<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 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 SEPTEMBER 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 October 20, 2000, the following shares of the Registrant's capital
stock were outstanding:
<TABLE>
<S> <C>
Common Stock................................................ 305,082,551
Class B Common Stock........................................ 63,033,452
-----------
Total..................................................... 368,116,003
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.................................................. 729,268,849
===========
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 20, 2000 was $4,107,195,198. 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 October 20, 2000, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 729,268,849 shares of Common Stock with an
aggregate market value of $13,126,839,282.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUES
USA ENTERTAINMENT
Networks and television production........................ $ 336,047 $307,094 $1,105,688 $ 955,032
Filmed entertainment...................................... 14,468 27,912 65,548 39,687
Broadcasting.............................................. 5,263 2,341 13,620 5,691
Emerging networks......................................... 8,591 266 12,862 693
USA ELECTRONIC RETAILING
Electronic retailing...................................... 426,549 314,718 1,243,756 941,467
USA INFORMATION AND SERVICES
Ticketing operations...................................... 124,929 105,188 395,909 324,615
Hotel reservations........................................ 94,619 47,652 227,964 70,670
Teleservicing............................................. 70,162 -- 140,374 --
Interactive............................................... 26,709 16,333 76,331 43,851
Electronic commerce and services.......................... 7,174 6,168 15,634 14,470
OTHER..................................................... 509 -- 1,568 6,894
---------- -------- ---------- ----------
Total net revenues.................................... 1,115,020 827,672 3,299,254 2,403,070
---------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales............................................. 527,539 279,813 1,485,297 767,962
Program costs............................................. 146,000 147,549 485,037 466,896
Selling and marketing..................................... 141,841 129,720 401,975 378,050
General and administrative................................ 110,174 126,971 320,196 330,582
Other operating costs..................................... 31,638 14,805 86,162 58,525
Amortization of cable distribution fees................... 8,845 6,938 25,335 19,214
Non-cash distribution and marketing expense............... 2,693 -- 4,414 --
Depreciation and amortization............................. 141,564 83,544 380,830 230,581
---------- -------- ---------- ----------
Total operating costs and expenses.................... 1,110,294 789,340 3,189,246 2,251,810
---------- -------- ---------- ----------
Operating profit...................................... 4,726 38,332 110,008 151,260
Other income (expense):
Interest income........................................... 10,862 8,948 35,141 24,297
Interest expense.......................................... (20,417) (21,170) (62,097) (61,233)
Gain on sale of securities................................ -- 39,451 -- 89,721
Other, net................................................ 69,907 (509) 67,362 1,986
---------- -------- ---------- ----------
60,352 26,720 40,406 54,771
---------- -------- ---------- ----------
Earnings before income taxes and minority interest.......... 65,078 65,052 150,414 206,031
Income tax expense.......................................... (22,313) (24,947) (72,813) (65,302)
Minority interest........................................... (63,004) (47,785) (145,299) (150,582)
---------- -------- ---------- ----------
NET LOSS.................................................... $ (20,239) $ (7,680) $ (67,698) $ (9,853)
========== ======== ========== ==========
Basic and diluted loss per common share..................... $ (.06) $ (.02) $ (.19) $ (.03)
========== ======== ========== ==========
</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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 359,079 $ 424,239
Marketable securities, available for sale................... 74,817 --
Accounts and notes receivable, net of allowance of $58,860
and $41,993, respectively................................. 619,016 454,341
Inventories, net............................................ 595,073 470,844
Investments held for sale................................... 2,381 11,512
Other current assets, net................................... 66,321 27,519
----------- ----------
Total current assets.................................... 1,716,687 1,388,455
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 385,193 324,412
Buildings and leasehold improvements........................ 149,906 110,403
Furniture and other equipment............................... 97,743 85,487
Land........................................................ 15,334 16,094
Projects in progress........................................ 53,293 41,438
----------- ----------
701,469 577,834
Less accumulated depreciation and amortization.......... (226,065) (221,203)
----------- ----------
475,404 356,631
OTHER ASSETS
Intangible assets, net...................................... 7,773,464 6,831,487
Cable distribution fees, net
($30,235 and $35,181, respectively, to related parties)... 146,155 130,988
Long-term investments....................................... 63,989 121,383
Notes and accounts receivable, net of current portion
($3,283 and $2,562, respectively, from related parties)... 36,671 26,248
Advance to Universal........................................ 102,362 163,814
Inventories, net............................................ 197,447 166,477
Deferred income taxes....................................... 18,254 --
Deferred charges and other, net............................. 80,660 67,669
----------- ----------
$10,611,093 $9,253,152
=========== ==========
</TABLE>
2
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 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................. $ 27,293 $ 10,801
Accounts payable, trade..................................... 192,116 188,343
Accounts payable, client accounts........................... 102,442 98,586
Obligations for program rights and film costs............... 307,935 272,945
Amount due under acquisition agreement...................... -- 17,500
Cable distribution fees payable
($18,431 and $18,733, respectively, to related parties)... 28,993 43,993
Deferred revenue............................................ 129,232 83,811
Deferred income taxes....................................... 21,872 4,050
Other accrued liabilities................................... 391,138 311,724
----------- ----------
Total current liabilities............................... 1,201,021 1,031,753
LONG-TERM OBLIGATIONS (net of current maturities)........... 572,449 574,979
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS,
net of current............................................ 292,198 262,810
OTHER LONG-TERM LIABILITIES................................. 102,456 116,695
DEFERRED INCOME TAXES....................................... -- 5,120
MINORITY INTEREST........................................... 4,941,036 4,492,066
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock--$.01 par value; authorized 15,000,000
shares; no
shares issued and outstanding............................. -- --
Common stock--$.01 par value; authorized 1,600,000,000
shares;
issued and outstanding, 305,082,551 and 274,013,418
shares, respectively...................................... 3,051 2,740
Class B--convertible common stock--$.01 par value;
authorized, 400,000,000 shares; issued and outstanding,
63,033,452 shares......................................... 630 630
Additional paid-in capital.................................. 3,780,587 2,830,506
Accumulated deficit......................................... (122,056) (54,358)
Accumulated other comprehensive income...................... (15,867) 4,773
Treasury stock, at cost..................................... (139,414) (9,564)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
----------- ----------
Total stockholders' equity.............................. 3,501,933 2,769,729
----------- ----------
$10,611,093 $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 nine
months ended
September 30, 2000.... (67,698) -- -- -- (67,698) -- -- --
Decrease in unrealized
gains in available for
sale securities....... (14,588) -- -- -- -- (14,588) -- --
Foreign currency
translation........... (6,052) -- -- -- -- (6,052) -- --
----------
Comprehensive loss.... (88,338)
Issuance of common stock
upon exercise of stock
options................. 34,493 42 -- 34,451 -- -- -- --
Income tax benefit related
to stock options
exercised............... 19,808 -- -- 19,808 -- -- -- --
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...... (129,907) (57) -- -- -- -- (129,850) --
---------- ------ ---- ---------- --------- -------- --------- -------
BALANCE AT SEPTEMBER 30,
2000.................... $3,501,933 $3,051 $630 $3,780,587 $(122,056) $(15,867) $(139,414) $(4,998)
========== ====== ==== ========== ========= ======== ========= =======
</TABLE>
Comprehensive loss for the three months ended September 30, 2000 was $30,946.
