<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31, 2000, the following shares of the Registrant's capital stock
were outstanding:
<TABLE>
<S> <C>
Common Stock................................................ 305,046,756
Class B Common Stock........................................ 63,033,452
-----------
Total..................................................... 368,080,208
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.................................................. 729,233,054
===========
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of July 31, 2000 was $4,805,136,742. For the purpose of the
foregoing calculation only, all directors and executive officers of the
Registrant are assumed to be affiliates of the Registrant.
Assuming the exchange, as of July 31, 2000, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 729,233,054 shares of Common Stock with an
aggregate market value of $15,359,471,200.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUES
USA ENTERTAINMENT
Networks and television production........................ $ 390,688 $ 316,394 $ 769,641 $ 647,938
Filmed entertainment...................................... 20,773 10,080 51,080 11,775
Broadcasting.............................................. 4,723 2,449 8,357 3,350
Developing networks....................................... 3,709 218 4,271 427
USA ELECTRONIC RETAILING
Electronic retailing...................................... 357,722 284,322 736,780 559,832
USA INFORMATION AND SERVICES
Ticketing operations...................................... 143,019 119,703 270,980 219,426
Hotel reservations........................................ 78,082 23,018 133,345 23,018
Teleservicing............................................. 70,212 -- 70,212 --
Interactive............................................... 25,024 13,427 47,525 25,540
Electronic commerce and services.......................... 3,730 4,982 8,294 8,188
OTHER..................................................... 395 2,836 395 6,882
---------- ---------- ---------- ----------
Total net revenues.................................... 1,098,077 777,429 2,100,880 1,506,376
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of sales............................................. 465,627 227,348 874,418 421,105
Program costs............................................. 173,173 149,280 339,037 319,347
Selling and marketing..................................... 133,117 132,909 259,747 248,330
General and administrative................................ 116,161 110,047 209,677 203,611
Other operating costs..................................... 30,831 23,138 54,525 41,742
Amortization of cable distribution fees................... 8,267 6,186 16,490 12,276
Non-cash distribution and marketing expense............... 1,596 -- 2,359 --
Depreciation and amortization............................. 131,274 76,800 239,266 147,037
---------- ---------- ---------- ----------
Total operating costs and expenses.................... 1,060,046 725,708 1,995,519 1,393,448
---------- ---------- ---------- ----------
Operating profit...................................... 38,031 51,721 105,361 112,928
Other income (expense):
Interest income........................................... 14,547 5,263 24,279 15,349
Interest expense.......................................... (23,308) (19,613) (41,680) (40,063)
Gain on sale of securities................................ -- 2,970 -- 50,270
Other, net................................................ (1,929) (7,470) (2,545) 2,495
---------- ---------- ---------- ----------
(10,690) (18,850) (19,946) 28,051
---------- ---------- ---------- ----------
Earnings before income taxes and minority interest.......... 27,341 32,871 85,415 140,979
Income tax expense.......................................... (18,993) (13,855) (50,498) (40,355)
Minority interest........................................... (36,903) (28,732) (82,344) (102,797)
---------- ---------- ---------- ----------
NET LOSS.................................................... $ (28,555) $ (9,716) $ (47,427) $ (2,173)
========== ========== ========== ==========
Basic loss per common share................................. $ (.08) $ (.03) $ (.14) $ (.01)
========== ========== ========== ==========
Diluted loss per common share............................... $ (.08) $ (.03) $ (.14) $ (.01)
========== ========== ========== ==========
</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>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 457,133 $ 424,239
Marketable securities, available for sale................... 61,105 --
Accounts and notes receivable, net of allowance of $52,478
and $41,993, respectively................................. 560,303 454,341
Inventories, net............................................ 477,786 470,844
Investments held for sale................................... 9,443 11,512
Other current assets, net................................... 50,871 27,519
----------- ----------
Total current assets.................................... 1,616,641 1,388,455
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 384,657 324,412
Buildings and leasehold improvements........................ 140,638 110,403
Furniture and other equipment............................... 93,226 85,487
Land........................................................ 15,059 16,094
Projects in progress........................................ 55,367 41,438
----------- ----------
688,947 577,834
Less accumulated depreciation and amortization.......... (228,554) (221,203)
----------- ----------
460,393 356,631
OTHER ASSETS
Intangible assets, net...................................... 7,718,345 6,831,487
Cable distribution fees, net
($31,884 and $35,181, respectively, to related parties)... 151,059 130,988
Long-term investments....................................... 95,636 121,383
Notes and accounts receivable, net of current portion
($3,283 and $2,562, respectively, from related parties)... 36,247 26,248
Advance to Universal........................................ 132,939 163,814
Inventories, net............................................ 141,948 166,477
Deferred income taxes....................................... 18,548 --
Deferred charges and other, net............................. 90,651 67,669
----------- ----------
$10,462,407 $9,253,152
=========== ==========
</TABLE>
2
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 24,315 $ 10,801
Accounts payable, trade..................................... 213,088 188,343
Accounts payable, client accounts........................... 106,007 98,586
Obligations for program rights and film costs............... 259,679 272,945
Amount due under acquisition agreement...................... 45,639 17,500
Cable distribution fees payable
($18,476 and $18,733, respectively, to related parties)... 38,183 43,993
Deferred revenue............................................ 100,827 83,811
Deferred income taxes....................................... 792 4,050
Other accrued liabilities................................... 386,481 311,724
----------- ----------
Total current liabilities............................... 1,175,011 1,031,753
LONG-TERM OBLIGATIONS (net of current maturities)........... 574,763 574,979
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS,
net of current............................................ 243,692 262,810
OTHER LONG-TERM LIABILITIES................................. 107,242 116,695
DEFERRED INCOME TAXES....................................... -- 5,120
MINORITY INTEREST........................................... 4,823,507 4,492,066
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock--$.01 par value; authorized 15,000,000
shares; no shares issued and outstanding.................. -- --
Common stock--$.01 par value; authorized 1,600,000,000
shares; issued and outstanding, 304,909,661 and
274,013,418 shares, respectively.......................... 3,049 2,740
Class B--convertible common stock--$.01 par value;
authorized, 400,000,000 shares; issued and outstanding,
63,033,452 shares......................................... 630 630
Additional paid-in capital.................................. 3,766,534 2,830,506
Accumulated deficit......................................... (101,785) (54,358)
Accumulated other comprehensive income...................... (5,192) 4,773
Treasury stock, at cost..................................... (120,046) (9,564)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
----------- ----------
Total stockholders' equity.............................. 3,538,192 2,769,729
----------- ----------
$10,462,407 $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
CLASS B ACCUM. FROM KEY
CONVERTIBLE ADDIT. OTHER EXECUTIVE FOR
COMMON COMMON PAID-IN ACCUM. COMP. TREASURY COMMON 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 six
months ended June 30,
2000.................. (47,427) -- -- -- (47,427) -- -- --
Decrease in unrealized
gains in available for
sale securities....... (8,936) -- -- -- -- (8,936) -- --
Foreign currency
translation........... (1,029) -- -- -- -- (1,029) -- --
----------
Comprehensive loss.... (57,392)
Issuance of common stock
upon exercise of stock
options................. 26,101 33 -- 26,068 -- -- -- --
Income tax benefit related
to stock options
exercised............... 14,138 -- -- 14,138 -- -- -- --
Issuance of stock in
connection with PRC
acquisition............. 887,451 322 -- 887,129 -- -- -- --
Issuance of stock in
connection with other
transactions............ 8,697 4 -- 8,693 -- -- -- --
Purchase of treasury stock
in connection with stock
repurchase program...... (110,532) (50) -- -- -- -- (110,482) --
---------- ------ ---- ---------- --------- ------- --------- -------
BALANCE AT JUNE 30,
2000.................... $3,538,192 $3,049 $630 $3,766,534 $(101,785) $(5,192) $(120,046) $(4,998)
========== ====== ==== ========== ========= ======= ========= =======
</TABLE>
Comprehensive loss for the three months ended June 30, 2000 was $37,548.
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>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (47,427) $ (2,173)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 239,266 147,037
Amortization of cable distribution fees................... 16,490 12,276
Amortization of program rights and film costs............. 334,788 270,530
Amortization of non-cash distribution and marketing
costs................................................... 2,359 --
Amortization of deferred financing costs and non-cash
interest................................................ 2,179 945
Equity in losses (earnings) of unconsolidated
affiliates.............................................. 7,007 (10,112)
Gain on sale of subsidiary stock.......................... (3,718) --
Gain on sale of securities................................ -- (50,270)
Non-cash interest income.................................. (4,917) (1,110)
Non-cash stock compensation............................... 7,557 2,187
Minority interest......................................... 82,344 102,797
Changes in current assets and liabilities:
Accounts receivable....................................... 7,954 (4,571)
Inventories............................................... 6,498 (18,421)
Accounts payable.......................................... (35,213) (12,071)
Accrued liabilities and deferred revenue.................. 48,568 7,860
Payment for program rights and film costs................. (386,740) (265,512)
Increase in cable distribution fees....................... (27,296) (12,746)
Other, net................................................ 5,977 22,974
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 255,676 189,620
--------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (148,229) (162,183)
Capital expenditures...................................... (76,337) (52,665)
Advance to Universal...................................... -- (200,000)
Recoupment of advance to Universal........................ 35,792 1,343
Advance to Styleclick for promissory note................. (9,000) --
Increase in long-term investments and notes receivable.... (14,338) (12,150)
Purchase of marketable securities......................... (64,535) --
Proceeds from sale of securities.......................... -- 61,080
Proceeds from long-term notes receivable.................. -- 3,691
Payment of merger and financing costs..................... (3,216) --
Other, net................................................ (14,127) (2,384)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES................... (293,990) (363,268)
--------- --------
Cash flows from financing activities:
Borrowings................................................ 35,906 --
Principal payments on long-term obligations............... (69,158) (15,472)
Purchase of treasury stock................................ (110,532) (4,938)
Payment of mandatory tax distribution to LLC partners..... (68,065) (28,830)
Proceeds from sale of subsidiary stock.................... 90,969 --
Proceeds from issuance of common stock and LLC shares..... 199,402 34,732
Other, net................................................ (6,285) --
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... 72,237 (14,508)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,029) (475)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 32,894 (188,631)
Cash and cash equivalents at beginning of period............ 424,239 445,356
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 457,133 $256,725
========= ========
</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 focused on the new convergence of entertainment,
information and direct selling.
