set forth by Viacom/CBS for the
Series. That same day, USA Cable filed an action against WWFE, CBS and Viacom in
Delaware Chancery Court seeking a declaration that USA Cable properly exercised
its rights of first refusal as to the Series and specific performance of the
agreement by the exercise of its right of first refusal, and requesting an
injunction restraining the defendants from engaging in actions inconsistent with
USA Cable's contractual rights. A trial of the action is scheduled to commence
on June 12, 2000.
On November 4, 1998, Ticketmaster Ticketing Co. filed an action entitled
TICKETMASTER TICKETING CO. V. N2K, INC, CASE NO. BC 200194, in Los Angeles
Superior Court against N2K, Inc. ("N2K") for breach of contract. The Complaint
seeks damages of not less than $8 million. On or about February 5, 1999, N2K
filed a cross-complaint alleging breach of contract, breach of the implied
covenant of good faith and fair dealing, intentional misrepresentation,
negligent misrepresentation, fraudulent concealment and rescission. On April 4,
2000, the Court granted N2K leave to file a First Amended Cross-complaint adding
new factual allegations to N2K's claim of intentional misrepresentation. N2K's
First Amended Cross-complaint seeks compensatory damages of $4 million, plus an
unspecified amount of punitive damages. Ticketmaster believes that the First
Amended Cross-complaint is without merit and has filed a motion for summary
adjudication seeking to dismiss all of N2K's tort claims. The motion is set to
be heard on June 20, 2000. Trial is currently scheduled to commence on June 28,
2000.
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.
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.1* Letter Agreement, dated February 25, 2000, between USA
Networks,Inc. and Thomas J. Kuhn.
27.1 Financial Data Schedule (for SEC use only)
27.2 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------
* Reflects management contracts and compensatory plans.
(b) Forms 8-K
USAi filed a report on Form 8-K, dated January 12, 2000, reporting items 5
and 7, announcing that USAi had entered into a definitive agreement to acquire
Precision Response Corporation.
USAi filed a report on Form 8-K, dated January 20, 2000, reporting items 5
and 7, announcing a two-for-one stock split with respect to USAi's common stock
and Class B common stock.
USAi filed a report on Form 8-K, dated January 25, 2000, reporting items 5
and 7, announcing that USANI Sub LLC, a subsidiary of USAi, had entered into an
Agreement and Plan of Merger with Styleclick.com Inc.
USAi filed a report on Form 8-K, dated February 24, 2000, reporting item 5,
announcing the completion of USAi's two-for-one stock split with respect to its
common stock and Class B common stock.
USAi filed a report on Form 8-K and a report on Form 8-K/A, dated March 23,
2000, in each case reporting items 5 and 7, containing the audited consolidated
financial statements of Precision Response Corporation as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999,
and the unaudited pro forma condensed combined financial statements, giving
effect to the acquisition by USAi of Precision Response Corporation as well as
other transactions completed by USAi in 1999.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
USA NETWORKS, INC.
(REGISTRANT)
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ BARRY DILLER
------------------------------------------- Chairman of the Board and May 15, 2000
Barry Diller Chief Executive Officer
/S/ MICHAEL SILECK Senior Vice President,
------------------------------------------- Chief Financial Officer May 15, 2000
Michael Sileck (Principal Financial Officer)
/S/ WILLIAM J. SEVERANCE
------------------------------------------- Vice President and Controller May 15, 2000
William J. Severance (Chief Accounting Officer)
</TABLE>
26
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
NET REVENUES
Networks and television production........................ $378,953 $331,544
Electronic retailing...................................... 379,058 275,510
Interactive............................................... 6,088 6,516
Electronic commerce and services.......................... 898 273
Other..................................................... -- 4,046
-------- --------
Total net revenues........................................ 764,997 617,889
OPERATING COSTS AND EXPENSES:
Cost of sales and services................................ 238,411 176,086
Program costs............................................. 165,864 170,067
Selling and marketing..................................... 88,894 62,631
General and administrative................................ 72,159 56,036
Other operating costs..................................... 25,724 22,129
Amortization of cable distribution fees................... 8,223 6,090
Depreciation and amortization............................. 47,738 43,007
-------- --------
Total operating costs and expenses.................... 647,013 536,046
-------- --------
Operating profit.......................................... 117,984 81,843
Other income (expense):
Interest income........................................... 13,829 10,615
Interest expense.......................................... (16,907) (20,378)
Gain on sale of securities................................ -- 47,300
Miscellaneous............................................. (2,479) 9,616
-------- --------
(5,557) 47,153
-------- --------
Earnings before income taxes.............................. 112,427 128,996
Minority interest benefit................................. (66,010) (77,306)
Income tax expense........................................ (24,627) (20,192)
-------- --------
NET EARNINGS.............................................. $ 21,790 $ 31,498
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 241,778 $ 247,474
Accounts and notes receivable, net of allowance of $41,200
and $33,317, respectively................................. 389,562 381,175
Inventories, net............................................ 440,116 432,520
Investments held for sale................................... 12,000 --
Deferred income taxes....................................... 5,443 12,077
Other current assets, net................................... 20,551 8,542
---------- ----------
Total current assets........................................ 1,109,450 1,081,788
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 152,077 123,606
Buildings and leasehold improvements........................ 60,725 59,074
Furniture and other equipment............................... 66,669 67,246
Land........................................................ 10,246 10,246
Projects in progress........................................ 28,377 31,736
---------- ----------
318,094 291,908
Less accumulated depreciation and amortization.............. (92,620) (79,350)
---------- ----------
225,474 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,028,458 5,029,769
Cable distribution fees, net ($33,532 and $35,181,
respectively, to related parties)......................... 149,442 130,988
Long-term investments....................................... 53,597 93,742
Notes and accounts receivable, net.......................... 19,370 19,506
Inventories, net............................................ 142,891 154,497
Advances to USAI and Subsidiaries........................... 420,971 410,107
Deferred income taxes....................................... 57,006 61,755
Deferred charges and other, net............................. 39,558 36,934
---------- ----------
$7,246,217 $7,231,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 16,335 $ 3,758