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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (67,698) $ (9,853)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 380,830 230,467
Amortization of cable distribution fees................... 25,335 19,214
Amortization of program rights and film costs............. 489,887 420,285
Amortization of non-cash distribution and marketing
costs................................................... 4,414 --
Amortization of deferred financing costs and non-cash
interest................................................ 1,676 2,545
Equity in losses (earnings) of unconsolidated
affiliates.............................................. 40,896 (812)
Gain on sale of subsidiary stock.......................... (108,343) --
Gain on sale of securities................................ -- (89,721)
Non-cash interest income.................................. (5,559) (3,965)
Non-cash stock compensation............................... 8,380 3,754
Minority interest......................................... 145,299 150,582
Changes in current assets and liabilities:
Accounts receivable....................................... (54,469) 2,607
Inventories............................................... (1,888) (18,343)
Accounts payable.......................................... (68,078) (25,488)
Accrued liabilities and deferred revenue.................. 105,083 48,453
Payment for program rights and film costs................. (614,406) (448,975)
Increase in cable distribution fees....................... (39,251) (35,624)
Other, net................................................ 14,505 4,306
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 256,613 249,432
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (221,329) (184,671)
Capital expenditures...................................... (116,491) (87,795)
Advance to Universal...................................... -- (200,000)
Recoupment of advance to Universal........................ 70,295 20,741
Increase in long-term investments and notes receivable.... (15,306) (17,746)
Purchase of marketable securities......................... (78,172) --
Proceeds from sale of securities.......................... -- 107,231
Other, net................................................ (14,446) 5,845
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................... (375,449) (356,395)
--------- ---------
Cash flows from financing activities:
Borrowings................................................ 50,166 --
Principal payments on long-term obligations............... (81,926) (337,636)
Purchase of treasury stock................................ (129,907) (7,226)
Payment of mandatory tax distribution to LLC partners..... (68,065) (28,830)
Proceeds from sale of subsidiary stock.................... 92,604 2,490
Proceeds from minority interest shareholders.............. -- 4,050
Cash acquired in merger transactions...................... -- 1,209
Proceeds from issuance of common stock and LLC shares..... 207,795 413,318
Other, net................................................ (12,858) --
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... 57,809 47,375
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (4,133) 264
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (65,160) (59,324)
Cash and cash equivalents at beginning of period............ 424,239 445,356
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 359,079 $ 386,032
========= =========
</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 July 27, 2000, USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers ("Styleclick.com"), completed the
merger of Internet Shopping Network ("ISN") and Styleclick.com (the "Styleclick
Transaction"). See Note 3.
On April 5, 2000, the Company acquired Precision Response Corporation
("PRC") (the "PRC 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.
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.
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.
- EMERGING NETWORKS, which primarily represents recently acquired cable
television properties Trio and News World International and SciFi.com, an
emerging Internet content and commerce site.
USA ELECTRONIC RETAILING
- ELECTRONIC RETAILING, consisting primarily of the Home Shopping Network
and America's Store, HSN International and HSN.com, 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.
6
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
- HOTEL RESERVATIONS, consisting of Hotel Reservations Network, a leading
consolidator of hotel rooms for resale in the consumer market in the
United States.
- 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 Styleclick, Inc. (see more information in
Note 3), a facilitator of e commerce websites and Internet enabled
applications and the Company's online retailing networks First Auction and
First Jewelry, and local city guide business.
- ELECTRONIC COMMERCE AND 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 nine months ended September 30, 1999 have been
reclassified to conform to the 2000 presentation, including all amounts charged
to customers for shipping and handling, which are now presented as revenue.
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.
7
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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--BUSINESS ACQUISITIONS
STYLECLICK TRANSACTION
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 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 agreed to contribute $10 million in dedicated media, and
received warrants to purchase additional shares of the new company. At closing,
Styleclick.com repaid the $10 million of borrowing outstanding under the bridge
loan.
The aggregate purchase price, including transaction costs, of
$211.9 million was determined as follows:
<TABLE>
<S> <C>
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USAi.......... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs..................................... 211,914
</TABLE>
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In conjunction with the transaction, the Company
recorded a pre-tax gain of $104.6 million based upon the 25% of ISN exchanged
for 75% of Styleclick.com.
The Styleclick 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
8
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
assets acquired of $170.5 million has been allocated to goodwill, which is being
amortized over 3 years. Assets and liabilities as of the acquisition date
consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Current assets.............................................. $39,095
Non-current assets.......................................... 4,039
Goodwill.................................................... 170,526
Current liabilities......................................... 1,746
Non-current liabilities..................................... --
</TABLE>
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 $711.1 million. 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 $649.8 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.................................................... 649,750
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"). 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
9
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
purchase agreement with the sellers of HRN's predecessor business entered into
in contemplation of the initial public offering, HRN agreed to issue HRN
class A common stock to the sellers in exchange for releasing the obligation to
make additional performance-based payments covering the twelve month periods
ending March 31, 2001 and 2002. HRN issued the sellers approximately
5.1 million shares of HRN class A common stock valued at $81.6 million. The
contingent payment for the twelve month period ending March 31, 2000 of
approximately $45.8 million has been paid. The payment resulted in additional
goodwill which is being 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 nine
months ended September 30, 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 $12.0 million to October Films shareholders
(other than Universal) for total consideration of $23.6 million. To fund the
cash consideration portion of the transaction, Universal purchased from USAi
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 September 30, 2000, approximately
$111.3 million had been offset against the advance and $13.6 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 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.
10
<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 nine months ended September 30, 2000 and 1999 is
presented to show the results of the Company as if the Styleclick Transaction,
the PRC Transaction, the Hotel Reservations Network Transaction and the October
Films/PFE Transaction had occurred on January 1, 1999. The pro forma results
reflect 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>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------- ------------------- ------------------- -------------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues......... $3,307,792 $1,115,164 $2,616,554 $885,465
Net loss............. (86,698) (19,486) (56,883) (5,674)
Basic and diluted
loss per share..... (.24) (.05) (.16) (.05)
</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 is 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 nine months ended September 30, 1999, the Company
recognized pre-tax gains of $39.5 and $89.7 million, respectively, on the sale
of securities in a publicly traded entity.
11
<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 NINE MONTHS ENDED
SEPTEMBER 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 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 January 31, 2000, TMCS completed its acquisition of 2b Technology, Inc.
("2b"), by issuing approximately 458,005 shares of TMCS Class B Common Stock for
all the outstanding stock of 2b, for a total value of approximately
$17.1 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 $711.1 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 $35.3 million.
For the three and nine months ended September 30, 2000, interest accrued on
the $200.0 million advance to Universal amounted to $2.0 million and
$6.9 million, respectively.
For the three and nine months ended September 30, 2000, the Company incurred
non-cash distribution and marketing expense of $2.7 million and $4.4 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.
During the third quarter, the Company realized a pre-tax loss of
$30.5 million related to the write-off of investments to fair value.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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 September 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.
On September 13, 1999, TMCS purchased all the outstanding limited liability
company units ("Units") of Web Media Ventures, L.L.C. ("Web Media"). Web Media
is an Internet personals company distributing its services through a network of
affiliated Internet sites. In connection with the acquisition, TMCS issued
1.2 million shares of Class B Common Stock in exchange for all of the Web Media
Units. In
12
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--STATEMENTS OF CASH FLOWS (CONTINUED)
addition, TMCS is obligated to issue additional contingent shares related to
certain revenue targets. The total purchase price recorded at September 13, 1999
was $36.6 million.
On September 18, 1999, the Company acquired certain assets associated with
the entertainment city guide (A&E) portion of the Sidewalk.com web site
("Sidewalk") from Microsoft Corporation ("Microsoft"). The Company also entered
into a four year distribution agreement with Microsoft pursuant to which the
Company became the exclusive provider of local city guide content on the
Microsoft Network ("MSN") and the Company's internet personals Web sites became
the premier provider of personals content to MSN. In addition, the Company and
Microsoft entered into additional cross-promotional arrangements. TMCS issued
Microsoft 7.0 million shares of TMCS Class B Common Stock. The fair value of the
consideration provided in exchange for the Sidewalk assets and distribution
agreement amounted to $338.5 million.
During the nine months ended September 30, 1999, the Company acquired
post-production equipment through a capital lease totaling $2.5 million.
NOTE 7--INDUSTRY SEGMENTS
For the three and nine months ended September 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 Emerging 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 Styleclick 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 Emerging
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, an emerging 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 Emerging networks. USA
Electronic Retailing consists of Electronic retailing. USA Information and
Services consists of Ticketing operations, Hotel reservations, Teleservices,
Interactive and Electronic commerce and services.