On April 5, 2000, the Company acquired Precision Response Corporation
("PRC") (the "PRC Transaction"). See Note 3.
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.
The Company engages in ten principal areas of business. In the second
quarter, the Company reorganized the segments into three units, USA
Entertainment, USA Electronic Retailing and USA Information and Services. The
units and segments are as follows:
USA ENTERTAINMENT
- 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.
- FILMED ENTERTAINMENT, which primarily represents the Company's domestic
theatrical film distribution and production businesses.
- BROADCASTING, which owns and operates television stations.
- DEVELOPING NETWORKS, which primarily represents recently acquired cable
television properties Trio and News World International and SciFi.com, a
developing Internet content and commerce site.
USA ELECTRONIC RETAILING
- ELECTRONIC RETAILING, consisting primarily of the Home Shopping Network
and America's Store, which are engaged in the electronic retailing
business.
USA INFORMATION AND SERVICES
- 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.
6
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
- TELESERVICES, consisting of Precision Response Corporation, a leader in
outsourced customer care for both large corporations and high-growth
internet-focused companies.
- 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.
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 Consolidated Financial
Statements for the three and six months ended June 30, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Securities and Exchange Commission issued an amendment to
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101") which delayed the effective date for adoption of SAB 101 to the
fourth quarter of 2000. SAB 101 provides guidance on revenue recognition
criteria for certain types of transactions. SAB 101 also provides guidance on
the disclosures that companies should make about their revenue recognition
policies and the impact of events and trends on revenue.
In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued
SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which
replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND
DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be
accounted for under an inventory model. In addition, the SOP considers such
topics as revenue recognition (fixed fees and minimum guarantees in variable fee
arrangements), fee allocation in multiple
7
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
films, accounting for exploitation costs, and impairment assessment. The SOP is
effective for financial statements issued for fiscal years beginning after
December 15, 2000.
The Company is currently evaluating the impact of SAB 101 and SOP 00-2,
although the impact is not expected to be material.
NOTE 3--BUSINESS ACQUISITIONS
PRC TRANSACTION
On April 5, 2000, USAi acquired PRC in a tax-free merger by issuing
approximately 24.3 million shares of USAi common stock for all of the
outstanding stock of PRC for a total value of approximately $708.3 million (the
"PRC Transaction"). In connection with the acquisition, the Company repaid
approximately $32.3 million of outstanding borrowings under PRC's existing
revolving credit facility.
The PRC 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 $647.0 million has been allocated to goodwill, which is being
amortized over 20 years. Assets and liabilities as of the acquisition date
consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Current assets.............................................. $65,335
Non-current assets.......................................... 90,001
Goodwill.................................................... 646,975
Current liabilities......................................... 60,292
Non-current liabilities..................................... 33,739
</TABLE>
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
8
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
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
$45.6 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 liabilities assumed based on their respective fair
values at the date of purchase, resulting in goodwill of approximately
$405.9 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 June 30, 2000, approximately
$78.7 million had been offset against the advance and $11.7 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 $184.5 million has been allocated to goodwill, which is being
amortized over 20 years.
9
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
The following unaudited pro forma condensed consolidated financial
information for the three and six months ended June 30, 2000 and 1999, is
presented to show the results of the Company, as if the PRC Transaction, 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 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>
SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1999
------------- ------------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net revenues..................... $2,170,529 $ 854,586 $1,657,702
Net loss......................... (54,711) (26,144) (30,368)
Basic and diluted loss per (.15) (.07) (.09)
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 and six months ended June 30, 1999, the Company
recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of
securities in a publicly traded entity.
10
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2000:
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 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.
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.
On April 5, 2000, USAi completed its acquisition of PRC by issuing
approximately 24.3 million shares of USAi common stock for all of the
outstanding stock of PRC, for a total value of approximately $708.3 million.
On May 26, 2000, TMCS completed its acquisition of Ticketweb, Inc.
("Ticketweb"), by issuing approximately 1.8 million shares of TMCS Class B
Common Stock for all the outstanding stock of Ticketweb, for a total value of
approximately $33.5 million.
For the three and six months ended June 30, 2000, interest accrued on the
$200.0 million advance to Universal amounted to $2.5 million and $5.0 million,
respectively.
For the three and six months ended June 30, 2000, the Company incurred
non-cash distribution and marketing expense of $1.6 million and $2.4 million,
respectively.
During the second quarter, the company recorded $11.6 million of expense
related to an agreement with an executive. Of this amount, $3.8 million is a
non-cash stock compensation charge related to restricted stock.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999:
On March 29, 1999, TMCS completed its acquisition of City Auction, Inc.
("City Auction"), a person-to-person online auction community, by issuing
approximately 800,000 shares of its Class B common stock for all the outstanding
stock of City Auction, for a total value of $27.2 million.
On May 28, 1999, the Company completed the October Films/ PFE Transaction by
issuing 600,000 shares of Common Stock, for a value of $11.6 million.
On June 14, 1999, TMCS completed its acquisition of Match.com, Inc.,
("Match"), an Internet personals company. In connection with the acquisition,
TMCS issued 1,924,777 shares of Class B Common Stock to the former owners of
Match representing a total purchase price of approximately $45.0 million.
During the six months ended June 30, 1999, the Company acquired
post-production equipment through a capital lease totaling $2.1 million.
NOTE 7--INDUSTRY SEGMENTS
For the three and six months ended June 30, 2000, the Company operated
principally in ten industry segments: Networks and television production,
Electronic retailing, Ticketing operations, Hotel reservations, Teleservices,
Interactive, Filmed entertainment, Electronic commerce and services,
Broadcasting and
11
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INDUSTRY SEGMENTS (CONTINUED)
Developing networks. 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 principally of the Home Shopping Network, America's Store and
HOT Germany, 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 Teleservices segment was formed on April 5, 2000 in
conjunction with the acquisition of PRC, a leader in outsourced customer care
for both large corporations and high-growth internet-focused companies. 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 operations of broadcast
television stations in twelve markets that principally transmit Home Shopping
Network programming although three transmit other programming. The Developing
networks segment consists primarily of the recently acquired cable television
properties Trio and News World International, which were acquired on May 19,
2000, and SciFi.com, a developing Internet content and commerce site.
In addition, in the second quarter, the Company reorganized the segments
into three units, USA Entertainment, USA Electronic Retailing and USA
Information and Services. USA Entertainment consists of Networks and television
production, Filmed entertainment, Broadcasting and Developing networks.
12
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INDUSTRY SEGMENTS (CONTINUED)
USA Electronic Retailing consists of Electronic retailing. USA Information and
Services consists of Ticketing operations, Hotel reservations, Teleservices,
Interactive and Electronic commerce and services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
USA ENTERTAINMENT
Networks and television production............ $ 390,688 $316,394 $ 769,641 $ 647,938
Filmed entertainment.......................... 20,773 10,080 51,080 11,775
Broadcasting.................................. 4,723 2,449 8,357 3,350
Developing networks........................... 3,709 218 4,271 427
USA ELECTRONIC RETAILING
Electronic retailing.......................... 357,722 284,322 736,780 559,832
USA INFORMATION AND SERVICES
Ticketing operations.......................... 143,019 119,703 270,980 219,426
Hotel reservations............................ 78,082 23,018 133,345 23,018
Teleservices.................................. 70,212 0 70,212 0
Interactive................................... 25,024 13,427 47,525 25,540
Electronic commerce and services.............. 3,730 4,982 8,294 8,188
OTHER......................................... 395 2,836 395 6,882
---------- -------- ---------- ----------
$1,098,077 $777,429 $2,100,880 $1,506,376
========== ======== ========== ==========
Operating profit (loss)
USA ENTERTAINMENT
Networks and television production............ $ 111,190 $ 77,697 $ 221,977 $ 158,967
Filmed entertainment.......................... (4,638) (441) (4,550) (642)
Broadcasting.................................. (19,234) (13,702) (34,003) (25,084)
Developing networks........................... (2,528) (543) (2,528) (543)
USA ELECTRONIC RETAILING
Electronic retailing.......................... 28,728 25,646 65,106 46,986
USA INFORMATION AND SERVICES
Ticketing operations.......................... 16,612 13,901 33,677 22,104
Hotel reservations............................ 885 659 1,751 659
Teleservices.................................. (2,989) 0 (2,989) 0
Interactive................................... (62,959) (38,795) (127,448) (68,326)
Electronic commerce and services.............. (6,294) 440 (12,510) 290
OTHER......................................... (20,742) (13,141) (33,122) (21,483)
---------- -------- ---------- ----------
$ 38,031 $ 51,721 $ 105,361 $ 112,928
========== ======== ========== ==========
</TABLE>
The Company operates principally within the United States.