Accounts payable, trade..................................... 148,915 147,864
Obligations for program rights and film costs............... 280,920 265,235
Cable distribution fees payable ($18,559 and $18,733,
respectively, to related parties)......................... 51,355 43,993
Deferred revenue............................................ 48,643 47,536
Other accrued liabilities................................... 306,449 271,846
---------- ----------
Total current liabilities................................... 852,617 780,232
LONG-TERM OBLIGATIONS (net of current maturities)........... 528,203 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 237,429 256,260
OTHER LONG-TERM LIABILITIES................................. 74,772 81,156
MINORITY INTEREST........................................... 4,305,373 4,244,114
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Common Stock................................................ 1,221,408 1,221,408
Additional paid-in capital.................................. 70,312 70,312
Retained (deficit) earnings................................. (45,556) 50,823
Accumulated other comprehensive income...................... 1,659 --
---------- ----------
Total stockholders' equity.................................. 1,247,823 1,342,543
---------- ----------
$7,246,217 $7,231,644
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
COMMON PAID-IN EARNINGS COMPREHENSIVE
TOTAL STOCK CAPITAL (DEFICIT) INCOME
---------- ---------- ----------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1999....................... $1,342,543 $1,221,408 $70,312 $ 50,823 $ --
Comprehensive Income:
Net earnings for the year
ended December 31, 1999.. 21,790 -- -- 21,790 --
Foreign currency
translation.............. (299) (299)
Increase in unrealized
gains in available for
sale securities.......... 1,958 -- -- -- 1,958
----------
Comprehensive income..... 23,449
Mandatory tax distribution to
LLC partners............... (118,169) -- -- (118,169) --
---------- ---------- ------- --------- ------
Balance at March 31, 2000.... $1,247,823 $1,221,408 $70,312 $(45,556) $1,659
========== ========== ======= ========= ======
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2000 1999
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................ $ 21,790 $ 31,498
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization........................... 47,738 43,007
Amortization of cable distribution fees................. 8,223 6,090
Amortization of program rights and film costs........... 143,468 159,261
Gain on sale of securities.............................. -- (47,300)
Amortization of deferred financing costs................ 935 --
Equity in (earnings) losses of unconsolidated
affiliates............................................ 2,788 443
Minority interest....................................... 66,010 77,306
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable..................................... (767) 11,477
Inventories............................................. 21,921 5,332
Accounts payable........................................ (9,225) (44,110)
Accrued liabilities and deferred revenue................ 33,999 10,137
Payment for program rights and film costs............... (166,028) (161,939)
Increase in cable distribution fees..................... (18,591) (6,981)
Other, net.............................................. 19,634 (1,185)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 171,895 83,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (3,997) (7,500)
Capital expenditures........................................ (17,010) (10,011)
Increase in long-term investments and notes receivable...... (1,853) (11,385)
Advance to Styleclick....................................... (5,000) --
Proceeds from sale of securities............................ -- 58,110
Proceeds from long-term notes receivable.................... -- 3,691
Other, net.................................................. (4,458) --
--------- ---------
NET CASH (USED) IN PROVIDED BY INVESTING ACTIVITIES... (32,318) 32,905
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 19,514 --
Intercompany................................................ (2,673) 4,311
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (16,162) (6,965)
Repurchase of LLC shares.................................... (34,419) --
Proceeds from issuance of LLC shares........................ 14,485 --
Other....................................................... (7,550) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................. (144,974) (55,409)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (299) --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (5,696) 60,532
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 241,778 $ 295,435
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Home Shopping Network, Inc. (the "Company" or "Home Shopping"), is a holding
company, whose subsidiary USANi LLC is engaged in diversified media and
electronic commerce businesses. In December 1996, the Company consummated a
merger with USA Networks, Inc. ("USAi"), formerly known as HSN, Inc., and became
a subsidiary of USAi (the "Home Shopping Merger").
On February 12, 1998, USAi acquired USA Networks, a New York general
partnership, consisting of cable television networks, USA Network and Sci-Fi
Channel ("Networks"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram") (the "Universal Transaction").
In connection with the Universal Transaction, the Company formed a new
subsidiary, USANi LLC, and contributed the operating assets of the Home Shopping
Network services ("HSN") to USANi LLC. Furthermore, USAi contributed Networks
and Studios USA to USANi LLC on February 12, 1998.
As of March 31, 2000, the Company engages in four principal areas of
business:
- Networks and television production, which includes Networks and Studios
USA. Networks operates the USA Network and Sci-Fi Channel cable networks
and Studios USA produces and distributes television programming.
- Electronic retailing, consisting primarily of the Home Shopping Network
and America's Store, which are engaged in the electronic retailing
business.
- Internet services, which represents Internet Shopping Network, the
Company's on-line retailing networks business.
- Electronic commerce and services which primarily represent the Company's
customer and e-care business.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements and Notes thereto of
the Company are unaudited and should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto for the three months ended
March 31, 2000. Certain amounts in the Condensed Consolidated Financial
Statements for the quarter ended March 31, 1999 have been reclassified to
conform to the 2000 presentation.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The interim Condensed
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
31
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (the "1999 Form 10-K") for a summary of all significant
accounting policies.
NOTE 3--INVESTMENTS
During the quarter ended March 31, 1999, the Company recognized a pre-tax
gain of $47.3 million on the sale of securities in a publicly traded entity.
NOTE 4--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2000:
As of January 1, 2000 the Company began to consolidate the accounts of HOT
Germany, an electronic retailer in Germany, whereas its investment in HOT
Germany was previously accounted for under the equity method of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999:
During the quarter ended March 31, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.0 million.