13
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
USA ENTERTAINMENT
Networks and television production............ $ 336,047 $307,094 $1,105,688 $ 955,032
Filmed entertainment.......................... 14,468 27,912 65,548 39,687
Broadcasting.................................. 5,263 2,341 13,620 5,691
Emerging networks............................. 8,591 266 12,862 693
USA ELECTRONIC RETAILING
Electronic retailing.......................... 426,549 314,718 1,243,756 941,467
USA INFORMATION AND SERVICES
Ticketing operations.......................... 124,929 105,188 395,909 324,615
Hotel reservations............................ 94,619 47,652 227,964 70,670
Teleservices.................................. 70,162 -- 140,374 --
Interactive................................... 26,709 16,333 76,331 43,851
Electronic commerce and services.............. 7,174 6,168 15,634 14,470
OTHER......................................... 509 -- 1,568 6,894
---------- -------- ---------- ----------
1,115,020 827,672 3,299,254 2,403,070
========== ======== ========== ==========
Operating profit (loss)
USA ENTERTAINMENT
Networks and television production............ $ 90,394 64,555 $ 312,371 223,170
Filmed entertainment.......................... (8,244) 904 (12,794) 262
Broadcasting.................................. (18,115) (11,525) (52,118) (36,609)
Emerging networks............................. (1,875) (787) (6,669) (1,885)
USA ELECTRONIC RETAILING
Electronic retailing.......................... 27,723 27,075 93,228 74,894
USA INFORMATION AND SERVICES
Ticketing operations.......................... 9,275 6,382 42,952 21,521
Hotel reservations............................ 1,899 1,500 3,650 2,159
Teleservices.................................. (1,597) -- (4,586) --
Interactive................................... (75,122) (42,563) (200,383) (103,551)
Electronic commerce and services.............. (7,451) 483 (19,961) 768
OTHER......................................... (8,761) (7,692) (42,282) (29,469)
One-time settlement of litigation............. (3,400) -- (3,400) --
---------- -------- ---------- ----------
$ 4,726 $ 38,332 $ 110,008 $ 151,260
========== ======== ========== ==========
</TABLE>
In the third quarter of 2000, the Company recorded a one-time charge of
$3.4 million for the settlement of litigation related to ticketing operations.
The settlement was reached on November 13, 2000 after a judgment was reached by
a jury on November 9, 2000.
14
<PAGE>
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INDUSTRY SEGMENTS (CONTINUED)
The Company operates principally within the United States.
NOTE 8--SAVOY SUMMARIZED FINANCIAL INFORMATION
The Company has not prepared separate financial statements and other
disclosures concerning Savoy Pictures, Inc., a subsidiary of the Company,
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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................ $4,632 $4,687
Operating expenses....................................... 1,408 4,882
Operating income (loss).................................. 3,224 (195)
Net income............................................... 4,165 3,258
</TABLE>
SUMMARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current assets...................................... $ 591 $ 191
Non-current assets.................................. 154,244 150,236
Current liabilities................................. 14,834 12,273
Non-current liabilities............................. 38,961 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 Home Shopping Network, Inc. ("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.
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)
The following tables present condensed consolidating financial information
for the three and nine months ended September 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 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
SEPTEMBER 30, 2000:
Current Assets.................. $ 5,372 $ -- $ 95,282 $ 979,448 $ 636,585 $ -- $ 1,716,687
Property and equipment, net..... -- -- 24,848 257,267 193,289 -- 475,404
Goodwill and other intangible
assets, net................... 74,217 -- -- 5,106,882 2,738,520 -- 7,919,619
Investment in subsidiaries...... 3,522,749 1,292,445 6,894,645 19,717 -- (11,729,556) --
Other assets.................... 114,580 -- 3,463 816,080 88,017 (522,757) 499,383
---------- ---------- ---------- ---------- ---------- ------------ -----------
TOTAL ASSETS.................... $3,716,918 $1,292,445 $7,018,238 $7,179,394 $3,656,411 $(12,252,313) $10,611,093
========== ========== ========== ========== ========== ============ ===========
Current liabilities............. $ -- $ -- $ -- $ 806,536 $ 444,652 $ (50,167) $ 1,201,021
Long-term debt, less current
portion....................... -- -- 517,981 1,243 53,225 -- 572,449
Other liabilities............... 214,985 -- 297,911 562,733 509,758 (1,190,733) 394,654
Minority interest............... -- -- 55,037 225,475 518,681 4,141,843 4,941,036
Interdivisional equity.......... -- -- -- 5,583,407 2,130,095 (7,713,502) --
Stockholders' equity............ 3,501,933 1,292,445 6,147,309 -- -- (7,439,754) 3,501,933
---------- ---------- ---------- ---------- ---------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY........... $3,716,918 $1,292,445 $7,018,238 $7,179,394 $3,656,411 $(12,252,313) $10,611,093
========== ========== ========== ========== ========== ============ ===========
STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue......................... $ -- $ -- $ -- $ 725,271 $ 390,819 $ (1,070) $ 1,115,020
Operating expenses.............. (3,353) -- (5,764) (638,380) (463,867) 1,070 (1,110,294)
Interest expense, net........... (7,718) -- 6,471 (7,798) (510) -- (9,555)
Other income, expense........... (8,348) 34,197 147,313 (45,915) (2,257) (55,083) 69,907
Income tax expense.............. (820) -- -- (12,719) (8,774) -- (22,313)
Minority interest............... -- -- -- (4,093) 28,315 (87,226) (63,004)
---------- ---------- ---------- ---------- ---------- ------------ -----------
NET (LOSS) INCOME............... $ (20,239) $ 34,197 $ 148,020 $ 16,366 $ (56,274) $ (142,309) $ (20,239)
========== ========== ========== ========== ========== ============ ===========
</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>
STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
Revenue............................... $ -- $ -- $ -- $2,227,887 $1,072,437 $ (1,070) $3,299,254
Operating expenses.................... (12,164) -- (29,627) (1,928,502) (1,220,023) 1,070 (3,189,246)
Interest expense, net................. (18,499) -- 16,260 (23,687) (1,030) -- (26,956)
Other income, expense................. (37,557) 78,571 382,640 (71,922) (5,689) (278,681) 67,362
Provision for income taxes............ 522 -- (27,351) (22,307) (23,677) -- (72,813)
Minority interest..................... -- -- -- (8,784) 72,060 (208,575) (145,299)
-------- ------- -------- ---------- ---------- --------- ----------
NET (LOSS) INCOME..................... $(67,698) $78,571 $341,922 $ 172,685 $ (105,922) $(487,256) $ (67,698)
======== ======= ======== ========== ========== ========= ==========
CASH FLOW FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Cash flow from (used in) operations... $(29,055) $ -- $ (2,018) $ 260,231 $ 27,455 $ -- $ 256,613
Cash flow provided (used in) investing
activities.......................... 9,870 -- (44,131) (179,513) (161,675) -- (375,449)
Cash flow from financing activities... 19,185 -- (63,944) (123,362) 225,930 -- 57,809
Effect of exchange rate............... -- -- -- (15) (4,118) -- (4,133)
Cash at beginning of period........... -- -- 276,678 (26,004) 173,565 -- 424,239
-------- ------- -------- ---------- ---------- --------- ----------
CASH AT END OF PERIOD................. $ -- $ -- $166,585 $ (68,663) $ 261,157 $ -- $ 359,079
======== ======= ======== ========== ========== ========= ==========
</TABLE>
<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
THREE MONTHS ENDED SEPTEMBER 30,
1999
Revenue............................. $ -- $ -- $ -- $ 628,677 $198,995 $ -- $ 827,672
Operating expenses.................. (1,035) -- (6,347) (558,517) (223,441) -- (789,340)
Interest expense, net............... (3,213) -- (2,763) (5,860) (386) -- (12,222)
Gain on sale of securities.......... -- -- -- 39,451 -- -- 39,451
Other income (expense), net......... 13,271 21,237 105,597 (18,722) 18,213 (140,105) (509)
Income tax expense.................. (16,703) -- -- (2,394) (5,850) -- (24,947)
Minority interest................... -- -- -- (2,815) 14,137 (59,107) (47,785)
-------- ------- -------- ---------- -------- --------- ----------
NET (LOSS) INCOME................... $ (7,680) $21,237 $ 96,487 $ 79,820 $ 1,668 $(199,212) $ (7,680)
======== ======= ======== ========== ======== ========= ==========
STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
Revenue............................. $ -- $ -- $ -- $1,918,476 $484,594 $ -- $2,403,070
Operating expenses.................. (8,333) -- (17,868) (1,686,459) (539,150) -- (2,251,810)
Interest expense, net............... (7,974) -- (13,672) (15,329) 39 -- (36,936)
Gain on sale of securities.......... -- -- -- 89,721 -- -- 89,721
Other income (expense), net......... 28,282 61,308 336,089 (26,716) 28,702 (425,679) 1,986
Income tax expense.................. (21,828) -- (21,898) (5,532) (16,044) -- (65,302)
Minority interest................... -- -- -- (8,368) 31,970 (174,184) (150,582)
-------- ------- -------- ---------- -------- --------- ----------
Net (loss) income................... $ (9,853) $61,308 $282,651 $ 265,793 $ (9,889) $(599,863) $ (9,853)
======== ======= ======== ========== ======== ========= ==========
</TABLE>
17
<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 NINE MONTHS ENDED
SEPTEMBER 30, 1999
Cash flow from operations........... $(39,534) $ -- $(24,076) $ 298,798 $ 14,244 $ -- $ 249,432
Cash flow from investing
activities........................ (370,727) -- (10,448) 36,543 (11,763) -- (356,395)
Cash flow from financing
activities........................ 410,261 -- 138,107 (471,389) (29,604) -- 47,375
Effect of exchange rate............. -- -- -- -- 264 -- 264
Cash at the beginning of period..... -- -- 151,160 75,511 218,685 -- 445,356
-------- ------- -------- ---------- -------- --------- ----------
CASH AT THE END OF THE PERIOD....... $ -- $ -- $254,743 $ (60,537) $191,826 $ -- 386,032
======== ======= ======== ========== ======== ========= ==========
</TABLE>
NOTE 10--SUBSEQUENT EVENTS
As disclosed on its Schedule 13D/A filed on October 23, 2000, the Company is
considering possible transactions in order to obtain the benefits of joint
operation of the ticketing and reservations businesses of TMCS and Ticketmaster
Corporation, a wholly owned subsidiary of the Company. These may include a
merger or other transaction that could involve the issuance to the Company of
additional shares of TMCS common stock. The Company has asked the TMCS Board to
appoint a committee of independent directors in connection with the foregoing
and such a committee has been appointed.