13
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--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.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................... $ 3,851 $ 3,073
Operating expenses...................................... 1,389 3,201
Operating income (loss)................................. 2,462 (128)
Net income.............................................. 3,045 2,120
</TABLE>
SUMMARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets........................................ $ 591 $ 191
Non-current assets.................................... 152,710 150,236
Current liabilities................................... 14,392 12,273
Non-current liabilities............................... 38,991 39,081
</TABLE>
NOTE 9-- 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 and six months ended June 30, 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
14
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION (CONTINUED)
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 Exchange Act of 1934 because the
Company's management has determined that the information contained in such
documents would not be material to investors.
<TABLE>
<CAPTION>
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET AS OF JUNE 30,
2000:
Current Assets.................. $ 2,412 $ -- $ 171,217 $ 845,192 $ 597,820 $ -- $ 1,616,641
Property and equipment, net..... -- -- 24,956 262,336 173,101 -- 460,393
Goodwill and other intangible
assets, net................... 74,741 -- 2,160 5,291,406 2,501,097 -- 7,869,404
Investment in subsidiaries...... 3,501,270 1,265,420 6,631,639 19,717 -- (11,418,046) --
Other assets.................... 132,780 -- 14,505 814,225 99,182 (544,723) 515,969
---------- ---------- ---------- ---------- ---------- ------------ -----------
TOTAL ASSETS.................... $3,711,203 $1,265,420 $6,844,477 $7,232,876 $3,371,200 $(11,962,769) $10,462,407
========== ========== ========== ========== ========== ============ ===========
Current liabilities............. $ -- $ -- $ -- $ 690,333 $ 484,678 $ -- $ 1,175,011
Long-term debt, less current
portion....................... -- -- 518,026 2,244 54,493 -- 574,763
Other liabilities............... 173,011 -- 309,009 505,030 331,140 (967,256) 350,934
Minority interest............... -- -- -- 452,688 585,260 3,785,559 4,823,507
Interdivisional equity.......... -- -- -- 5,582,581 1,915,629 (7,498,210) --
Stockholders' equity............ 3,538,192 1,265,420 6,017,442 -- -- (7,282,862) 3,538,192
---------- ---------- ---------- ---------- ---------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY........... $3,711,203 $1,265,420 $6,844,477 $7,232,876 $3,371,200 $(11,962,769) $10,462,407
========== ========== ========== ========== ========== ============ ===========
STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30,
2000
Revenue......................... $ -- $ -- $ -- $ 709,807 $ 388,270 $ -- $ 1,098,077
Operating expenses.............. (5,418) -- (15,028) (610,385) (429,215) -- (1,060,046)
Interest expense, net........... (6,281) -- 5,664 (8,589) 445 -- (8,761)
Other income, expense........... (16,856) 22,585 98,147 (23,000) (1,610) (81,195) (1,929)
Income tax expense.............. -- -- (8,108) (10,885) (18,993)
Minority interest............... -- -- -- (2,395) 19,975 (54,483) (36,903)
---------- ---------- ---------- ---------- ---------- ------------ -----------
NET (LOSS) INCOME............... $ (28,555) $ 22,585 $ 88,783 $ 57,330 $ (33,020) $ (135,678) $ (28,555)
========== ========== ========== ========== ========== ============ ===========
</TABLE>
15
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 2000
Revenue............................. $ -- $ -- $ -- $ 1,419,262 $ 681,618 $ -- $ 2,100,880
Operating expenses.................. (8,811) -- (23,863) (1,206,689) (756,156) -- (1,995,519)
Interest expense, net............... (10,781) -- 9,789 (15,889) (520) -- (17,401)
Other income, expense............... (29,177) 44,375 235,327 (26,007) (3,465) (223,598) (2,545)
Provision for income taxes.......... 1,342 -- (27,351) (9,588) (14,901) -- (50,498)
Minority interest................... -- -- -- (4,691) 43,696 (121,349) (82,344)
-- -- -- -- -- -- --
-------- ------- -------- ----------- --------- ---------- -----------
NET (LOSS) INCOME................... $(47,427) $44,375 $193,902 $ 156,398 $ (49,728) $ (344,947) $ (47,427)
======== ======= ======== =========== ========= ========== ===========
CASH FLOW FOR THE SIX MONTHS ENDED
JUNE 30, 2000
Cash flow from (used in)
operations........................ $(12,806) $ -- $ (9,919) $ 223,613 $ 54,788 $ -- $ 255,676
Cash flow provided (used in)
investing activities.............. 23,153 -- (12,604) (158,163) (146,376) -- (293,990)
Cash flow from financing
activities........................ (10,347) -- (25,632) (64,517) 172,733 -- 72,237
Effect of exchange rate............. -- -- -- -- (1,029) -- (1,029)
Cash at beginning of period......... -- -- 276,678 (26,004) 173,565 -- 424,239
-------- ------- -------- ----------- --------- ---------- -----------
CASH AT END OF PERIOD............... $ -- $ -- $228,523 $ (25,071) $ 253,681 $ -- $ 457,133
======== ======= ======== =========== ========= ========== ===========
<CAPTION>
WHOLLY-OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 1999
Revenue............................. $ -- $ -- $ -- $ 607,988 $ 169,441 $ -- $ 777,429
Operating expenses.................. (4,843) -- (6,362) (529,778) (184,725) -- (725,708)
Interest expense, net............... (3,037) -- (6,345) (4,959) (9) -- (14,350)
Gain on sale of securities.......... -- -- -- 2,970 -- -- 2,970
Other income (expense), net......... 4,890 8,573 71,572 (17,492) 10,022 (85,035) (7,470)
Income tax expense.................. (6,726) -- -- (1,255) (5,874) -- (13,855)
Minority interest................... -- -- -- (1,249) 10,102 (37,585) (28,732)
-------- ------- -------- ----------- --------- ---------- -----------
NET (LOSS) INCOME................... $ (9,716) $ 8,573 $ 58,865 $ 56,225 $ (1,043) $ (122,620) $ (9,716)
======== ======= ======== =========== ========= ========== ===========
STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1999
Revenue............................. $ -- $ -- $ -- $ 1,220,777 $ 285,599 $ -- $ 1,506,376
Operating expenses.................. (7,298) -- (11,521) (1,058,920) (315,709) -- (1,393,448)
Interest expense, net............... (4,761) -- (10,909) (9,469) 425 -- (24,714)
Gain on sale of securities.......... -- -- -- 50,270 -- -- 50,270
Other income (expense), net......... 15,011 40,071 230,492 (7,994) 10,489 (285,574) 2,495
Income tax expense.................. (5,125) -- (21,898) (3,138) (10,194) -- (40,355)
Minority interest................... -- -- -- (5,553) 17,833 (115,077) (102,797)
-------- ------- -------- ----------- --------- ---------- -----------
Net (loss) income................... $ (2,173) $40,071 $186,164 $ 185,973 $ (11,557) $ (400,651) $ (2,173)
======== ======= ======== =========== ========= ========== ===========
</TABLE>
16
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
WHOLLY-OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW FOR THE SIX MONTHS ENDED
JUNE 30, 1999
Cash flow from operations........... $(33,381) $ -- $ (9,423) $ 216,788 $ 15,636 $ -- $ 189,620
Cash flow from investing
activities........................ (372,285) -- 18,498 14,130 (23,611) -- (363,268)
Cash flow from financing
activities........................ 405,666 -- (67,918) (351,947) (309) -- (14,508)
Effect of exchange rate............. -- -- -- -- (475) -- (475)
Cash at the beginning of period..... -- -- 151,160 102,308 191,888 -- 445,356
-------- ------- -------- ----------- --------- ---------- -----------
CASH AT THE END OF THE PERIOD....... $ -- $ -- $ 92,317 $ (18,721) $ 183,129 $ -- $ 256,725
======== ======= ======== =========== ========= ========== ===========
</TABLE>
NOTE 10--SUBSEQUENT EVENTS
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, completed the merger of Internet
Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new
company, Styleclick, Inc., which owns and operates the combined properties of
Styleclick.com and ISN. Styleclick, Inc. is traded on the Nasdaq market under
the symbol "IBUY". In accordance with the terms of the agreement, USAi invested
$40 million in cash and will contribute $10 million in dedicated media, and will
receive warrants to purchase additional shares of the new company. On a fully
diluted basis, USAi owns approximately 75% of the new company and former
Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com
repaid the $10 million of borrowing outstanding under the bridge loan.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
USAi is a holding company, with subsidiaries focused on the new convergence
of entertainment, information and direct selling. 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 April 2000, the Company acquired Precision Response Corporation ("PRC"),
a leader in outsourced customer care for both large corporations and high-growth
internet-focused companies (the "PRC Transaction"). 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 Teleservices,
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 PRC transaction, the Hotel Reservations
Network transaction and the October Films/PFE transaction should be considered
when comparing the results of operations for the three and six months ended
June 30, 2000 to
18
<PAGE>
June 30, 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.
The pro forma information is not necessarily indicative of the revenues and
cost of revenues which would have actually been reported had the PRC
transaction, 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 AND SIX MONTHS ENDED JUNE 30, 2000 VS. QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999
The PRC transaction, 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 June 30, 2000, revenues increased by
$320.6 million, or 41.2%, to $1.1 billion from $777.4 million in 1999 primarily
due to increases of $74.3 million, $73.4 million, $70.2 million, $55.1 million
and $23.3 million from the Networks and television production, Electronic
retailing, Teleservices, Hotel reservations and Ticketing operations businesses,
respectively.
For the six months ended June 30, 2000, revenues increased by
$594.5 million, or 39.5%, to $2.1 billion from $1.5 billion in 1999 primarily
due to increases of $176.9 million, $121.7 million, $110.3 million,
$70.2 million and $51.6 million from the Electronic retailing, Networks and
television production, Hotel reservations, Teleservices and Ticketing operations
businesses, respectively.