NOTE 5--INDUSTRY SEGMENTS
For the three months ended ended March 31, 2000 and 1999, the Company
operated principally in four industry segments: Networks and television
production, Electronic retailing, Interactive and Electronic commerce and
services. The Networks and television production segment consists of the cable
networks USA Network and 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 Interactive segment
32
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--INDUSTRY SEGMENTS (CONTINUED)
represents the Company's on-line retailing networks business. The Electronic
commerce and services segment primarily represents the Company's customer and
e-care businesses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Networks and television production...................... $378,953 $331,544
Electronic retailing.................................... 379,058 275,510
Interactive............................................. 6,088 6,516
Electronic commerce and services........................ 898 273
Other................................................... -- 4,046
-------- --------
$764,997 $617,889
======== ========
OPERATING PROFIT (LOSS)
Networks and television production...................... $110,787 $ 81,270
Electronic retailing.................................... 30,012 14,686
Electronic commerce and services........................ (3,923) (426)
Interactive............................................. (10,057) (7,801)
Corporate and other..................................... (8,835) (5,886)
-------- --------
$117,984 $ 81,843
======== ========
</TABLE>
NOTE 6--GUARANTEE OF NOTES
USAi issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi
LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of USAi,
including the Company and all of the subsidiaries of USANi LLC (other than
subsidiaries that are, individually and in the aggregate, inconsequential to
USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors").
All of the Subsidiary Guarantors (other than the Company) (the "Wholly Owned
Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company
or USANi LLC, as the case may be.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because the
Company's management has determined that the information contained in such
documents would not be material to investors.
NOTE 7--SUBSEQUENT EVENTS
ACQUISITION OF PRECISION RESPONSE CORPORATION
On April 5, 2000, USAi acquired Precision Response Corp. ("PRC") in a
stock-for-stock transaction, issuing 24.3 million shares of USAi common stock
valued at approximately $705 million in exchange for all outstanding equity of
PRC.
33
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--SUBSEQUENT EVENTS (CONTINUED)
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On January 25, 2000, USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, announced an agreement to form a new
company by merging Internet Shopping Network ("ISN") and Styleclick.com. The new
company, which will be named Styleclick, Inc., will own and operate the combined
properties of Styleclick.com Inc. and ISN. Under the terms of the agreement,
USAi will also invest $40 million in cash, contribute $10 million in dedicated
media, and will receive warrants to purchase additional shares of the new
company. Upon both the closing of the transaction and on a fully diluted basis,
USAi will own approximately 75% of the new company and Styleclick.com
stockholders will own approximately 25%. In the interim, USAi has agreed to
extend a $10 million bridge loan to Styleclick.com. As of March 31, 2000, the
amount outstanding under the loan is $5.0 million. The transaction is expected
to close in the second quarter of 2000.
34
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
NET REVENUES
Networks and television production.......................... $378,953 $331,544
Electronic retailing........................................ 379,058 275,510
Interactive................................................. 6,088 6,516
Electronic commerce and services............................ 898 273
Other....................................................... -- 4,046
-------- --------
Total net revenues.......................................... 764,997 617,889
OPERATING COSTS AND EXPENSES:
Cost of sales and services.................................. 238,411 176,086
Program costs............................................... 165,864 170,067
Selling and marketing....................................... 88,894 62,631
General and administrative.................................. 72,159 56,036
Other operating costs....................................... 25,724 22,129
Amortization of cable distribution fees..................... 8,223 6,090
Depreciation and amortization............................... 47,738 43,007
-------- --------
Total operating costs and expenses...................... 647,013 536,046
-------- --------
Operating profit............................................ 117,984 81,843
Other income (expense):
Interest income............................................. 13,829 10,615
Interest expense............................................ (16,907) (20,378)
Gain on sale of securities.................................. -- 47,300
Miscellaneous............................................... (2,479) 9,616
-------- --------
(5,557) 47,153
-------- --------
Earnings before income taxes................................ 112,427 128,996
Minority interest (expense) benefit......................... (2,296) 186
Income tax expense.......................................... (5,012) (1,883)
-------- --------
NET EARNINGS................................................ $105,119 $127,299
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
35
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ------------
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 241,778 $ 247,474
Accounts and notes receivable, net of allowance of $41,200
and $33,317, respectively................................. 389,562 381,175
Inventories, net............................................ 440,116 432,520
Investments held for sale................................... 12,000 --
Other current assets, net................................... 20,551 8,542
---------- ----------
Total current assets.................................... 1,104,007 1,069,711
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 152,077 123,606
Buildings and leasehold improvements........................ 60,725 59,074
Furniture and other equipment............................... 66,669 67,246
Land........................................................ 10,246 10,246
Projects in progress........................................ 28,377 31,736
---------- ----------
318,094 291,908
Less accumulated depreciation and amortization.......... (92,620) (79,350)
---------- ----------
225,474 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,104,199 5,105,510
Cable distribution fees, net ($33,532 and $35,181,
respectively, to related parties)......................... 149,442 130,988
Long-term investments....................................... 53,597 93,742
Notes and accounts receivable, net.......................... 19,370 19,506
Inventories, net............................................ 142,891 154,497
Advances to USAI and Subsidiaries........................... 656,244 649,480
Deferred charges and other, net............................. 39,558 36,934
---------- ----------
$7,494,782 $7,472,926
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
36
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ------------
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 16,335 $ 3,758
Accounts payable, trade..................................... 148,915 147,864
Obligations for program rights and film costs............... 280,920 265,235
Cable distribution fees payable ($18,559 and $18,733,
respectively, to related parties)......................... 51,355 43,993
Deferred revenue............................................ 48,643 47,536
Other accrued liabilities................................... 292,892 257,575
---------- ----------
Total current liabilities................................... 839,060 765,961
LONG-TERM OBLIGATIONS
(net of current maturities)................................. 528,203 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 237,429 256,260
OTHER LONG-TERM LIABILITIES................................. 74,772 81,156
MINORITY INTEREST........................................... 4,964 531
COMMITMENTS AND CONTINGENCIES............................... -- --
MEMBERS' EQUITY.............................................