There can be no assurance that a transaction will occur, or what the terms
or form would be.
18
<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 Home Shopping Network, Inc. ("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.
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 "Styleclick Transaction"). The
Styleclick class A common stock is quoted on the Nasdaq Stock Market under the
symbol "IBUY". 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, the Company has augmented its media and
electronic commerce businesses by acquiring and developing several new
businesses. As a result, the changes resulting from the
19
<PAGE>
Styleclick transaction, 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 nine months ended
September 30, 2000 to September 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 Styleclick
transaction, 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1999
The Styleclick transaction, 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 September 30, 2000, revenues increased by
$287.3 million, or 34.7%, to $1.1 billion from $827.7 million in 1999 primarily
due to increases of $111.8 million, $70.2 million, $47.0 million, $29.0 million
and $19.7 million from the Electronic retailing, Teleservices, Hotel
reservations, Networks and television production and Ticketing operations
businesses, respectively.
For the nine months ended September 30, 2000, revenues increased by
$896.2 million, or 37.5%, to $3.3 billion from $2.4 billion in 1999 primarily
due to increases of $302.3 million, $157.3 million, $150.7 million,
$140.3 million and $71.3 million from the Electronic retailing, Hotel
reservations, Networks and television production, Teleservices and Ticketing
operations businesses, respectively.
OPERATING COSTS AND EXPENSES
For the three months ended September 30, 2000, operating expenses increased
by $317.6 million, or 40.2%, to $1.1 billion from $789.3 million in 1999,
primarily due to increases of $105.7 million, $59.0 million, $39.7 million, and
$20.9 million from the Electronic retailing, Teleservices, Hotel reservations,
Networks and television production, and Ticketing operations businesses,
respectively. In addition, depreciation and amortization expense increased
$58.0 million primarily as a result of goodwill arising from acquisitions.
For the nine months ended September 30, 2000, operating expenses increased
by $934.0 million, or 41.5%, to $3.2 billion from $2.3 billion in 1999,
primarily due to increases of $267.5 million, $132.5 million, $117.3 million,
$62.1 million and $60.2 million from the Electronic retailing, Hotel
reservations, Teleservices, Networks and television production and Ticketing
operations businesses, respectively. In addition, depreciation and amortization
expense increased $150.2 million primarily as a result of goodwill arising from
acquisitions. During the nine months ended September 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.
20
<PAGE>
OTHER INCOME (EXPENSE)
For the three and nine months ended September 30, 2000, net interest expense
decreased by $2.8 million and $10.0 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").
In the three months ended September 30, 2000, the Company realized a pre-tax
gain of $104.6 million based upon the exchange of 25% of ISN for 75% of Old
Styleclick in the Styleclick Transaction. Also, the Company realized a pre-tax
loss of $30.5 million related to the write-off of investments to fair value. In
the nine months ended September 30, 2000, the Company realized a pre-tax gain of
$3.7 million related to the initial public offering of its subsidiary, HRN. In
the three and nine months ended September 30, 1999, the Company realized pre-tax
gains of $39.5 million and $89.7 million, respectively, related to the sale of
securities. Furthermore, in the nine months ended September 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 nine months ended September 30,
2000 of 38.3% and 48.2%, 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. The rate would have been higher
if not for the impact of the one-time gain from the Styleclick merger and the
write-off of the investments to fair value.
MINORITY INTEREST
For the three and nine months ended September 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, the
public's ownership interest in HRN since February 25, 2000 and the public's
ownership interest in Styleclick since July 27, 2000.
PRO FORMA QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
VS. PRO FORMA QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
The following unaudited pro forma operating results of USAi present combined
results of operations as if the Styleclick transaction, 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.
21
<PAGE>
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES:
USA ENTERTAINMENT
Networks and television production.............. $ 336,047 $307,094 $1,105,688 $ 955,032
Filmed entertainment............................ 14,468 27,912 65,548 56,974
Broadcasting.................................... 5,263 2,341 13,620 5,691
Emerging networks............................... 8,591 266 12,862 693
USA ELECTRONIC RETAILING
Electronic retailing............................ 426,549 354,199 1,243,756 1,057,683
USA INFORMATION AND SERVICES
Ticketing operations............................ 124,929 105,188 395,909 324,615
Hotel reservations.............................. 94,619 47,652 227,964 108,371
Teleservices.................................... 70,162 57,006 210,023 153,344
Interactive..................................... 26,853 17,120 78,220 49,003
Electronic commerce and services................ 7,174 6,168 15,634 14,470
OTHER........................................... 509 -- 1,568 6,894
--------- -------- ---------- ---------
Total net revenues.......................... 1,115,164 924,946 3,370,792 2,732,770
--------- -------- ---------- ---------
Operating costs and expenses:
Cost of sales................................... 527,600 347,179 1,539,786 998,228
Program costs................................... 146,000 147,549 485,037 466,896
Selling and marketing........................... 141,842 129,720 401,976 378,050
General and administrative...................... 111,701 149,417 338,749 403,776
Other operating costs........................... 31,636 14,805 86,161 58,525
Amortization of non cash distribution and
marketing expense............................. 2,693 -- 4,414 --
Amortization of cable distribution fees......... 8,845 6,938 25,335 19,213
Depreciation and amortization................... 146,370 116,526 429,924 337,449
--------- -------- ---------- ---------
Total operating costs and expenses.......... 1,116,687 912,134 3,311,382 2,662,137
--------- -------- ---------- ---------
Operating profit.................................. $ (1,523) $ 12,812 $ 59,410 $ 70,633
========= ======== ========== =========
EBITDA............................................ $ 156,385 $136,276 $ 519,083 $ 427,295
========= ======== ========== =========
</TABLE>
Net revenues for the three months ended September 30, 2000 increased by
$190.2 million, or 20.6%, to $1.1 billion from $924.9 million in 1999. Cost
related to revenues and other costs and expenses for the three months ended
September 30, 2000 increased by $170.1 million, or 21.6%, to $958.8 million from
$788.7 million in 1999. In the third quarter of 2000, the Company recorded a
one-time charge of $3.4 million for the settlement of litigation related to
ticketing operations. The settlement was reached on November 13, 2000 after a
judgment was reached by a jury on November 9, 2000. EBITDA for the three months
ended September 30, 2000 increased by $20.1 million, or 14.7%, to
$156.4 million from $136.3 million in 1999.