OPERATING COSTS AND EXPENSES
For the three months ended June 30, 2000, operating expenses increased by
$276.2 million, or 43.0%, to $918.9 million from $642.7 million in 1999,
primarily due to increases of $65.5 million, $58.3 million, $45.7 million,
$41.0 million, $18.9 million and $13.3 and $11.8 million from the Electronic
retailing, Teleservices, Hotel reservations, Networks and television production,
Ticketing operations, Filmed entertainment and Interactive businesses,
respectively. During the three months ended June 30, 2000, the Company recorded
$11.6 million of expense related to an agreement with an executive. Of this
amount, $3.8 million is a non-cash stock compensation expense related to
restricted stock.
For the six months ended June 30, 2000, operating expenses increased by
$503.3 million, or 40.8%, to $1.7 billion from $1.2 billion in 1999, primarily
due to increases of $148.7 million, $92.8 million, $59.1 million,
$58.3 million, $39.7 million, $39.3 million and $30.3 million from the
Electronic retailing, Hotel reservations, Networks and television production,
Teleservices, Filmed entertainment, Ticketing operations and Interactive
businesses, respectively.
OTHER INCOME (EXPENSE)
For the three and six months ended June 30, 2000, net interest expense
decreased by $5.6 million and $7.3 million, respectively, 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").
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In the six months ended June 30, 2000, the Company realized a gain of
$3.7 million related to the initial public offering of its subsidiary, HRN. In
the three and six months ended June 30, 1999, the Company realized pre-tax gains
of $3.0 million and $50.3 million, respectively, related to the sale of
securities. Furthermore, in the six months ended June 30, 1999, the Company
recognized other income of $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 for the three and six months ended June 30, 2000
of 69.5% and 59.1%, respectively, 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 and six months ended June 30, 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.
PRO FORMA QUARTER AND SIX MONTHS ENDED JUNE 30, 2000
VS. PRO FORMA QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
The following unaudited pro forma operating results of USAi present combined
results of operations as if the PRC transaction, 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.
20
<PAGE>
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES:
USA ENTERTAINMENT
Networks and television production............ $ 390,688 $316,394 $ 769,641 $ 647,938
Filmed entertainment.......................... 20,773 22,367 51,080 29,062
Broadcasting.................................. 4,723 2,449 8,357 3,350
Developing networks........................... 3,709 218 4,271 427
USA ELECTRONIC RETAILING
Electronic retailing.......................... 357,722 319,115 736,780 630,982
USA INFORMATION AND SERVICES
Ticketing operations.......................... 143,019 119,703 270,980 219,426
Hotel reservations............................ 78,082 37,798 133,345 60,719
Teleservices.................................. 70,212 50,090 139,861 96,338
Interactive................................... 25,024 13,427 47,525 25,540
Electronic commerce and services.............. 3,730 4,982 8,294 8,188
OTHER......................................... 395 2,836 395 6,882
---------- -------- ---------- ----------
Total net revenues........................ 1,098,077 889,379 2,170,529 1,728,852
---------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales................................. 465,627 319,422 928,439 601,718
Program costs................................. 173,173 149,280 339,037 319,347
Selling and marketing......................... 133,117 132,909 259,747 248,330
General and administrative.................... 116,161 118,407 215,844 222,082
Other operating costs......................... 30,831 23,138 54,525 41,742
Amortization of non cash distribution and
marketing expense........................... 1,596 -- 2,359 --
Amortization of cable distribution fees....... 8,267 6,186 16,490 12,276
Depreciation and amortization................. 131,274 101,002 254,739 195,458
---------- -------- ---------- ----------
Total operating costs and expenses........ 1,060,046 850,344 2,071,180 1,640,953
---------- -------- ---------- ----------
Operating profit................................ $ 38,031 $ 39,035 $ 99,349 $ 87,899
========== ======== ========== ==========
EBITDA.......................................... $ 179,168 $146,223 $ 372,937 $ 295,633
========== ======== ========== ==========
</TABLE>
Net revenues for the three months ended June 30, 2000 increased by
$208.7 million, or 23.5%, to $1.1 billion from $889.4 million in 1999. Cost
related to revenues and other costs and expenses for the three months ended
June 30, 2000 increased by $175.8 million, or 23.6%, to $918.9 million from
$743.2 million in 1999. EBITDA for the three months ended June 30, 2000
increased by $32.9 million, or 22.5%, to $179.2 million from $146.2 million in
1999.
Net revenues for the six months ended June 30, 2000 increased by
$441.7 million, or 25.5%, to $2.2 billion from $1.7 billion in 1999. Cost
related to revenues and other costs and expenses for the six months ended
June 30, 2000 increased by $364.4 million, or 25.4%, to $1.8 billion from
$1.4 billion in 1999.
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EBITDA for the six months ended June 30, 2000 increased by $77.3 million, or
26.1%, to $372.9 million from $295.6 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 June 30, 2000 increased by
$74.3 million, or 23.5%, to $390.7 million from $316.4 million in 1999. The
increase primarily resulted from an increase in advertising and affiliate
revenues at USA Network and the Sci-Fi Channel, and increased revenue from
Studios USA related principally to one-hour dramas.
Net revenues for the six months ended June 30, 2000 increased by
$121.7 million, or 18.8%, to $769.6 million from $647.9 million in 1999. The
increase primarily resulted from an increase in advertising and affiliate
revenues at USA Network and the Sci-Fi Channel due to an increase in subscribers
and higher ratings at Sci-Fi. Revenue of Studios USA also increased due to
increased revenues from one-hour dramas, talk shows and movie productions,
offset by fewer network pick-ups for comedy productions.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $41.0 million, or 19.5%, to $251.3 million from
$210.3 million in 1999. This increase resulted primarily from marketing and
development costs.
Cost related to revenues and other costs and expenses for the six months
ended June 30, 2000 increased by $59.1 million, or 13.7%, to $491.5 million from
$432.4 million in 1999. This increase resulted primarily from marketing,
development and distribution costs.
EBITDA for the three months ended June 30, 2000 increased by $33.3 million,
or 31.4%, to $139.4 million from $106.1 million in 1999.
EBITDA for the six months ended June 30, 2000 increased by $62.6 million, or
29.0%, to $278.1 million from $215.5 million in 1999.
ELECTRONIC RETAILING
Net revenues for the three months ended June 30, 2000 increased by
$38.6 million, or 12.1%, to $357.7 million from $319.1 million in 1999. The
increase primarily resulted from Home Shopping Network's core domestic business,
which generated increased sales of $25.7 million, including HSN.com, which began
operations in late 1999 and generated sales of $5.7 million. Also, core
international business increased $12.9 million due primarily to operations in
Germany, which generated increased revenue of $12.1 million. The increase in net
revenues also reflected a decrease in the return rate to 19.6% from 20.4% in
1999.
Net revenues for the six months ended June 30, 2000 increased by
$105.8 million, or 16.8%, to $736.8 million from $631.0 million in 1999. The
increase primarily resulted from Home Shopping Network's core domestic business,
which generated increased sales of $73.0 million due primarily to the increase
from the Home Shopping service of $58.5 million and HSN.com, which generated
revenue of $9.9 million. Also, core international business increased
$33.0 million due primarily to operations in Germany, which generated increased
revenue of $30.6 million.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $32.6 million, or 12.1%, to $303.3 million from
$270.6 million in 1999. The increase resulted primarily from higher sales
volume. The gross profit margin increased to 39.9% as compared to 39.0% in the
prior year.
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<PAGE>
Cost related to revenues and other costs and expenses for the six months
ended June 30, 2000 increased by $83.0 million, or 15.5%, to $620.5 million from
$537.4 million in 1999. The increase resulted primarily from higher sales
volume.
EBITDA for the three months ended June 30, 2000 increased by $6.0 million,
or 12.4%, to $54.5 million from $48.5 million in 1999.
EBITDA for the six months ended June 30, 2000 increased by $22.8 million, or
24.3%, to $116.3 million from $93.5 million in 1999.
TICKETING OPERATIONS
Net revenues for the three months ended June 30, 2000 increased by
$23.3 million, or 19.5%, to $143.0 million from $119.7 million in 1999. The
increase resulted from an increase of 12.1% in the number of tickets sold,
including an increase in the percentage of tickets sold online to 25.8% from
13.5% in 1999, and an increase in revenue per ticket to $5.89 from $5.36 in
1999.
Net revenues for the six months ended June 30, 2000 increased by
$51.6 million, or 23.5%, to $271.0 million from $219.4 million in 1999. The
increase resulted from an increase of 13.1% in the number of tickets sold and an
increase in revenue per ticket to $5.67 from $5.03 in 1999.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $18.9 million, or 20.4%, to $111.5 million from
$92.6 million in 1999. The increase resulted primarily from higher ticketing
operations costs as a result of higher ticketing volume and increased secondary
commissions.
Cost related to revenues and other costs and expenses for the six months
ended June 30, 2000 increased by $39.3 million, or 22.7%, to $212.0 million from
$172.8 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 June 30, 2000 increased by $4.4 million,
or 16.3%, to $31.6 million from $27.2 million in 1999.
EBITDA for the six months ended June 30, 2000 increased by $12.3 million, or
26.3%, to $59.0 million from $46.7 million in 1999.
TELESERVICES
Net revenues for the three months ended June 30, 2000 increased by
$20.1 million, or 40.2%, to $70.2 million from $50.1 million in 1999. The
increase resulted from growth of new business and prcnetcare, PRC's fully
integrated suite of e-commerce customer care services, which increased more than
450% to $6.7 million of revenue.
Net revenues for the six months ended June 30, 2000 increased by
$43.5 million, or 45.2%, to $139.9 million from $96.4 million in 1999 due to the
growth of new business and prcnetcare.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $14.7 million, or 33.6%, to $58.3 million from
$43.6 million in 1999 due primarily to increased operations.