Class A (245,393,314 and 245,601,782 shares,
respectively)............................................. 1,892,580 1,912,514
Class B (282,161,532 shares)................................ 2,978,635 2,978,635
Class C (45,774,708 shares)................................. 466,252 466,252
Retained earnings........................................... 471,228 484,278
Accumulated other comprehensive income...................... 1,659 --
---------- ----------
Total members' equity....................................... 5,810,354 5,841,679
---------- ----------
$7,494,782 $7,472,926
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
37
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B CLASS C OTHER
LLC LLC LLC RETAINED COMPREHENSIVE
TOTAL SHARES SHARES SHARES EARNINGS INCOME
---------- ---------- ---------- -------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999...................... $5,841,679 $1,912,514 $2,978,635 $466,252 $484,278 $ --
COMPREHENSIVE INCOME:
Net earnings for the three
months ended March 31,
2000...................... 105,119 -- -- -- 105,119 --
Foreign currency
translation............... (299) (299)
Increase in unrealized gains
in available for sale
securities................ 1,958 -- -- -- -- 1,958
----------
Comprehensive income........ 106,778
Issuance of LLC shares...... 14,485 14,485 -- -- -- --
Repurchase of LLC shares.... (34,419) (34,419) -- -- -- --
Mandatory tax distribution
to LLC partners........... (118,169) -- -- -- (118,169) --
---------- ---------- ---------- -------- -------- ------
BALANCE AT MARCH 31,
2000...................... $5,810,354 $1,892,580 $2,978,635 $466,252 $471,228 $1,659
========== ========== ========== ======== ======== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
38
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 105,119 $ 127,299
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 47,738 43,007
Amortization of cable distribution fees................... 8,223 6,090
Amortization of program rights and film costs............. 143,468 159,261
Gain on sale of securities................................ -- (47,300)
Amortization of deferred financing costs.................. 935 --
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 2,788 443
Minority interest......................................... 2,296 (186)
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (767) 11,477
Inventories............................................... 21,921 5,332
Accounts payable.......................................... (9,225) (44,110)
Accrued liabilities and deferred revenue.................. 14,384 (8,172)
Payment for program rights and film costs................. (166,028) (161,939)
Increase in cable distribution fees....................... (18,591) (6,981)
Other, net................................................ 19,634 (1,185)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 171,895 83,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (3,997) (7,500)
Capital expenditures........................................ (17,010) (10,011)
Increase in long-term investments and notes receivable...... (1,853) (11,385)
Advance to Styleclick....................................... (5,000) --
Proceeds from sale of securities............................ -- 58,110
Proceeds from long-term notes receivable.................... -- 3,691
Other, net.................................................. (4,458) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................... (32,318) 32,905
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 19,514 --
Intercompany................................................ (2,673) 4,311
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (16,162) (6,965)
Repurchase of LLC shares.................................... (34,419) --
Proceeds from issuance of LLC shares........................ 14,485 --
Other....................................................... (7,550) --
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... (144,974) (55,409)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (299) --
NET INCREASE IN CASH AND CASH EQUIVALENTS................... (5,696) 60,532
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 241,778 $ 295,435
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
39
<PAGE>
USANi LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
COMPANY FORMATION
USANi LLC (the "Company" or "LLC"), a Delaware limited liability company,
was formed on February 12, 1998 and is a subsidiary of Home Shopping
Network, Inc. ("Home Shopping" or "Holdco"), which is a subsidiary of USA
Networks, Inc. ("USAi"), formerly known as HSN, Inc. At its formation, USAi and
Home Shopping contributed substantially all of the operating assets and
liabilities of Home Shopping to the Company in exchange for Class A LLC Shares
of the Company.
On February 12, 1998, the Company acquired USA Networks, a New York general
partnership, consisting of cable television networks, USA Network and 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").
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USANi LLC's members' equity interests, payable in the form of a
dividend to shareholders of record as of the close of business on February 10,
2000. The stock dividend was paid on February 24, 2000. All share numbers give
effect to such stock split.
COMPANY BUSINESS
The Company is a holding company, the subsidiaries of which are engaged in
diversified media and electronic commerce businesses.
The four principal areas of business are:
- Networks and television production, which includes Networks and Studios
USA. Networks operates the USA Network and Sci-Fi Channel cable networks
and Studios USA produces and distributes television programming.
- Electronic retailing, which consists primarily of the Home Shopping
Network and America's Store which are engaged in the electronic retailing
business.
- Interactive, which represents Internet Shopping Network, the Company's
on-line retailing networks business.
- Electronic commerce and services, which primarily represents the Company's
customer and e-care businesses.
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 three months ended
March 31, 2000. Certain amounts in the Condensed Consolidated Financial
Statements for the quarter ended March 31, 1999 have been reclassified to
conform to the 2000 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
40
<PAGE>
USANi LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (the "1999 Form 10-K") for a summary of all significant
accounting policies.
NOTE 3--INVESTMENTS
During the quarter ended March 31, 1999, the Company recognized a pre-tax
gain of $47.3 million on the sale of securities in a publicly traded entity.
NOTE 4--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2000:
As of January 1, 2000 the Company began to consolidate the accounts of HOT
Germany, an electronic retailer operating principally in Germany, whereas its
investment in HOT Germany was previously accounted for under the equity method
of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999:
During the quarter ended March 31, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.0 million.
NOTE 5--INDUSTRY SEGMENTS
For the three months ended ended March 31, 2000 and 1999, the Company
operated principally in four industry segments: Networks and television
production, Electronic retailing, Interactive and Electronic commerce and
services. The Networks and television production segment consists of the cable
networks USA Network and 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 Interactive segment
41
<PAGE>
USANi LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--INDUSTRY SEGMENTS (CONTINUED)
represents the Company's on-line retailing networks business. The Electronic
commerce and services segment primarily represents the Company's customer and
e-care businesses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
REVENUE
Networks and television production................... $378,953 $331,544
Electronic retailing................................. 379,058 275,510
Interactive.......................................... 6,088 6,516
Electronic commerce and services..................... 898 273
Other................................................ -- 4,046
-------- --------
$764,997 $617,889
======== ========
OPERATING PROFIT (LOSS)
Networks and television production................... $110,787 $ 81,270
Electronic retailing................................. 30,012 14,686
Electronic commerce and services..................... (3,923) (426)
Interactive.......................................... (10,057) (7,801)
Corporate and other.................................. (8,835) (5,886)
-------- --------
$117,984 $ 81,843
======== ========
</TABLE>
NOTE 6--NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
On November 23, 1998, USAi and the Company completed an offering of
$500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In May 1999, the
Old Notes were exchanged in full for $500.0 million of new 6 3/4% Senior Notes
due 2005 (the "Notes") that have terms that are substantially identical to the
Old Notes. Interest is payable on the Notes on May 15 and November 15 of each
year, commencing May 15, 1999. The Notes are jointly, severally, fully and
unconditionally guaranteed by certain subsidiaries of USAi, including Holdco, a
non-wholly owned, direct subsidiary of USAi, and all of the subsidiaries of the
Company (other than subsidiaries that are, individually and in the aggregate,
inconsequential to the Company on a consolidated basis) (collectively, the
"Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Holdco)
(the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or
indirectly, by USAi or the Company, as the case may be.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because USAi's
and the Company's management has determined that the information contained in
such documents would not be material to investors. USANi LLC and its
subsidiaries have no material restrictions on their ability to transfer amounts
to fund USAi's operations.