Net revenues for the nine months ended September 30, 2000 increased by
$638.0 million, or 23.3%, to $3.4 billion from $2.7 billion in 1999. Cost
related to revenues and other costs and expenses for the nine months ended
September 30, 2000 increased by $546.2 million, or 23.7%, to $2.8 billion from
$2.3 billion in 1999. EBITDA for the nine months ended September 30, 2000
increased by $91.8 million, or 21.5%, to $519.1 million from $427.3 million in
1999.
22
<PAGE>
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 September 30, 2000 increased by
$29.0 million, or 9.4%, to $336.0 million from $307.0 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 television movies and increased production
for USA Network and the Sci-Fi Channel.
Net revenues for the nine months ended September 30, 2000 increased by
$150.7 million, or 15.8%, to $1.1 billion from $955.0 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 September 30, 2000 increased by $3.3 million, or 1.6%, to $217.6 million
from $214.3 million in 1999. This increase resulted primarily from higher
marketing costs offset partially by lower programming costs.
Cost related to revenues and other costs and expenses for the nine months
ended September 30, 2000 increased by $62.1 million, or 9.6%, to $709.1 million
from $647.0 million in 1999. This increase resulted primarily from marketing,
development and distribution costs.
EBITDA for the three months ended September 30, 2000 increased by
$25.6 million, or 27.6%, to $118.5 million from $92.8 million in 1999.
EBITDA for the nine months ended September 30, 2000 increased by
$88.6 million, or 28.7%, to $393.6 million from $308.0 million in 1999.
ELECTRONIC RETAILING
Net revenues for the three months ended September 30, 2000 increased by
$72.3 million, or 20.4%, to $426.5 million from $354.2 million in 1999. The
increase primarily resulted from Home Shopping Network's core domestic business,
which generated increased sales of $52.4 million, including HSN.com, which began
operations in late 1999 and generated sales of $8.6 million. Also, core
international business increased $14.3 million due to operations in Germany,
which generated revenue of $53.8 million. The increase in net revenues was
offset partially from an increase in the return rate to 20.2% from 19.1% in
1999.
Net revenues for the nine months ended September 30, 2000 increased by
$186.1 million, or 17.6%, to $1.2 billion from $1.1 billion in 1999. The
increase primarily resulted from Home Shopping Network's core domestic business,
which generated increased sales of $136.0 million due primarily to the increase
from the Home Shopping service of $106.8 million and HSN.com, which generated
revenue of $20.5 million. Also, core international business increased
$46.0 million due primarily to operations in Germany.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $70.0 million, or 23.2%, to
$372.0 million from $302.0 million in 1999. The increase resulted primarily from
higher sales volume. The on-air gross profit margin decreased to 34.7% as
compared to 35.4% in the prior year.
Cost related to revenues and other costs and expenses for the nine months
ended September 30, 2000 increased by $160.6 million, or 17.6%, to $1.1 billion
from $912.0 million in 1999. The increase resulted primarily from higher sales
volume.
23
<PAGE>
EBITDA for the three months ended September 30, 2000 increased by
$2.4 million, or 4.5%, to $54.5 million from $52.1 million in 1999.
EBITDA for the nine months ended September 30, 2000 increased by
$25.5 million, or 17.5%, to $171.2 million from $145.7 million in 1999.
TICKETING OPERATIONS
Net revenues for the three months ended September 30, 2000 increased by
$19.7 million, or 18.8%, to $124.9 million from $105.2 million in 1999. The
increase resulted from an increase of 14.8% in the number of tickets sold,
including an increase in the percentage of tickets sold online to 25.2% from
15.0% in 1999, and an increase in revenue per ticket to $5.67 from $5.34 in
1999.
Net revenues for the nine months ended September 30, 2000 increased by
$71.3 million, or 22.0%, to $395.9 million from $324.6 million in 1999. The
increase resulted from an increase in the number of tickets sold and an increase
in revenue per ticket.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $24.3 million, or 29.0%, to
$108.3 million from $84.0 million in 1999. The increase resulted primarily from
higher ticketing operations costs as a result of higher ticketing volume and
increased secondary commissions. In the third quarter of 2000, the Company
recorded a one-time charge of $3.4 million for the settlement of litigation. The
settlement was reached on November 13, 2000 after a judgment was reached by a
jury on November 9, 2000.
Cost related to revenues and other costs and expenses for the nine months
ended September 30, 2000 increased by $63.6 million, or 24.8%, to
$320.3 million from $256.7 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 September 30, 2000 decreased by
$4.6 million, or 21.7%, to $16.7 million from $21.3 million in 1999. The
decrease is due primarily to costs related to recent acquisitions, including
TicketWeb and 2b Technology and the litigation settlement. Excluding the
one-time litigation settlement, EBITDA decreased $1.2 million, or 5.7%.
EBITDA for the nine months ended September 30, 2000 increased by
$7.7 million, or 11.3%, to $75.6 million from $67.9 million in 1999. Excluding
the one-time litigation settlement, EBITDA increased $11.1 million, or 16.3%.
TELESERVICES
Net revenues for the three months ended September 30, 2000 increased by
$13.2 million, or 23.1%, to $70.2 million from $57.0 million in 1999. The
increase resulted from growth of new business, as PRC reduced its concentration
of its top ten revenue-producing clients to 65% from 70% in the year-ago period.
Net revenues for the nine months ended September 30, 2000 increased by
$56.7 million, or 37.0%, to $210.0 million from $153.3 million in 1999 due to
the growth of new business.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $10.3 million, or 21.2%, to $59.0 million
from $48.7 million in 1999 due primarily to increased operations.
Cost related to revenues and other costs and expenses for the nine months
ended September 30, 2000 increased by $44.8 million, or 33.7%, to
$177.5 million from $132.8 million in 1999.
EBITDA for the three months ended September 30, 2000 increased by
$2.8 million, or 34.4%, to $11.1 million from $8.3 million in 1999.
24
<PAGE>
EBITDA for the nine months ended September 30, 2000 increased by
$11.9 million, or 57.9%, to $32.5 million from $20.6 million in 1999.
INTERACTIVE
Net revenues for the three months ended September 30, 2000 increased by
$9.7 million, or 56.9%, to $26.9 million from $17.1 million in 1999. The
increase primarily resulted from an increase in online city guide and
sponsorship revenue of $11.9 million, or 123%, due to the growth in its combined
reach among home and work users to 9.7% (7.8 million unique users) due to the
expansion into new cities as well as the expansion into the online personals
business. The increase was partially offset due to lower revenues of Styleclick
as a result of an effort to change the sales mix from less profitable categories
and lower marketing efforts due to the planned re-launch of the First Auction
site planned for late 2000.
Net revenues for the nine months ended September 30, 2000 increased by
$29.2 million, or 59.6%, to $78.2 million from $49.0 million in 1999. The
increase primarily resulted from an increase in online city guide and
sponsorship revenue of $36.4 million, or 162%, due to expansion into new cities
and expansion into the online personals business. The increase was offset by
lower revenues of Styleclick.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $2.3 million, or 4.8%, to $49.9 million
from $47.6 million in 1999. The increase resulted primarily from increased costs
of city guide revenue, costs to expand the local city guides into new markets
and costs related to the online personal business. The costs were offset by
lower marketing expenses for Styleclick.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $36.0 million, or 28.9%, to
$160.6 million from $125.6 million in 1999.
EBITDA loss for the three months ended September 30, 2000 increased by
$7.4 million, or 24.4%, to $23.0 million from $30.5 million in 1999.
EBITDA loss for the nine months ended September 30, 2000 increased by
$6.8 million, or 9.03%, to $82.4million from $75.6 million in 1999.
HOTEL RESERVATIONS
Net revenues for the three months ended September 30, 2000 increased by
$47.0 million, or 98.6%, to $94.6 million from $47.6 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 118% more cities as
compared to the prior year. The number of room nights sold increased 92% as
compared to the prior year. Internet generated sales for the three months ended
September 30, 2000 increased to 94% in 2000 from 85% in 1999.