Cost related to revenues and other costs and expenses for the six months
ended June 30, 2000 increased by $34.4 million, or 41.0%, to $118.5 million from
$84.1 million in 1999.
EBITDA for the three months ended June 30, 2000 increased by $5.5 million,
or 84.4%, to $11.9 million from $6.5 million in 1999.
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<PAGE>
EBITDA for the six months ended June 30, 2000 increased by $9.1 million, or
74.0%, to $21.4 million from $12.3 million in 1999.
INTERACTIVE
Net revenues for the three months ended June 30, 2000 increased by
$11.6 million, or 86.4%, to $25.0 million from $13.4 million in 1999. The
increase primarily resulted from an increase in online city guide and
sponsorship revenue of $13.3 million, or 193%, due to the growth in its combined
national reach to 9.1% (7.2 million unique users) in June 2000 versus 6.6%
(4.1 million unique users) one year ago due to the expansion into new cities as
well as the expansion into the online personals business.
Net revenues for the six months ended June 30, 2000 increased by
$22.0 million, or 86.1%, to $47.5 million from $25.5 million in 1999. The
increase primarily resulted from an increase in online city guide and
sponsorship revenue of $24.5 million, or 193%, 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 June 30, 2000 increased by $11.8 million, or 30.5%, to $50.3 million from
$38.5 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.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $30.3 million, or 45.6%, to $96.6 million from
$66.3 million in 1999.
EBITDA loss for the three months ended June 30, 2000 increased by
$0.2 million, or .6%, to $25.3 million from $25.1 million in 1999.
EBITDA loss for the six months ended June 30, 2000 increased by
$8.3 million, or 20.3%, to $49.1 million from $40.8 million in 1999.
HOTEL RESERVATIONS
Net revenues for the three months ended June 30, 2000 increased by
$40.3 million, or 106.6%, to $78.1 million from $37.8 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 62% more cities as
compared to the prior year. The number of room nights sold increased 101.7% as
compared to the prior year. Internet generated sales for the three months ended
June 30, 2000 increased to 91.8% in 2000 from 80.5% in 1999.
Net revenues for the six months ended June 30, 2000 increased by
$72.6 million, or 119.6%, to $133.3 million from $60.7 million in 1999.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $33.2 million, or 103.7%, to $65.2 million from
$32.0 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.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $60.7 million, or 117.9%, to $112.2 million
from $51.5 million in 1999.
EBITDA for the three months ended June 30, 2000 increased by $7.1 million,
or 122.7%, to $12.9 million from $5.8 million in 1999.
EBITDA for the six months ended June 30, 2000 increased by $11.9 million, or
128.9%, to $21.1 million from $9.2 million in 1999.
24
<PAGE>
FILMED ENTERTAINMENT
Net revenues for the three months ended June 30, 2000 decreased by
$1.6 million, or 7.1%, to $20.8 million from $22.4 million in 1999. The decrease
resulted primarily from a reduction in revenues from the Savoy library.
Net revenues for the six months ended June 30, 2000 increased by
$22.0 million, or 75.8%, to $51.1 million from $29.1 million in 1999. The
increase resulted primarily from increased theatrical, foreign and television
revenues of $17.1 million and home entertainment video of $6.8 million, offset
partially by a reduction in revenues from the Savoy library.
Cost related to revenues and other costs and expenses for the three months
ended June 30, 2000 increased by $1.9 million or 9.0%, to $23.1 million from
$21.2 million in 1999 due principally to higher overhead costs.
Cost related to revenues and other costs and expenses for the six months
ended June 30, 2000 increased by $22.3 million or 77.0%, to $51.2 million from
$28.9 million in 1999 due to the amortization costs due to increased theatrical
releases, costs related to the home entertainment and higher overhead costs.
EBITDA for the three months ended June 30, 2000 decreased by $3.5 million to
a loss of $2.3 million from $1.2 million in 1999.
EBITDA for the six months ended June 30, 2000 decreased by $0.3 million to a
loss of $0.2 million from $0.1 million in 1999.
ELECTRONIC COMMERCE AND SERVICES
Net revenues for the three months ended June 30, 2000 decreased by
$1.3 million, or 25.1%, to $3.7 million compared to $5.0 million in 1999 due to
a decrease in ECS teleservices, while net revenues for the six months ended
June 30, 2000 increased by $0.1 million, or 1.3%, to $8.3 million compared to
$8.2 million in 1999. Cost related to revenues and other costs and expenses for
the three and six months ended June 30, 2000 increased by $5.5 million and
$12.2 million due primarily from start-up costs incurred to launch the business
initiatives and other overhead expenses. EBITDA loss for the three and six
months ended June 30, 2000 increased by $6.7 million and $12.1 million,
respectively.
BROADCASTING
Net revenues increased by $2.3 million to $4.7 million from $2.4 million for
the three months ended June 30, 2000 and $5.0 million to $8.4 million from
$3.4 million for the six months ended June 30, 2000 as compared to the
respective periods 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 $6.5 million and $11.8 million for the three and six months ended
June 30, 2000 as compared to the respective periods in 1999, 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.
DEVELOPING NETWORKS
Net revenues increased by $3.5 million to $3.7 million from $0.2 million for
the three months ended June 30, 2000 and $3.8 million to $4.2 million from
$0.4 million for the six months ended June 30, 2000 as compared to the
respective periods in 1999 due to the acquisition of Trio and News World
International on May 19, 2000. Prior to this acquisition, the results reflect
only SciFi.com. Cost related to revenue increased by $4.9 million and
$7.0 million for the three and six months ended June 30, 2000 as compared to the
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respective periods in 1999. EBITDA loss for the three and six months ended
June 30, 2000 increased by $1.5 million and $3.2 million, as compared to the
respective periods in 1999.
OTHER
Other revenue relates to a business that was sold in 1999, which resulted in
decreased revenue of $2.8 million and $6.9 million in the three and six months
ended June 30, 2000 as compared to the respective periods in 1999.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $255.7 million for the six
months ended June 30, 2000 compared to $189.6 million for the six months ended
June 30, 1999. These cash proceeds and available cash and borrowings were used
to pay for acquisitions of $148.2 million, to make capital expenditures of
$76.3 million, and to make mandatory tax distribution payments to the LLC
partners of $68.1 million.
On April 5, 2000, the Company acquired Precision Response Corp. ("PRC") in a
tax-free merger by issuing approximately 24.3 million shares of USAi common
stock in exchange for all outstanding equity of PRC. In conjunction with the
acquisition, USAi repaid $32.3 of outstanding borrowing under PRC's existing
credit facility.
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
June 30, 2000.
Pursuant to an agreement between USAi and HRN, USAi made a contingent
payment of $12.5 million in the three months ended June 30, 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 finalized in the
third quarter. The amount is estimated to be approximately $45.6 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.
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 June 30, 2000,
approximately $78.7 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, on the open market or in
negotiated transactions. In July 2000, 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 an indefinite period of time, on the open market or in negotiated
transactions. The amount and timing of purchases, if any, will depend on market
conditions and other factors, including USAi's overall capital structure. Funds
for these purchases will come from cash on hand or borrowings under the
Company's credit facility. During the six months ended
26
<PAGE>
June 30, 2000, the Company purchased 4.9 million shares of its common stock for
aggregate consideration of $106.2 million.
Under the investment agreement relating to the Universal Transaction, USAi
has granted to Universal and Liberty preemptive rights with respect to future
issuances of USAi's common stock and Class B common stock. These preemptive
rights generally allow Universal and Liberty the right to maintain an ownership
percentage in USAi equal to the ownership percentage that entity held, on a
fully converted basis, immediately prior to the issuance. In May 2000, Liberty
exercised its preemptive right for approximately 7.9 million shares related
principally to the PRC transaction, resulting in proceeds of approximately
$179.1 million to USAi.
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 June 30, 2000, there was $597.4 million
available for borrowing after taking into account outstanding letters of credit.
On July 28, 2000 USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, completed the merger of Internet
Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new
company, Styleclick, Inc., which owns and operates the combined properties of
Styleclick.com Inc. and ISN. In accordance with the terms of the agreement, USAi
invested $40 million in cash and will contribute $10 million in dedicated media,
and will receive warrants to purchase additional shares of the new company. On a
fully diluted basis, USAi owns approximately 75% of the new company and
Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com
repaid the $10 million of borrowing outstanding under the bridge loan provided
by USAi.
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.
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 six months ended June 30, 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.
27
<PAGE>
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 3. 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 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 June 30, 2000, the Company's outstanding debt approximated
$599.1 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 June 30, 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.
28
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Ticketmaster Consumer Class Action litigation previously reported in
the Company's 1999 Form 10-K, a hearing date for class certification has been
set by the United States District Court for the Eastern District of Missouri for
December 15, 2000, and a trial date has been set for October 29, 2001.
In the Home Shopping Network Consumer Class Action litigation previously
reported in the Company's 1999 Form 10-K, the plaintiffs filed an amended class
action complaint that, among other things, added an additional named plaintiff,
added Home Shopping Club LP, Warrantech Helpdesk, Inc., Banctech Service, Inc.
and Timespace Internet, Inc. as named defendants, and removed two individuals as
named defendants. On May 9, 2000, Home Shopping Network, Inc. and Home Shopping
Club LP (the "HSN Defendants") filed a motion to dismiss the amended complaint.
On May 23, 2000, the Cook County Circuit Court addressed the HSN Defendants'
motion to dismiss by entering an Order that, in pertinent part, required the
plaintiffs to file a second amended complaint. On June 6, 2000, the plaintiffs
filed a second amended class action complaint that, among other things, added an
additional named plaintiff and asserted two new causes of action for negligent
misrepresentation and breach of contract. The HSN Defendants have filed an
answer and affirmative defenses to the second amended complaint and intend to
continue to vigorously defend this action.