42
<PAGE>
USANi LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--SUBSEQUENT EVENTS
ACQUISITION OF PRECISION RESPONSE CORPORATION
On April 5, 2000, USAi acquired Precision Response Corp. ("PRC") in a
stock-for-stock transaction, issuing 24.3 million shares of USAi common stock
valued at approximately $705 million in exchange for all outstanding equity of
PRC.
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On January 25, 2000, USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, announced an agreement to form a new
company by merging Internet Shopping Network ("ISN") and Styleclick.com. The new
company, which will be named Styleclick, Inc., will own and operate the combined
properties of Styleclick.com Inc. and ISN. Under the terms of the agreement,
USAi will also invest $40 million in cash, contribute $10 million in dedicated
media, and will receive warrants to purchase additional shares of the new
company. Upon both the closing of the transaction and on a fully diluted basis,
USAi will own approximately 75% of the new company and Styleclick.com
stockholders will own approximately 25%. In the interim, USAi has agreed to
extend a $10 million bridge loan to Styleclick.com. As of March 31, 2000, the
amount outstanding under the loan is $5.0 million. The transaction is expected
to close in the second quarter of 2000.
43
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.1* Letter Agreement, dated February 25, 2000, between USA
Networks, Inc. and Thomas J. Kuhn...........................
27.1 Financial Data Schedule (for SEC use only)..................
27.2 Financial Data Schedule (for SEC use only)..................
</TABLE>
- ------------------------
* Reflects management contracts and compensatory plans.
<PAGE>
EXHIBIT 10.1
USA NETWORKS, INC.
152 WEST 57(TH) STREET
NEW YORK, NEW YORK 10019
February 25, 2000
MR. THOMAS J. KUHN
325 East 57th Street
New York, New York 10022
Dear Tom:
This Letter Agreement sets out the agreements and understandings of Thomas
J. Kuhn ("you") and USA Networks, Inc. ("USAi") with regard to your separation
from USAi, and (i) confirms that, effective on the Termination Date (as defined
herein), you will no longer serve as an officer or director of USAi or any of
its subsidiaries or affiliates, (ii) except as otherwise expressly provided
herein, terminates, effective upon execution of this Letter Agreement, the
Employment Agreement, dated as of February 9, 1998 (the "Employment Agreement"),
between you and USAi, and (iii) confirms certain agreements between you and USAi
concerning, among other matters:
(a) your continued role with USAi through the Termination Date;
(b) the cash payment to you of $800,000, as described below;
(c) the exercise (and sale of shares incident to such exercise) of your
remaining options to purchase (i) 170,000 shares of the Common Stock of
USAi (the "Initial Options") granted to you pursuant to Section 3(c) of
the Employment Agreement and to the Stock Option Agreement, dated as of
February 9, 1998, between USAi and you (the "February Stock Option
Agreement," and collectively with Section 3(c) of the Employment
Agreement, the "Initial Option Agreements") and (ii) 50,000 shares of the
Common Stock of USAi (collectively with the Initial Options, the
"Options") granted to you pursuant to the Stock Option Agreement, dated
as of December 15, 1998 between USAi and you (the "December Stock Option
Agreement," and collectively with the Initial Option Agreements, the
"Stock Option Agreements");
(d) the 7,500 restricted shares of USAi Common Stock (the "Restricted
Stock") granted to you pursuant to the Restricted Stock Agreement dated
as of December 15, 1998 (the "Restricted Stock Agreement");
(e) the vesting of the 1,242 shares of USAi stock (the "Bonus Stock")
purchased by you pursuant to the election made by you in January 2000 to
defer $45,000 of your 1999 bonus pursuant to the USAi Bonus Stock
Purchase Program (the "Bonus Stock Program"); and
(f) the continuation of your health insurance.
In the event of any ambiguity or conflict between the provisions of (x) this
Letter Agreement and (y) the Employment Agreement, the Stock Option Agreements,
or the Restricted Stock Agreement (such three Agreements, collectively the
"Existing Agreements"), as the case may be, the provisions of this Letter
Agreement shall control. USAi share amounts used in this Letter Agreement do not
give effect to the 2-for-1 stock split paid to USAi stockholders on
February 24, 2000. It is hereby agreed that the share amounts and exercise or
other share prices of the Options, Restricted Stock and Bonus Stock referred to
herein shall be adjusted to give effect to the split.
1. SERVICES. (a) Your service with USAi will terminate on June 30, 2000 or
such earlier date as you and USAi may mutually agree (June 30, 2000 or such
earlier agreed date, the "Termination Date"). Your last regular pay period ran
through February 11, 2000.
(b) From the date hereof through the Termination Date, you shall continue
to supervise the legal affairs of USAi (continuing to report to the Vice
Chairman of USAi) and will assist in the transition to a
<PAGE>
new general counsel; provided, however, that USAi acknowledges and agrees that
during this period you will spend a significant percentage of your available
time seeking another position.
(c) USAi shall continue in effect, through the Termination Date, the
medical, dental and other health and welfare benefits for you and your family as
in effect prior to the date hereof.
(d) Notwithstanding the termination of your Employment Agreement, USAi's
obligations under Section 3(d)(iii) (Reimbursement of Expenses) as it relates to
expenses incurred prior to the Termination Date, Section 8 (Successors) and
Section 14 (Indemnification) of the Employment Agreement, and your obligations
under Section 5 (Confidentiality and Non-Solicitation of Employees) of the
Employment Agreement, survive the Termination Date and are incorporated herein
by reference.
(e) Between the date hereof and the Termination Date, you shall be entitled
to take two weeks paid leave: one week to be taken after the birth of your
expected child and one week in late May.