Net revenues for the nine months ended September 30, 2000 increased by
$119.6 million, or 110.4%, to $228.0 million from $108.4 million in 1999.
Cost related to revenues and other costs and expenses for the three months
ended September 30, 2000 increased by $39.7 million, or 96.7%, to $80.7 million
from $41.0 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 September 30, 2000 increased by $100.4 million, or 108.5%, to
$193.0 million from $92.6 million in 1999.
25
<PAGE>
EBITDA for the three months ended September 30, 2000 increased by
$7.3 million, or 110.4%, to $13.9 million from $6.6 million in 1999.
EBITDA for the nine months ended September 30, 2000 increased by
$19.2 million, or 121.2%, to $35.0 million from $15.8 million in 1999.
FILMED ENTERTAINMENT
Net revenues for the three months ended September 30, 2000 decreased by
$13.4 million, or 48.2%, to $14.5 million compared to $27.9 million in 1999 due
to fewer theatrical releases, while net revenues for the nine months ended
September 30, 2000 increased by $8.6 million, or 15.0%, to $65.5 million
compared to $56.7 million in 1999. Cost related to revenues and other costs and
expenses for the three and nine months ended September 30, 2000 decreased by
$5.9 million due to the lower revenues. Cost related to revenues and other costs
and expenses for the nine months ended September 30, 2000 increased by
$16.4 million. EBITDA loss for the three and nine months ended September 30,
2000 increased by $7.6 million and $7.8 million, respectively.
ELECTRONIC COMMERCE AND SERVICES
Net revenues for the three months ended September 30, 2000 increased by
$1.0 million, or 16.3%, to $7.2 million compared to $6.2 million in 1999 due to
increases in ECS teleservices and Short Shopping contextual selling spots,
including spots during USA Network's coverage of the US Open. Net revenues for
the nine months ended September 30, 2000 increased by $1.2 million, or 8.0%, to
$15.6 million compared to $14.5 million in 1999. Cost related to revenues and
other costs and expenses for the three and nine months ended September 30, 2000
increased by $9.5 million and $21.8 million due primarily from start-up costs
incurred to launch the business initiatives and other overhead expenses. EBITDA
loss for the three and nine months ended September 30, 2000 increased by
$8.5 million and $20.6 million, respectively.
BROADCASTING
Net revenues increased by $2.9 million to $5.3 million from $2.4 million for
the three months ended September 30, 2000 and $7.9 million to $13.6 million from
$5.7 million for the nine months ended September 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 and Boston in August 2000.
Cost related to revenue increased by $7.0 million and $18.8 million for the
three and nine months ended September 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.
EMERGING NETWORKS
Net revenues increased by $8.3 million to $8.6 million from $0.3 million for
the three months ended September 30, 2000 and $12.2 million to $12.9 million
from $0.7 million for the nine months ended September 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 $7.8 million and
$14.9 million for the three and nine months ended September 30, 2000 as compared
to the respective periods in 1999. EBITDA loss for the three and nine months
ended September 30, 2000 decreased by $0.4 million and increased by
$2.7 million, as compared to the respective periods in 1999.
OTHER
Other revenue for 2000 relates to Ingenious Designs, a business acquired in
2000. Other revenue for 1999 relates to a business that was sold in 1999.
26
<PAGE>
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $256.6 million for the nine
months ended September 30, 2000 compared to $249.4 million for the nine months
ended September 30, 1999. These cash proceeds and available cash and borrowings
were used to pay for acquisitions of $203.0 million, to make capital
expenditures of $116.5 million, and to make mandatory tax distribution payments
to the LLC partners of $68.1 million.
On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers, completed the merger of 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
agreed to contribute $10 million in dedicated media, and received 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.
On April 5, 2000, the Company acquired 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 million 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
September 30, 2000.
Pursuant to an agreement between USAi and the sellers of the two entities
which operated HRN, USAi made a contingent payment of $58.3 million in the nine
months ended September 30, 2000. The payments were based on the results of HRN
for the three month period ended December 31, 1999 and the twelve month period
ending March 31, 2000. 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 agreed to 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 September 30, 2000, approximately $111.3 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 nine months ended
27
<PAGE>
September 30, 2000, the Company purchased 5.8 million shares of its common stock
for aggregate consideration of $129.9 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 September 30, 2000, there was
$597.3 million available for borrowing after taking into account outstanding
letters of credit.
USAi implemented its plan to disaffiliate its television stations in the
Miami/Ft. Lauderdale, Dallas and the Atlanta markets in prior years. In 2000,
the Boston station was disaffiliated. 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 to maximize the value of the broadcasting stations, rather than have a
material adverse effect.
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 nine months ended September 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.
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
28
<PAGE>
financial instruments in its investment portfolio. The Company has a prescribed
methodology whereby it invests its excess cash in debt instruments of government
agencies and high quality corporate issuers. To further mitigate risk, the vast
majority of the securities have a maturity date within 60 days. The portfolio is
reviewed on a periodic basis and adjusted in the event that the credit rating of
a security held in the portfolio has deteriorated.
At September 30, 2000, the Company's outstanding debt approximated
$599.7 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 September 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.
29
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Jovon litigation, previously reported in the Company's Form 10-K for
the year ended December 31, 1999 and the Company's Form 10-Q for the quarterly
period ended March 31, 2000, the Federal Communications Commission released on
October 6, 2000 a Memorandum Opinion and Order confirming that the Company could
have used an insulated trust mechanism to exercise the option. The FCC again
stated that the validity of the option agreement was a matter for determination
by the state courts. Oral argument occurred before the Court of Appeal for the
Second District of Florida on October 25, 2000.
In the Urban litigation, previously reported in the Company's Form 10-K for
the year ended December 31, 1999 and the Company's Form 10-Qs for the quarterly
periods ended March 31, 2000 and June 30, 2000, USA Station Group of
Virginia, Inc. ("USA-SGV") filed motions on August 3, 2000 requesting the Court
to: (a) transfer venue of Urban's bankruptcy case from the U.S. Bankruptcy Court
for the District of Columbia to the U.S. Bankruptcy Court for the Eastern
District of Virginia, and (b) appoint a Chapter 11 trustee for Urban. The U.S.
Bankruptcy Court for the District of Columbia granted USA-SGV's motion to
transfer venue, and an evidentiary hearing on USA-SGV's motion for entry of an
order directing appointment of a Chapter 11 trustee for Urban is scheduled to
occur before the Bankruptcy Court for the Eastern District of Virginia on
November 29, 2000.
In the Ticketmaster Consumer Class Action litigation previously reported in
the Company's Form 10-K for the year ended December 31, 1999, 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 Ticketmaster Cash Discount Litigation previously reported in the
Company's Form 10-K for the year ended December 31, 1999 and the Company's
Form 10-Q for the quarterly period ended March 31, 2000, the plaintiff filed an
amended class action petition in Texas state court on June 20, 2000 asserting as
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 that
all consumers using VISA and Mastercard to purchase tickets from Ticketmaster
are third-party beneficiaries of this agreement. 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 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. The hearing on this motion to
remand has been continued without date.
In the N2K litigation previously reported in the Company's Form 10-Q for the
quarterly period ended March 31, 2000, the parties entered into a settlement
agreement, dated as of November 13, 2000, pursuant to which all claims were
released with prejudice. The settlement does not have a material adverse effect
on the Company.
On July 23, 1999, Ticketmaster Corporation and Ticketmaster
Online-Citysearch, Inc. ("TMCS", and together with the Ticketmaster Corporation,
the "TM plaintiffs") filed a complaint for damages and injunctive relief against
Tickets.com, Inc. ("Tickets.com") in the United States District Court, Central
District of California, entitled TICKETMASTER CORPORATION AND TICKETMASTER
ONLINE-CITYSEARCH, INC. V. TICKETS.COM, INC., Case No. 99-07654 HLH. The
complaint claims that Tickets.com violates the TM plaintiffs'
30
<PAGE>
legal and contractual rights by, among other things, (i) trespassing on their
web sites, (ii) providing deep-links to their internal web pages without their
consent, (iii) systematically, deceptively and intentionally accessing their
computers and computer systems and copying verbatim their event pages daily and
extracting and reprinting their Uniform Resource Locators ("URLs") and event
data and information in complete form on Tickets.com's web site and
(iv) providing false and misleading information about them, the availability of
tickets on their web sites, and the relationship between them and Tickets.com.