In the Urban litigation previously reported in the Company's 1999 Form 10-K
and the Company's 1st Quarter Form 10-Q, the Virginia Supreme Court entered an
Order denying Urban's Petition for Appeal on June 2, 2000. On June 16, 2000,
Urban filed a Petition for Rehearing with the Virginia Supreme Court requesting
that the Court reconsider its Order dated June 2, 2000. On July 21, 2000, the
Virginia Supreme Court entered an Order denying Urban's Petition for Rehearing.
On August 1, 2000, Urban and Mr. Theodore M. White, President and owner of all
of the voting stock of Urban, filed voluntary petitions under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Columbia.
In addition, by order dated May 3, 2000, the U.S. Bankruptcy Court for the
Eastern District of Virginia denied Urban's motion to reopen Urban's prior
chapter 11 case and clarify certain factual and legal matters contained within
the Court's September 30, 1996 confirmation order, which motion had been joined
in by Amresco Funding Corporation, the entity that provided Urban with
bankruptcy exit financing. On May 15, 2000, Urban filed a motion requesting that
the U.S. Bankruptcy Court reconsider its May 3, 2000 ruling, or, in the
alternative, amend findings of fact. By Memorandum Opinion and Order dated
June 9, 2000, the U.S. Bankruptcy Court denied Urban's motion to reconsider, or,
in the alternative, to amend findings of fact.
In the Anthony Martin litigation, previously reported in the Company's 1999
Form 10-K, the parties have agreed to a settlement that will not have a material
effect on 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 previously reported in the
Company's 1999 Form 10-K and the Company's 1st Quarter Form 10-Q, the plaintiff
filed an amended class action petition in state court on June 20, 2000 asserting
an additional claim that the cash discount program in question violates a
provision in a Merchant Services Bankcard Agreement between Ticketmaster and
Chase Merchant Services L.L.C. and First Financial Bank. Plaintiff claims all
consumers using VISA and Mastercard to purchase tickets from Ticketmaster are
third-party beneficiaries of this contract. Plaintiff also filed on July 14,
2000 an amended class certification motion. In addition to the nine-state class
sought by Plaintiff's original class certification request, the amended motion
seeks the certification of a nationwide class of VISA and Mastercard customers
since approximately April 1998 to prosecute the alleged third-party beneficiary
claim. Ticketmaster filed a summary judgment motion on May 1, 2000 and Plaintiff
filed a second amended motion for partial summary judgment on May 24, 2000.
Currently no hearing is set on any of these motions. On July 20, 2000,
Ticketmaster removed the case to federal court in McAllen, Texas on
29
<PAGE>
the grounds that the newly added third-party beneficiary claim raises a federal
question under the Truth-in-Lending Act. On August 1, 2000, Plaintiff filed a
motion to remand the case to state court. Hearing on the motion to remand is
currently anticipated to occur on September 7, 2000. Ticketmaster continues to
believe that plaintiff's claims lack merit and expects to continue to vigorously
defend itself in this case.
In the N2K litigation previously reported in the Company's 1st Quarter Form
10-Q, the Court denied Ticketmaster's motion for summary adjudication as to
N2K's Cross-Complaint on June 29, 2000. Trial is currently scheduled to commence
on September 20, 2000.
In the Polygram Filmed Entertainment litigation, previously reported in the
Company's 1999 Form 10-K and the Company's 1st Quarter 10-Q, the parties have
agreed to a settlement for an amount that is not material to 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 World Wrestling Federation litigation, previously reported in the
Company's 1st Quarter Form 10-Q, in a decision dated June 27, 2000, the Delaware
Chancery Court dismissed USA Cable's complaint, holding that while USA Cable had
no obligation to match the terms of the Viacom/CBS offer pertaining to matters
other than the four wrestling entertainment programs, USA had failed to match
the terms of the Viacom Inc. and CBS Corporation offer. USA Cable is pursuing an
expedited appeal of the decision of the Chancery Court in the Delaware Supreme
Court. Oral argument of the appeal is scheduled for August 14, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 4, 2000, the annual meeting of stockholders was held. Stockholders
present in person or by proxy, representing 199,274,084 shares of Common Stock
and 63,033,452 shares of Class B Common Stock, voted on the following matters:
1. The stockholders elected the following thirteen directors of the Company
to hold office until the next annual meeting of stockholders or until their
successors have been duly elected:
Elected by holders of Common Stock voting as a separate class:
<TABLE>
<CAPTION>
NUMBER OF SHARES CAST
NUMBER OF SHARES AGAINST OR FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ---------------------
<S> <C> <C>
Anne M. Busquet........................... 198,498,633 775,451
Donald R. Keough.......................... 198,485,663 788,421
William D. Savoy.......................... 198,491,279 782,805
Gen. H. Norman Schwarzkopf................ 187,831,102 11,442,982
</TABLE>
30
<PAGE>
Elected by holders of Common Stock and Class B Common Stock voting as a single
class:
<TABLE>
<CAPTION>
NUMBER OF SHARES CAST
NUMBER OF SHARES AGAINST OR FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ---------------------
<S> <C> <C>
Paul G. Allen............................. 828,826,704 781,900
Barry Baker............................... 828,827,033 781,571
Edgar Bronfman, Jr. ...................... 828,818,274 790,330
Barry Diller.............................. 828,829,356 779,248
Victor A. Kaufman......................... 828,826,697 782,007
Robert W. Matschullat..................... 828,816,211 792,393
Samuel Minzberg........................... 828,664,249 944,355
Brian Mulligan............................ 828,822,697 785,097
Diane Von Furstenberg..................... 828,653,737 954,867
</TABLE>
2. The holders of the Common Stock and Class B Common Stock, voting as
separate classes, approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock and
Class B Common Stock, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
--------------------- ---------------- ----------------
<S> <C> <C>
245,380,545 16,790,165 136,829
</TABLE>
3. The holders of Common Stock and Class B Common Stock, voting as a single
class, approved the Company's 2000 Stock and Annual Incentive Plan, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING BROKER NON-VOTES
--------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
754,915,322 56,465,650 174,115 18,053,515
</TABLE>
4. The holders of Common Stock and Class B Common Stock, voting as a single
class, approved the Company's Deferred Compensation Plan for Non-Employee
Directors, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
--------------------- ---------------- ----------------
<S> <C> <C>
828,105,732 1,306,288 196,582
</TABLE>
5. The holders of Common Stock and Class B Common Stock, voting as a single
class, also ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ended December 31, 2000, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
--------------------- ---------------- ----------------
<S> <C> <C>
829,443,324 50,683 114,596
</TABLE>
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation
10.1 USA Networks, Inc. 2000 Stock and Annual Incentive Plan
10.2 USA Networks, Inc. Deferred Compensation Plan For
Non-Employee Directors
10.3* Consulting Agreement, dated June 21, 2000, between USA
Networks,Inc. and Barry Baker
10.5* Employment Agreement, dated August 9, 2000, between USA
Networks, Inc. and Julius Genachowski
27.1 Financial Data Schedule (for SEC use only)
27.2 Financial Data Schedule (for SEC use only)
27.3 Financial Data Schedule (for SEC use only)
27.4 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/A, dated April 14, 2000, 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.
32
<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.
USA NETWORKS, INC.