2. CASH PAYMENTS. (a) As promptly as practicable after execution of this
Letter Agreement, USAi shall pay to you, by wire transfer to your account,
number 967-547-814 at Chase Manhattan Private Bank, 1211 Avenue of the Americas,
New York, New York 10036 ("your Chase Account") in immediately available funds,
the sum of Two Hundred Thousand Dollars ($200,000), less amounts required to be
withheld by USAi under applicable federal, state and local tax laws.
(b) USAi shall pay to you an additional Six Hundred Thousand Dollars
($600,000) in three equal installments of Two Hundred Thousand Dollars
($200,000) each, on each of (1) March 31, 2000; (2) April 28, 2000 and
(3) May 31, 2000, in each case, by wire transfer to your Chase Account, in
immediately available funds, less amounts required to be withheld by USAi under
applicable federal, state and local tax laws.
3. OPTIONS. (a) On the date of this Letter Agreement, all Options under
the Initial Option Agreements shall immediately vest and will be exercisable by
you, in whole or any part, at any time prior to the first anniversary of the
Termination Date.
(b) On the date of this Letter Agreement, all Options under the December
Option Agreements shall immediately vest and will be exercisable by you, in
whole or any part, at any time prior to the 90(th) day following the Termination
Date.
(c) So long as any of your Options are exercisable, USAi shall make
available to you the option exercise and share sale procedures generally made
available to senior executives of USAi (currently including the broker
loan/cashless exercise procedures available through Salomon Smith Barney). It is
also hereby acknowledged and agreed that withholding for federal, state and
local tax obligations arising in connection with your exercise of such Options
shall be handled in the same manner as it is handled for other senior executives
of USAi.
4. RESTRICTED STOCK. On the date of this Letter Agreement, the Restricted
Stock shall immediately vest. USAi shall pay all required federal, state and
local tax withholding related to the vesting of the Restricted Stock. You shall,
as promptly as practicable after the date hereof, but in any event within
10 days following the date of this Letter Agreement, surrender to USAi the
original legended certificate representing the 7,500 shares of Restricted Stock.
USAi shall, as promptly as practicable after its receipt of such certificate,
but in any event within 10 days after your surrender of such certificate,
redeliver to you an unlegended share certificate (freely tradeable) representing
that number of shares of USAi Common Stock as shall be equal to the number of
shares of Restricted Stock less such number of shares as have a value equal to
the amount withheld by USAi under the second sentence of this paragraph 4. The
stock price used to calculate the number of shares to be withheld shall be the
closing price of USAi Common Stock on the date of this Letter Agreement.
5. BONUS STOCK. On the Termination Date, the Bonus Stock shall immediately
vest. USAi shall pay all required federal, state and local tax withholding
related to the vesting of the Bonus Stock. USAi shall, as promptly as
practicable after, but in any event within 10 days following, the Termination
Date deliver to you an unlegended share certificate (freely tradeable)
representing that number of shares of USAi Common Stock as shall be equal to the
number of shares of Bonus Stock less such number of shares as
<PAGE>
have a value equal to the amount withheld by USAi under the second sentence of
this paragraph 5. The stock price used to calculate the number of shares to be
withheld shall be the closing price of USAi Common Stock on the Termination
Date.
6. POST-TERMINATION DATE MATTERS.
(a) LIMITATION ON SALES OF USA SHARES. With respect to the shares of USAi
Common Stock owned by you on the date hereof (including the Restricted Shares
and the Bonus Shares), and any shares acquired by you pursuant to any Options,
you agree that you shall not sell in the public market on any one trading day
more than 50,000 of such shares. Subject to compliance with law, you shall not
from and after the date of this Letter Agreement be subject to USAi "window"
period or similar restrictions or policies regarding option exercises and/or the
sale of USAi Common Stock.
(b) HEALTH COVERAGE. Following the Termination Date, you shall make a
COBRA election with respect to the continuation of health-related benefits for
you and your family. The cost of such benefits (currently $1,292 per month)
through February 2002 (the remainder of the otherwise applicable term of the
Employment Agreement) shall be borne by USAi; provided that USAi's obligation to
continue to bear the cost of such coverage shall cease when you obtain
equivalent coverage from a subsequent employer. Thereafter, you shall be
permitted to continue your health coverage at the then applicable COBRA rates
(and at your sole expense) for an additional period of 17 months, through
June 2003.
(c) 401(K) PLAN. With respect to your payout/rollover options under the
USAi Retirement Savings Plan (401(k)), you shall in accordance with the
applicable provisions of such plan advise USAi of your directions with respect
to your account balances, and USAi shall comply therewith.
7. RELEASES. (a) For and in consideration of the payments and promises
made by USAi herein and other good and valuable consideration, and recognizing
that you are receiving certain benefits hereunder in excess of those provided
under your Employment Agreement, you hereby waive, release and forever discharge
USAi and its affiliates, and each of USAi's affiliates', divisions, branches,
predecessors, successors, as signs, directors, officers, employees, agents,
partners, members, stockholders, representatives and attorneys, in their
individual and representative capacities (collectively, the "Releasees") of and
from any and all actions, causes of action, suits, debts, dues, sums of money,
accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
extents, executions, claims and demands whatsoever, in law, admiralty or equity,
whether known or unknown, suspected or unsuspected, of every kind and nature
whatsoever, which may now exist or which may later arise (collectively,
"Claims"), including without limitation under Title VII of the Civil Rights Act
of 1964, as amended, 42 U.S.C. Section2000 ET SEQ.; the Fair Labor Standards
Act, as amended, 29 U.S.C. Section201 ET SEQ.: the Age Discrimination in
Employment Act, 29 U.S.C. Section621 ET SEQ. (the "ADEA"); the Americans With
Disabilities Act, 42 U.S.C. Section1001 ET SEQ. and Section12,112 ET SEQ.; the
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C.