On January 7, 2000, the TM plaintiffs filed an amended complaint. Tickets.com
filed a motion to dismiss the amended complaint on or about February 23, 2000,
claiming that Tickets.com did not violate the Copyright Act or Lanham Act and
that TM plaintiffs' state law claims were preempted and/or did not state a valid
claim for relief. The Court denied Tickets.com's motion as to TM plaintiffs'
claims for copyright infringement, violations of the Lanham Act, state law,
unfair competition and interference with prospective economic advantage. The
Court granted Tickets.com's motion as to TM plaintiffs' claims for breach of
contract, trespass, unjust enrichment and misappropriation, but gave TM
plaintiffs leave to amend. TM plaintiffs filed a second amended complaint on
April 21, 2000.
On March 3, 2000, TM plaintiffs filed a motion for preliminary injunction,
requesting the Court to enjoin Tickets.com from, among other things,
deep-linking to TM plaintiffs' internal web pages, accessing their computers and
computer systems and copying their event pages, and providing misleading and
false information about them, the availability of tickets on their web sites and
the relationship between them and Tickets.com. On July 31, 2000 the Court held a
hearing, and on August 11, 2000 issued a ruling denying TM plaintiffs' motion
for preliminary injunction. On October 20, 2000, TM plaintiffs filed an appeal
of the denial of their request for a preliminary injunction with the Court of
Appeals for the Ninth Circuit. No hearing on that appeal has yet been set.
On May 30, 2000, Tickets.com filed its answer to TM plaintiffs' second
amended complaint in addition to counterclaims against TM plaintiffs.
Tickets.com alleges claims for relief against TM plaintiffs for violations of
the Sherman Act, sections 1 and 2, violations of California's Cartwright Act,
violations of California's Business and Professions Code section 17200,
violations of common law restraint of trade and unfair competition and business
practices, interference with contract and declaratory relief. Tickets.com claims
that Ticketmaster Corporation's exclusive agreements with TMCS, venues,
promoters and other third parties injure competition, violate antitrust laws,
constitute unfair competition and interfere with Tickets.com's prospective
economic advantages. On July 19, 2000, TM plaintiffs filed a motion to dismiss
any claim based in whole or in part on TM plaintiffs' alleged litigation conduct
as well as Tickets.com's ninth claim for relief under California's antitrust
laws (the Cartwright Act). On September 25, 2000 that motion was denied. On
October 24, 2000, TM plaintiffs filed their answer to Tickets.com's. TM
plaintiffs intend to vigorously defend this litigation.
In the MovieFone litigation previously reported in the Company's 10-K for
the year ended December 31, 1999, the parties entered into a settlement
agreement, dated as of August 11, 2000, pursuant to which all claims were
released with prejudice. The settlement does not have a material adverse effect
on the Company.
In the Home Shopping Network Consumer Class Action litigation previously
reported in the Company's Form 10-K for the year ended December 31, 1999, the
plaintiffs filed an amended class action complaint that, among other things:
(i) added an additional named plaintiff, (ii) added Home Shopping Club LP,
Warrantech Helpdesk, Inc., Banctech Service, Inc. and Timespace Internet, Inc.
as named defendants, and (iii) 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 additional causes of action for negligent
misrepresentation and breach of contract. The HSN Defendants have filed an
answer and
31
<PAGE>
affirmative defenses to the second amended complaint and intend to continue to
vigorously defend this action.
In the World Wrestling Federation litigation, previously reported in the
Company's Form 10-Qs for the quarterly periods ended March 31, 2000 and
June 30, 2000, the Delaware Supreme Court on September 18, 2000 ruled against
USA Cable on appeal of the decision of the Chancery Court. In the opinion of
management, this outcome will not have a material adverse effect on the Company.
In the Marketingworks, Inc. litigation previously reported in the Company's
Form 10-K for the year ended December 31, 1999, a status conference was held on
October 30, 2000, at which time a trial date of July 3, 2001 was scheduled. In
January 2000, Universal/USA removed the case to Federal Court on the basis of
copyright preemption and as a result of the fact that Marketingworks sought
Federal remedies under the Lanham Act. Although discovery is not yet complete,
based on information revealed thus far to Universal/USA, the Company believes
this claim is unlikely to present a material liability to the Company.
On August 25, 2000, RTL Plus Deutschland Fernsehen GMBH & Co. Betriebs-KG,
Companie Luxembourgeoise de Telediffusion S.A. and UFA Film--Und Fernseh-GMBH &
Co. KG (collectively "RTL") filed a complaint in the Netherlands against
Universal Studios International B.V. ("USI"). USI, the international
distribution entity of Universal Studios, Inc., has the rights, subject to
various exemptions, to distribute internationally certain television programs
owned by Studios USA and other USAi entities. The complaint involves a 10-year
"output" agreement between RTL and USI, signed July 30, 1996, pursuant to which,
among other things, certain television programs owned by Studios USA and other
USAi entities are distributed in Germany (the "RTL Output Agreement"). The RTL
Output Agreement also includes "co-production" provisions under which RTL
acquires an equity interest in certain programs. The complaint, based on
equitable doctrines of "mistake of fact" and "unforseen circumstances," requests
the court to modify or nullify RTL's licensing and "co-production" obligations
with respect to current television programs. USI currently has until
November 22, 2000 to respond to the complaint. Studios USA and its affiliated
companies are not parties to the RTL Output Agreement and currently not parties
to the pending proceeding. Studios USA and its affiliated entities believe the
RTL complaint to be without merit, and intend to vigorously protect their
interests.
The Company is engaged in various other lawsuits either as plaintiff or
defendant. In the opinion of management, the ultimate outcome of these various
lawsuits should not have a material impact on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.1* Employment Agreement, dated September 21, 2000, between USA
Networks, Inc. and Dara Khosrowshahi
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
32
<PAGE>
On October 26, 2000, USAi furnished a report on Form 8-K reporting under
Item 9, Regulation FD Disclosure, attaching a press release announcing its
results for the quarter ended September 30, 2000 and forward-looking financial
information.
On October 27, 2000, USAi furnished a report on Form 8-K reporting under
Item 9, Regulation FD Disclosure, providing an overview of the company and
supplemental information.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
USA NETWORKS, INC.