(REGISTRANT)
By: /s/ BARRY DILLER
--------------------------------------
Barry Diller
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BARRY DILLER
------------------------------- Chairman of the Board and Chief Executive August 14, 2000
Barry Diller Officer
/s/ MICHAEL SILECK Senior Vice President,
------------------------------- Chief Financial Officer August 14, 2000
Michael Sileck (Principal Financial Officer)
/s/ WILLIAM J. SEVERANCE
------------------------------- Vice President and Controller August 14, 2000
William J. Severance (Chief Accounting Officer)
</TABLE>
33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production.......... $ 390,688 $ 316,394 $ 769,641 $ 647,938
Electronic retailing........................ 357,722 284,322 736,780 559,832
Interactive................................. 4,785 6,544 10,311 12,851
Electronic commerce and services............ 1,533 800 2,431 1,073
Developing networks......................... 3,709 218 4,271 427
Other....................................... 395 2,836 395 6,882
--------- --------- ----------- -----------
Total net revenues........................ 758,832 611,114 1,523,829 1,229,003
--------- --------- ----------- -----------
Operating costs and expenses:
Cost of sales............................... 221,125 182,586 459,536 358,672
Program costs............................... 173,173 149,280 339,037 319,347
Selling and marketing....................... 94,094 73,107 182,988 135,738
General and administrative.................. 82,940 57,760 155,099 113,796
Other operating costs....................... 31,228 22,190 56,952 44,319
Amortization of cable distribution fees..... 8,267 6,186 16,490 12,276
Depreciation and amortization............... 48,236 43,555 95,974 86,562
--------- --------- ----------- -----------
Total operating costs and expenses........ 659,063 534,664 1,306,076 1,070,710
--------- --------- ----------- -----------
Operating profit.......................... 99,769 76,450 217,753 158,293
Other income (expense):
Interest income............................. 9,163 8,708 13,912 19,323
Interest expense............................ (10,651) (20,241) (18,478) (40,619)
Gain on sale of securities.................. -- 2,970 -- 50,270
Other, net.................................. (1,529) (7,958) (4,008) 1,658
--------- --------- ----------- -----------
(3,017) (16,521) (8,574) 30,632
--------- --------- ----------- -----------
Earnings before income taxes and minority
interest.................................... 96,752 59,929 209,179 188,925
Income tax expense............................ (17,666) (13,962) (42,293) (34,154)
Minority interest............................. (56,501) (37,394) (122,511) (114,700)
--------- --------- ----------- -----------
NET EARNINGS.................................. $ 22,585 $ 8,573 $ 44,375 $ 40,071
========= ========= =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
34
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 216,670 $ 247,474
Accounts and notes receivable, net of allowance of $44,608
and $33,317, respectively................................. 406,900 381,175
Inventories, net............................................ 450,831 432,520
Investments held for sale................................... 5,735 --
Deferred income taxes....................................... -- 12,077
Other current assets, net................................... 23,752 8,542
---------- ----------
Total current assets........................................ 1,103,888 1,081,788
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 137,142 123,606
Buildings and leasehold improvements........................ 61,553 59,074
Furniture and other equipment............................... 67,277 67,246
Land........................................................ 10,246 10,246
Projects in progress........................................ 23,573 31,736
---------- ----------
299,791 291,908
Less accumulated depreciation and amortization.............. (75,885) (79,350)
---------- ----------
223,906 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,078,984 5,029,769
Cable distribution fees, net ($31,884 and $35,181,
respectively, to related parties)......................... 151,059 130,988
Long-term investments....................................... 68,841 93,742
Notes and accounts receivable, net.......................... 23,382 19,506
Inventories, net............................................ 133,722 154,497
Advances to USAI and subsidiaries........................... 339,590 410,107
Deferred income taxes....................................... 75,335 61,755
Deferred charges and other, net............................. 43,538 36,934
---------- ----------
$7,242,245 $7,231,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 16,853 $ 3,758
Accounts payable, trade..................................... 157,791 147,864
Obligations for program rights and film costs............... 245,717 265,235
Cable distribution fees payable ($18,476 and $18,733,
respectively, to related parties)......................... 38,183 43,993
Deferred revenue............................................ 42,685 47,536
Deferred income taxes....................................... 3,367 --
Other accrued liabilities................................... 312,400 271,846
---------- ----------
Total current liabilities................................... 816,996 780,232
LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 527,011 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF
CURRENT................................................... 232,482 256,260
OTHER LONG-TERM LIABILITIES................................. 71,632 81,156
MINORITY INTEREST........................................... 4,328,704 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................................. (22,971) 50,823
Accumulated other comprehensive income...................... (3,329) --
---------- ----------
Total stockholders' equity.................................. 1,265,420 1,342,543
---------- ----------
$7,242,245 $7,231,644
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
35
<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 six months
ended June 30, 2000............. 44,375 -- -- 44,375 --
Foreign currency translation...... 978 978
Increase in unrealized gains in
available for sale securities... (4,307) -- -- -- (4,307)
----------
Comprehensive income............ 41,046
Mandatory tax distribution to LLC
partners.......................... (118,169) -- -- (118,169) --
---------- ---------- ------- -------- -------
Balance at June 30, 2000............ $1,265,420 $1,221,408 $70,312 $(22,971) $(3,329)
========== ========== ======= ======== =======
</TABLE>
Comprehensive income for the three months ended June 30, 2000 was $17,597.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
36
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 44,375 $ 40,071
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 95,974 86,562
Amortization of cable distribution fees................... 16,490 12,276
Amortization of program rights and film costs............. 294,026 261,252
Gain on sale of securities................................ -- (50,270)
Non-cash compensation..................................... 5,870 1,900
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 5,015 (10,112)
Minority interest......................................... 122,511 114,700
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (25,112) 3,108
Inventories............................................... 6,012 (2,177)
Accounts payable.......................................... (1,089) (41,286)
Accrued liabilities and deferred revenue.................. 31,200 30,759
Payment for program rights and film costs................. (332,891) (255,335)
Increase in cable distribution fees....................... (27,296) (12,746)
Other, net................................................ 13,270 15,599
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 248,355 194,301
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (107,654) (7,500)
Capital expenditures........................................ (28,730) (28,862)
Increase in long-term investments and notes receivable...... (20,322) (12,150)
Advance to Styleclick....................................... (9,000) --
Proceeds from sale of securities............................ -- 61,080
Proceeds from long-term notes receivable.................... -- 3,691
Other, net.................................................. (2,224) 2,163
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (167,930) 18,422
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 35,769 --
Intercompany................................................ (86,768) (385,065)
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (33,057) (13,942)
Repurchase of LLC shares.................................... (110,532) (4,938)
Proceeds from issuance of LLC shares........................ 208,100 22,732
Other....................................................... (7,550) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................... (112,207) (433,968)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 978 --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (30,804) (221,245)
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 216,670 $ 13,658
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
37
<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.
The Company is a holding company, the subsidiaries of which are engaged in
diversified media and electronic commerce businesses.
The five 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.
- Developing networks, which primarily represents recently acquired cable
television properties Trio and News World International and SciFi.com, a
developing Internet content and commerce site.
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 and six months
ended June 30, 2000. Certain amounts in the Condensed Consolidated Financial
Statements for the three and six months ended June 30, 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
38
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Securities and Exchange Commission issued an amendment to
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101") which delayed the effective date for adoption of SAB 101 to the
fourth quarter of 2000. SAB 101 provides guidance on revenue recognition
criteria for certain types of transactions. SAB 101 also provides guidance on
the disclosures that companies should make about their revenue recognition
policies and the impact of events and trends on revenue.
In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued
SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which
replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND
DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be
accounted for under an inventory model. In addition, the SOP considers such
topics as revenue recognition (fixed fees and minimum guarantees in variable fee
arrangements), fee allocation in multiple films, accounting for exploitation
costs, and impairment assessment. The SOP is effective for financial statements
issued for fiscal years beginning after December 15, 2000.
The Company is currently evaluating the impact of SAB 101 and SOP 00-2,
although the impact is not expected to be material.
NOTE 3--INVESTMENTS
During the quarter and six months ended June 30, 1999, the Company
recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of
securities in a publicly traded entity.
NOTE 4--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 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.
During the second quarter, the company recorded $8.7 million of expense
related to an agreement with an executive. Of this amount, $2.9 million is a
non-cash stock compensation charge related to restricted stock.
39
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999:
During the six months ended June 30, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.1 million.
NOTE 5--INDUSTRY SEGMENTS
For the three and six months ended June 30, 2000 and 1999, the Company
operated principally in five industry segments: Networks and television
production, Electronic retailing, Interactive, Electronic commerce and services
and Developing networks. 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
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. The Developing networks segment consists primarily of the
recently acquired cable television properties Trio and News World International,
which were acquired on May 19, 2000, and SciFi.com, a developing Internet
content and commerce site.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Networks and television production............. $390,688 $316,394 $ 769,641 $ 647,938
Electronic retailing........................... 357,722 284,322 736,780 559,832
Internet services.............................. 4,785 6,544 10,311 12,851
Electronic commerce and services............... 1,533 800 2,431 1,073
Developing networks............................ 3,709 218 4,271 427
Other.......................................... 395 2,836 395 6,882
-------- -------- ---------- ----------
$758,832 $611,114 $1,523,829 $1,229,003
======== ======== ========== ==========
Operating profit (loss)
Networks and television production............. $111,190 $ 77,697 $ 221,977 $ 158,967
Electronic retailing........................... 21,808 18,964 51,820 33,650
Internet services.............................. (11,355) (11,220) (21,412) (19,021)
Electronic commerce and services............... (4,022) (500) (7,945) (926)
Developing networks............................ (2,528) (543) (3,762) (543)
Other.......................................... (15,324) (7,948) (22,925) (13,834)
-------- -------- ---------- ----------
$ 99,769 $ 76,450 $ 217,753 $ 158,293
======== ======== ========== ==========
</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
40
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--GUARANTEE OF NOTES (CONTINUED)
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
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, completed the merger of Internet
Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new
company, Styleclick, Inc., which owns and operates the combined properties of
Styleclick.com Inc. and ISN. Styleclick, Inc. is traded on the Nasdaq market
under the symbol "IBUY". In accordance with the terms of the agreement, USAi
invested $40 million in cash and will contribute $10 million in dedicated media,
and will receive warrants to purchase additional shares of the new company. On a
fully diluted basis, USAi owns approximately 75% of the new company and
Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com
repaid the $10 million of borrowing outstanding under the bridge loan.