Section1001 ET SEQ.; the Reconstruction Era Civil Rights Act, as amended, 42
U.S.C. Section1981 ET SEQ.; and all other federal, state and local laws,
statutes, rules or regulations of any type or description, including, without
limitation, contract law, tort law, civil rights laws, express or implied
covenants of good faith or fair dealing, and otherwise, regarding employment
discrimination or the employment of labor, or otherwise, which you or your
heirs, executors, administrators, successors and assigns ever had, now have or
hereafter can, shall or may have against the Releasees or any of them for, upon
or by reason of any matter, cause or thing whatsoever from the beginning of the
world to the day of the date of this Letter Agreement, except for Claims arising
under or in connection with this Letter Agreement. Without limiting the
generality of the foregoing, except as expressly referred to or set forth in
this Letter Agreement, you expressly waive any right or claim for reinstatement
of employment, backpay, interest, bonuses, damages, accidental death and
dismemberment coverage, long term disability coverage, stock or other interests
in USAi or any affiliate, life insurance benefits, severance pay and/or
attorneys' fees or costs with respect to or derivative of such employment with
USAi, or any predecessors or successors thereof, or the termination thereof.
(b) For and in consideration of the promises made by you herein and other
good and valuable consideration, the Releasees and each of them hereby waive,
release and forever discharge you and your heirs, successors and assigns,
partners, representatives and attorneys, of and from all Claims, including,
<PAGE>
without limitation, under all federal, state and local laws, statutes, rules or
regulations of any type or description, including, without limitation, contract
law, tort law, civil rights laws, express or implied covenants of good faith or
fair dealing, and otherwise, regarding employment discrimination or the
employment of labor, or otherwise, which the Releasees or any of them ever had,
now have or hereafter can, shall or may have against you and your heirs,
successors and assigns, partners, representatives and attorneys, for, upon or by
reason of any matter, cause or thing whatsoever from the beginning of the world
to the day of the date of this Agreement, except for Claims arising under or in
connection with this Letter Agreement.
(c) Notwithstanding anything to the contrary set forth in this
paragraph 7, neither you nor USAi release, waive or discharge the other from (i)
any claims to seek to enforce this Letter Agreement or any provision hereof,
including without limitation, the obligations of USAi or you, as the case may
be, under the continuing provisions of the Employment Agreement specified in
paragraph 1(d) of this Letter Agreement, or (ii) any claims for indemnification
or contribution with respect to any liability or expense (A) incurred by you as
a director or officer of USAi (or any affiliate thereof) or (B) of USAi as a
result of any willful misconduct or material breach of fiduciary duties by you.
(d) For the purpose of implementing a full and complete release and
discharge of the Releasees and you, your heirs, successors and assigns,
partners, representatives and attorneys each party expressly acknowledges that
the mutual releases set out in this Letter Agreement are intended to include in
their effect, without limitation, all claims or other matters described in this
paragraph 7 that such party does not know or suspect to exist in its favor at
the time of execution hereof, and that the mutual releases set out in this
Letter Agreement contemplate the extinguishment of any and all such claims or
other such matters.
(e) On the Termination Date, the parties shall each execute and deliver to
the other a release, in the form of the release contained in this paragraph 7,
which shall release all Claims through the date of the Termination Date.
8. GOVERNING LAW; DISPUTES. This Letter Agreement and all matters or
issues related hereto shall be governed by the laws of the State of New York
applicable to contracts entered into and to be wholly performed therein, without
reference to conflicts of laws principles. Whenever possible, each provision of
this Letter Agreement shall be interpreted in such a manner as to be effective
and valid under applicable law, but if any provision of this Letter Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Letter Agreement. USAi hereby consents to, and you hereby submit your person to,
the jurisdiction of the state courts of the State of New York sitting in New
York County and the United States District Court for the Southern District of
New York, for the purposes of the enforcement of this Letter Agreement. All
disputes under this Letter Agreement will be determined in the Federal or State
courts within the State of New York sitting in New York County.
9. INDEPENDENT OBLIGATIONS. The parties expressly understand and agree
that the obligations of USAi under paragraphs 1 through 6, inclusive, of this
Letter Agreement are independent of, and not contingent upon, your performance
of your obligations under paragraph 1(b) hereof. Moreover, the parties hereto
confirm and agree that, notwithstanding any provision in this Letter Agreement,
or in any of the Existing Agreements, to the contrary, (i) your termination of
employment for any reason after the date hereof is hereby deemed for all
purposes to be a termination by USAi other than for cause (as term "cause" is
defined and/or used in the Employment Agreement, the other Existing Agreements,
or otherwise) and (ii) you shall not, for purposes of the Stock Option
Agreements and the other Existing Agreements, at any time be deemed to have
terminated your employment with USAi in violation of the Employment Agreement or
any of the other Existing Agreements; provided that nothing herein shall relieve
you of liability for any willful misconduct or material breach of fiduciary
duties by you. As of date hereof, USAi is not aware of any willful misconduct,
material breach of fiduciary duties or willful and gross neglect of material
duties on your part in the past.
10. REPRESENTATIONS AND WARRANTIES. USAi hereby represents and warrants to
you that its execution, delivery and performance of this Letter Agreement has
been duly authorized by all necessary actions and approvals, including without
limitation any action or approval by the Compensation Committee of the
<PAGE>
Board of Directors of USAi, and constitutes the valid and binding obligation of
USAi, enforceable in accordance with its terms.
11. MISCELLANEOUS.
(a) USAi shall provide you with the opportunity to review and comment on
any press release or statement that refers to you or to your successor. You and
USAi each hereby agrees that if any inquiry as to your employment with USAi, or
the termination thereof, is received, each party shall state that you left the
employ of USAi on the best of terms, you are assisting in the transition to the
new general counsel, and that your reasons for leaving were to pursue
entrepreneurial opportunities. You and USAi each hereby agrees not to disparage
the other. USAi shall provide strong, positive referrals at your request in
connection with your potential subsequent employment.
(b) Upon reasonable request by USAi, you shall cooperate with the
prosecution or defense of any litigation or other matters with respect to which
you have personal knowledge, involving USAi or its affiliates, including by way
of making yourself available for interviews by company counsel, and as a
witness, at deposition or trial. USAi hereby agrees and confirms that with
respect to any and all matters arising out of or in connection with your
employment by or service to USAi that you shall be entitled to receive the
benefits of all indemnification provisions contained in the charter or by-laws
of USAi, to the fullest extent permitted by applicable law at the time of the
assertion of any claim or liability against you. Without limiting the foregoing,
USAi shall pay promptly as incurred, to the fullest extent permitted by
applicable law, all legal fees and expenses incurred by you in connection with
the defense of any claim covered by such indemnity (including without limitation
any claim brought in the right of USAi or any subsidiary or affiliate) in
advance of its final disposition, upon receipt of an undertaking by you to repay
all amounts advanced if it should ultimately be determined that you are not
entitled to be indemnified. In addition, you shall be entitled to reimbursement
of any expenses reasonably incurred by you in connection with any assistance you
may provide at USAi's request in connection with litigation or other matters
with respect to which you have personal knowledge involving USAi or its
affiliates.
(c) You are under no obligation to mitigate any payment to be made to you
hereunder, nor shall the amount of any payment called for hereunder be reduced
(except as otherwise provided in the proviso in paragraph 6(b) hereof) by any
compensation or benefits hereafter earned by you.
(d) This Letter Agreement is personal in its nature and neither party
shall, without the prior written consent of the other, assign or transfer this
Letter Agreement or any rights or obligations hereunder; provided, however, the
provisions hereof shall inure to the benefit of, and be binding upon, (i) each
successor of USAi or any of its affiliates, whether by merger, consolidation,
transfer of all or substantially all of its assets or similar transaction, and
(ii) your heirs, legatees, executors, administrators and legal representatives.
(e) This Letter Agreement, together with the Stock Option Agreements and
the Restricted Stock Agreement (as the same are modified hereby), contain the
entire understanding of the parties hereto relating to the subject matter herein
contained and supersede all prior agreements or understandings between the
parties hereto with respect thereto, including, without limitation, the
Employment Agreement (excluding the Sections thereof incorporated by reference
into this Letter Agreement, as set out in paragraph 1(c) hereof), and can be
changed only by a writing signed by both parties hereto. No waiver shall be
effective against a party unless in writing and signed by the party against whom
such waiver shall be enforced.
(f) All notices and other communications hereunder shall be deemed to be
sufficient if in writing and delivered in person or by a nationally recognized
courier service or duly sent by facsimile with receipt acknowledged and with a
copy sent overnight delivery with a nationally recognized courier service,
addressed, if to you, to the address set forth above; Facsimile No.:
(212) 751-3418, and if to USAi, USA Networks, Inc., 152 West 57(th) Street; New
York, NY 10019; Facsimile No.: (212) 314-7329; Attention: General Counsel, or
such other address as you or USAi may have furnished to the other in writing.
Each notice delivered in person or by overnight courier shall be deemed given
when delivered or when delivery
<PAGE>
is attempted and refused. Each notice delivered by facsimile transmission, shall
be deemed delivered on the date on which the sender receives confirmation that
such was received by the addressee.
(g) This Letter Agreement may be executed in two or more counterparts, all
of which shall be considered one and the same agreement.
(h) You acknowledge and agree that, in deciding to execute this Letter
Agreement, you have relied entirely upon your own judgment, that you have read
this Letter Agreement and have had adequate time to consider its terms and
effects and to ask any question that you may have of anyone, including your
legal counsel, Kramer Levin Naftalis & Frankel LLP, and that you have executed
this Letter Agreement voluntarily and with full understanding of its terms and
effects on you, and that no fact, evidence, event or transaction currently
unknown to you but which may later become known to you will affect in any way or
manner the final and unconditional nature of this Letter Agreement. You further
acknowledge that (a) you were advised to consult with an attorney before you
executed this Letter Agreement; (b) you were afforded sufficient opportunity to
and did consult with an attorney; (c) you had 21 days from your receipt of this
Letter Agreement to consider this Letter Agreement before executing and
delivering this Letter Agreement; and (d) you may revoke your release of any
Claims under the ADEA set forth in paragraph 7 by delivering written notice to
USAi within a period of seven days following the day on which you execute this
Letter Agreement (the "Revocation Period"), and your release of any Claims under
the ADEA set forth in paragraph 7 shall not become effective or enforceable
until after the Revocation Period has expired. For this revocation to be
effective, written notice from you must be received by USAi at the address set
forth and as provided in paragraph 10(f) no later than the close of business on
the seventh day after you sign this Letter Agreement. If you revoke your release
of any claims under the ADEA set forth in paragraph 7, such release will be of
no force or effect.
BY SIGNING THIS LETTER AGREEMENT, YOU STATE THAT:
(a) YOU HAVE READ THIS LETTER AGREEMENT AND HAVE HAD SUFFICIENT TIME TO
CONSIDER ITS TERMS;
(b) YOU UNDERSTAND ALL OF THE TERMS AND CONDITIONS OF THIS LETTER AGREEMENT
AND KNOW THAT YOU ARE GIVING UP IMPORTANT RIGHTS;
(c) YOU AGREE WITH EVERYTHING IN THIS LETTER AGREEMENT;
(d) YOU ARE AWARE OF YOUR RIGHT TO CONSULT WITH AN ATTORNEY BEFORE SIGNING
THIS LETTER AGREEMENT AND HAVE BEEN ADVISED OF SUCH RIGHT;
(e) YOU HAVE SIGNED THIS LETTER AGREEMENT KNOWINGLY AND VOLUNTARILY; AND
(f) THIS LETTER AGREEMENT INCLUDES A RELEASE BY YOU OF ALL KNOWN AND
UNKNOWN CLAIMS, EXCEPT AS OTHERWISE PROVIDED HEREIN.
<PAGE>
If the foregoing correctly sets forth our understanding, please sign one
copy of this Letter Agreement and return it to the undersigned, whereupon this
letter shall constitute a binding agreement between us.
<TABLE>
<S> <C> <C>
Sincerely,
USA NETWORKS, INC.
By: /s/ VICTOR KAUFMAN
-----------------------------------------
Name: Victor Kaufman
Title: VICE CHAIRMAN
</TABLE>
<TABLE>
<C> <S> <C>
ACCEPTED AND
AGREED TO:
/s/ THOMAS J. KUHN
-------------------------------------------
Thomas J. Kuhn
</TABLE>
<TABLE> <S> <C>
<PAGE>
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<PAGE>
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</TABLE>