41
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production............ $ 390,688 $ 316,394 $ 769,641 $ 647,938
Electronic retailing.......................... 357,722 284,322 736,780 559,832
Interactive................................... 4,785 6,544 10,311 12,851
Electronic commerce and services.............. 1,533 800 2,431 1,073
Developing networks........................... 3,709 218 4,271 427
Other......................................... 395 2,836 395 6,882
--------- --------- ---------- ----------
Total net revenues.......................... 758,832 611,114 1,523,829 1,229,003
--------- --------- ---------- ----------
Operating costs and expenses:
Cost of sales................................. 221,125 182,586 459,536 358,672
Program costs................................. 173,173 149,280 339,037 319,347
Selling and marketing......................... 94,094 73,107 182,988 135,738
General and administrative.................... 82,940 57,760 155,099 113,796
Other operating costs......................... 31,228 22,190 56,952 44,319
Amortization of cable distribution fees....... 8,267 6,186 16,490 12,276
Depreciation and amortization................. 48,236 43,555 95,974 86,562
--------- --------- ---------- ----------
Total operating costs and expenses.......... 659,063 534,664 1,306,076 1,070,710
--------- --------- ---------- ----------
Operating profit............................ 99,769 76,450 217,753 158,293
Other income (expense):
Interest income............................... 9,163 8,708 13,912 19,323
Interest expense.............................. (10,651) (20,241) (18,478) (40,619)
Gain on sale of securities.................... -- 2,970 -- 50,270
Other, net.................................... (1,529) (7,958) (4,008) 1,658
--------- --------- ---------- ----------
(3,017) (16,521) (8,574) 30,632
--------- --------- ---------- ----------
Earnings before income taxes and minority
interest...................................... 96,752 59,929 209,179 188,925
Income tax expense.............................. (5,951) (1,255) (10,963) (3,138)
Minority interest............................... (2,018) 191 (4,314) 377
--------- --------- ---------- ----------
NET EARNINGS.................................... $ 88,783 $ 58,865 $ 193,902 $ 186,164
========= ========= ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
42
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 216,670 $ 247,474
Accounts and notes receivable, net of allowance of $44,608
and
$33,317, respectively..................................... 406,900 381,175
Inventories, net............................................ 450,831 432,520
Investments held for sale................................... 5,735 --
Other current assets, net................................... 23,752 8,542
---------- ----------
Total current assets.................................... 1,103,888 1,069,711
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 137,142 123,606
Buildings and leasehold improvements........................ 61,553 59,074
Furniture and other equipment............................... 67,277 67,246
Land........................................................ 10,246 10,246
Projects in progress........................................ 23,573 31,736
---------- ----------
299,791 291,908
Less accumulated depreciation and amortization.......... (75,885) (79,350)
---------- ----------
223,906 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,154,725 5,105,510
Cable distribution fees, net
($31,884 and $35,181, respectively, to related parties)... 151,059 130,988
Long-term investments....................................... 68,841 93,742
Notes and accounts receivable, net.......................... 23,382 19,506
Inventories, net............................................ 133,722 154,497
Advances to USAI and subsidiaries........................... 756,891 649,480
Deferred charges and other, net............................. 43,538 36,934
---------- ----------
$7,659,952 $7,472,926
========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 16,853 $ 3,758
Accounts payable, trade..................................... 157,791 147,864
Obligations for program rights and film costs............... 245,717 265,235
Cable distribution fees payable
($18,476 and $18,733, respectively, to related parties)... 38,183 43,993
Deferred revenue............................................ 42,685 47,536
Other accrued liabilities................................... 298,729 257,575
---------- ----------
Total current liabilities................................... 799,958 765,961
LONG-TERM OBLIGATIONS (net of current maturities)........... 527,011 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS,
net of current............................................ 232,482 256,260
OTHER LONG-TERM LIABILITIES................................. 68,859 81,156
MINORITY INTEREST........................................... 14,200 531
COMMITMENTS AND CONTINGENCIES............................... -- --
MEMBERS' EQUITY
Class A (245,393,314 and 245,601,782 shares,
respectively)............................................. 2,015,873 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........................................... 560,011 484,278
Accumulated other comprehensive income...................... (3,329) --
---------- ----------
Total members' equity................................... 6,017,442 5,841,679
---------- ----------
$7,659,952 $7,472,926
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
43
<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 six months ended
June 30, 2000....................... 193,902 -- -- -- 193,902 --
Foreign currency translation.......... 978 -- -- -- -- 978
Increase in unrealized gains in
available for sale securities....... (4,307) -- -- -- -- (4,307)
----------
Comprehensive income................ 190,573 -- -- -- -- --
Issuance of LLC shares.................. 213,891 213,891 -- -- -- --
Repurchase of LLC shares................ (110,532) (110,532) -- -- -- --
Mandatory tax distribution to
LLC partners.......................... (118,169) -- -- -- (118,169) --
---------- ---------- ---------- -------- --------- -------
BALANCE AT JUNE 30, 2000................ $6,017,442 $2,015,873 $2,978,635 $466,252 $ 560,011 $(3,329)
========== ========== ========== ======== ========= =======
</TABLE>
Comprehensive income for the three months ended June 30, 2000 was $83,795.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
44
<PAGE>
USANI LLC AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 193,902 $ 186,164
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 95,974 86,562
Amortization of cable distribution fees................... 16,490 12,276
Amortization of program rights and film costs............. 294,026 261,252
Gain on sale of securities................................ -- (50,270)
Non-cash compensation..................................... 5,870 1,900
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 5,015 (10,112)
Minority interest......................................... 4,314 (377)
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (25,112) 3,108
Inventories............................................... 6,012 (2,177)
Accounts payable.......................................... (1,089) (41,286)
Accrued liabilities and deferred revenue.................. (130) (257)
Payment for program rights and film costs................. (332,891) (255,335)
Increase in cable distribution fees....................... (27,296) (12,746)
Other, net................................................ 13,270 15,599
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 248,355 194,301
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (107,654) (7,500)
Capital expenditures........................................ (28,730) (28,862)
Increase in long-term investments and notes receivable...... (20,322) (12,150)
Advance to Styleclick....................................... (9,000) --
Proceeds from sale of securities............................ -- 61,080
Proceeds from long-term notes receivable.................... -- 3,691
Other, net.................................................. (2,224) 2,163
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (167,930) 18,422
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 35,769 --
Intercompany................................................ (86,768) (385,065)
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (33,057) (13,942)
Repurchase of LLC shares.................................... (110,532) (4,938)
Proceeds from issuance of LLC shares........................ 208,100 22,732
Other....................................................... (7,550) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................... (112,207) (433,968)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 978 --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (30,804) (221,245)
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 216,670 $ 13,658
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
45
<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 five 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.
- Developing networks, which primarily represents recently acquired cable
television properties Trio and News World International and SciFi.com, a
developing Internet content and commerce site.
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 and months
ended June 30, 2000. Certain amounts in the Condensed Consolidated Financial
Statements for the three and six months ended June 30, 1999 have been
reclassified to conform to the 2000 presentation.
46
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Securities and Exchange Commission issued an amendment to
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101") which delayed the effective date for adoption of SAB 101 to the
fourth quarter of 2000. SAB 101 provides guidance on revenue recognition
criteria for certain types of transactions. SAB 101 also provides guidance on
the disclosures that companies should make about their revenue recognition
policies and the impact of events and trends on revenue.
In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued
SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which
replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND
DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be
accounted for under an inventory model. In addition, the SOP considers such
topics as revenue recognition (fixed fees and minimum guarantees in variable fee
arrangements), fee allocation in multiple films, accounting for exploitation
costs, and impairment assessment. The SOP is effective for financial statements
issued for fiscal years beginning after December 15, 2000.
The Company is currently evaluating the impact of SAB 101 and SOP 00-2,
although the impact is not expected to be material.
NOTE 3--INVESTMENTS
During the quarter and six months ended June 30, 1999, the Company
recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of
securities in a publicly traded entity.
NOTE 4--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 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.
47
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--STATEMENTS OF CASH FLOWS (CONTINUED)
During the second quarter, the company recorded $8.7 million of expense
related to an agreement with an executive. Of this amount, $2.9 million is a
non-cash stock compensation charge related to restricted stock.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999:
During the six months ended June 30, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.1 million.
NOTE 5--INDUSTRY SEGMENTS
For the three and six months ended June 30, 2000 and 1999, the Company
operated principally in five industry segments: Networks and television
production, Electronic retailing, Interactive, Electronic commerce and services
and Developing networks. 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
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. The Developing networks segment consists primarily of the
recently acquired cable television properties Trio and News World International,
which were acquired on May 19, 2000, and SciFi.com, a developing Internet
content and commerce site.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Networks and television production............. $390,688 $316,394 $ 769,641 $ 647,938
Electronic retailing........................... 357,722 284,322 736,780 559,832
Internet services.............................. 4,785 6,544 10,311 12,851
Electronic commerce and services............... 1,533 800 2,431 1,073
Developing networks............................ 3,709 218 4,271 427
Other.......................................... 395 2,836 395 6,882
-------- -------- ---------- ----------
$758,832 $611,114 $1,523,829 $1,229,003
======== ======== ========== ==========
Operating profit (loss)
Networks and television production............. $111,190 $ 77,697 $ 221,977 $ 158,967
Electronic retailing........................... 21,808 18,964 51,820 33,650
Internet services.............................. (11,355) (11,220) (21,412) (19,021)
Electronic commerce and services............... (4,022) (500) (7,945) (926)
Developing networks............................ (2,528) (543) (3,762) (543)
Other.......................................... (15,324) (7,948) (22,925) (13,834)
-------- -------- ---------- ----------
$ 99,769 $ 76,450 $ 217,753 $ 158,293
======== ======== ========== ==========
</TABLE>
48
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
NOTE 7--SUBSEQUENT EVENTS
MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM
On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, completed the merger of Internet
Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new
company, Styleclick, Inc., which owns and operates the combined properties of
Styleclick.com Inc. and ISN. Styleclick, Inc. is traded on the Nasdaq market
under the symbol "IBUY". In accordance with the terms of the agreement, USAi
invested $40 million in cash and will contribute $10 million in dedicated media,
and will receive warrants to purchase additional shares of the new company. On a
fully diluted basis, USAi owns approximately 75% of the new company and
Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com
repaid the $10 million of borrowing outstanding under the bridge loan.
49
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation
10.1 USA Networks, Inc. 2000 Stock and Annual Incentive Plan
10.2 USA Networks, Inc. Deferred Compensation Plan For
Non-Employee Directors
10.3* Consulting Agreement, dated June 21, 2000, between USA
Networks,Inc. and Barry Baker
10.5* Employment Agreement, dated August 9, 2000, between USA
Networks, Inc. and Julius Genachowski
27.1 Financial Data Schedule (for SEC use only)
27.2 Financial Data Schedule (for SEC use only)
27.3 Financial Data Schedule (for SEC use only)
27.4 Financial Data Schedule (for SEC use only)
</TABLE>
------------------------
* Reflects management contracts and compensatory plans.