By: /s/ BARRY DILLER
-------------------------------------
Barry Diller
Chairman and Chief
Executive Officer
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BARRY DILLER
------------------------------- Chairman of the Board and Chief November 14, 2000
Barry Diller Executive Officer
/s/ MICHAEL SILECK Senior Vice President,
------------------------------- Chief Financial Officer November 14, 2000
Michael Sileck Principal Financial Officer)
/s/ WILLIAM J. SEVERANCE
------------------------------- Vice President and Controller November 14, 2000
William J. Severance (Chief Accounting Officer)
</TABLE>
34
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production............. $336,047 $307,094 $1,105,688 $ 955,032
Electronic retailing........................... 426,549 314,718 1,243,756 941,467
Interactive.................................... 5,147 6,660 17,555 21,489
Electronic commerce and services............... 2,524 543 5,121 1,731
Emerging networks.............................. 8,591 266 12,862 693
Other.......................................... 509 -- 1,568 6,894
-------- -------- ---------- ----------
Total net revenues........................... 779,367 629,281 2,386,550 1,927,306
-------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales.................................. 280,851 206,406 823,741 634,100
Program costs.................................. 146,000 147,549 485,037 466,896
Selling and marketing.......................... 97,940 74,121 280,928 209,859
General and administrative..................... 72,022 60,080 227,121 173,876
Other operating costs.......................... 33,391 22,081 90,343 66,400
Amortization of cable distribution fees........ 8,845 6,938 25,335 19,214
Depreciation and amortization.................. 58,971 44,058 154,945 130,620
-------- -------- ---------- ----------
Total operating costs and expenses........... 698,020 561,233 2,087,450 1,700,965
-------- -------- ---------- ----------
Operating profit............................. 81,347 68,048 299,100 226,341
Other income (expense):
Interest income................................ 5,283 12,636 19,195 31,959
Interest expense............................... (6,329) (21,066) (24,807) (61,685)
Gain on sale of securities..................... -- 39,451 -- 89,721
Other, net..................................... 70,575 (779) 66,567 879
-------- -------- ---------- ----------
69,529 30,242 60,955 60,874
-------- -------- ---------- ----------
Earnings before income taxes and minority
interest......................................... 150,876 98,290 360,055 287,215
Income tax expense............................... (34,205) (18,080) (76,498) (52,234)
Minority interest................................ (82,474) (58,973) (204,986) (173,673)
-------- -------- ---------- ----------
NET EARNINGS..................................... $ 34,197 $ 21,237 $ 78,571 $ 61,308
======== ======== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
35
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 135,335 $ 247,474
Accounts and notes receivable, net of allowance of $48,734
and $33,317, respectively................................. 453,277 381,175
Inventories, net............................................ 553,677 432,520
Investments held for sale................................... 2,062 --
Deferred income taxes....................................... -- 12,077
Other current assets, net................................... 28,267 8,542
---------- ----------
Total current assets........................................ 1,172,618 1,081,788
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 133,148 123,606
Buildings and leasehold improvements........................ 66,050 59,074
Furniture and other equipment............................... 71,249 67,246
Land........................................................ 10,275 10,246
Projects in progress........................................ 19,948 31,736
---------- ----------
300,670 291,908
Less accumulated depreciation and amortization.............. (66,643) (79,350)
---------- ----------
234,027 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,204,280 5,029,769
Cable distribution fees, net ($30,235 and $35,181,
respectively, to related parties)......................... 146,155 130,988
Long-term investments....................................... 37,272 93,742
Notes and accounts receivable, net ($3,283 and $2,562,
respectively, from related parties)....................... 29,121 19,506
Inventories, net............................................ 182,422 154,497
Advances to USAI and subsidiaries........................... 443,098 410,107
Deferred income taxes....................................... 70,308 61,755
Deferred charges and other, net............................. 39,494 36,934
---------- ----------
$7,558,795 $7,231,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 20,829 $ 3,758
Accounts payable, trade..................................... 139,149 147,864
Obligations for program rights and film costs............... 295,561 265,235
Cable distribution fees payable ($18,431 and $18,733,
respectively, to related parties)......................... 28,993 43,993
Deferred revenue............................................ 63,684 47,536
Deferred income taxes....................................... 13,383 --
Other accrued liabilities................................... 357,267 271,846
---------- ----------
Total current liabilities................................... 918,866 780,232
LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 525,406 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF
CURRENT................................................... 279,260 256,260
OTHER LONG-TERM LIABILITIES................................. 76,602 81,156
MINORITY INTEREST........................................... 4,466,216 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 earnings........................................... 11,225 50,823
Accumulated other comprehensive income...................... (10,500) --
---------- ----------
Total stockholders' equity.................................. 1,292,445 1,342,543
---------- ----------
$7,558,795 $7,231,644
========== ==========
</TABLE>
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 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 nine months
ended September 30, 2000....... 78,571 -- -- 78,571 --
Foreign currency translation..... (2,521) (2,521)
Increase in unrealized gains in
available for sale
securities..................... (7,979) -- -- -- (7,979)
----------
Comprehensive income........... 68,071
Mandatory tax distribution to LLC
partners......................... (118,169) -- -- (118,169) --
---------- ---------- ------- --------- --------
Balance at September 30, 2000...... $1,292,445 $1,221,408 $70,312 $ 11,225 $(10,500)
========== ========== ======= ========= ========
</TABLE>
Comprehensive income for the three months ended September 30, 2000 was $27,025.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
37
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 78,571 $ 61,308
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 154,945 130,620
Amortization of cable distribution fees................... 25,335 19,214
Amortization of program rights and film costs............. 428,537 391,088
Gain on sale of subsidiary stock.......................... (104,625) --
Gain on sale of securities................................ -- (89,721)
Non-cash compensation..................................... 5,954 1,890
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 38,260 754
Minority interest......................................... 204,986 173,673
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (67,348) 16,205
Inventories............................................... (1,615) 375
Accounts payable.......................................... (28,228) (43,174)
Accrued liabilities and deferred revenue.................. 103,126 60,120
Payment for program rights and film costs................. (528,053) (410,500)
Increase in cable distribution fees....................... (39,251) (35,624)
Other, net................................................ 20,430 4,082
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 291,024 280,310
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (107,934) (7,500)
Capital expenditures........................................ (49,247) (43,781)
Increase in long-term investments and notes receivable...... (21,769) (12,750)
Proceeds from sale of securities............................ -- 107,231
Other, net.................................................. (2,806) 6,221
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (181,756) 49,421
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 50,029 --
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (44,890) (252,182)
Repurchase of LLC shares.................................... (129,907) (7,226)
Proceeds from issuance of LLC shares........................ 216,493 401,319
Advances to USAi and subsidiaries........................... (181,052) (457,864)
Other....................................................... (13,309) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................... (220,805) (368,708)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (602) --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (112,139) (38,977)
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 135,335 $ 195,926
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
38
<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").
On July 27, 2000, the Company and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers ("Styleclick.com"), completed the
merger of Internet Shopping Network ("ISN") and Styleclick.com (the "Styleclick
Transaction"). See Note 3.
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 focused on
the new convergence of entertainment, information and direct selling.
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, HSN International and HSN.com, which are
engaged in the electronic retailing business.
- Interactive, which includes Styleclick, Inc. (see Note 3 for more
information), a facilitator of e-commerce websites and Internet enabled
applications, and the Company's online retailing networks First Auction
and First Jewelry.
- Electronic commerce and services, which primarily represents the Company's
customer and e-care businesses.
- Emerging networks, which primarily represents recently acquired cable
television properties Trio and News World International, and SciFi.com, an
emerging 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 twelve months ended
December 31, 1999. Certain amounts in the Condensed Consolidated Financial
Statements for the three and nine months ended September 30, 1999 have been
39
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
reclassified to conform to the 2000 presentation, including all amounts charged
to customers for shipping and handling, which are now presented as revenue.
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--BUSINESS ACQUISITIONS
STYLECLICK TRANSACTION
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 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 agreed to contribute $10 million in dedicated media, and
received warrants to purchase additional shares of the new company. At closing,
Styleclick.com repaid the $10 million of borrowing outstanding under the bridge
loan.
40
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
The aggregate purchase price, including transaction costs, of
$211.9 million was determined as follows:
<TABLE>
<S> <C>
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USAi.......... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs................................... $211,914
========
</TABLE>
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In conjunction with the transaction, the Company
recorded a pre-tax gain of $104.6 million based upon the 25% of ISN exchanged
for 75% of Styleclick.com.
The Styleclick 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 $170.5 million has been allocated to goodwill, which is being
amortized over 3 years. Assets and liabilities as of the acquisition date
consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Current assets.............................................. $ 39,095
Non-current assets.......................................... 4,039
Goodwill.................................................... 170,526
Current liabilities......................................... 1,746
Non-current liabilities..................................... --
</TABLE>
The following unaudited pro forma condensed consolidated financial
information for the three and nine months ended September 30, 2000 and 1999 is
presented to show the results of the Company as if the Styleclick Transaction
had occurred on January 1, 1999. The pro forma results reflect certain
adjustments, including increased amortization related to goodwill and other
intangibles, and are not necessarily indicative of what the results would have
been had the transactions actually occurred on January 1, 1999.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues............... $2,388,439 $779,511 $1,932,458 $630,068
Net income................. 58,021 31,116 49,642 16,574
</TABLE>
41
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--INVESTMENTS
During the quarter and nine months ended September 30, 1999, the Company
recognized pre-tax gains of $39.5 and $89.7 million, respectively, on the sale
of securities in a publicly traded entity.
NOTE 5--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999:
During the nine months ended September 30, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.5 million.
NOTE 6--INDUSTRY SEGMENTS
For the three and nine months ended September 30, 2000 and 1999, the Company
operated principally in five industry segments: Networks and television
production, Electronic retailing, Interactive, Electronic commerce and services
and Emerging 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 Styleclick. The Electronic commerce and services segment primarily
represents the Company's customer and e-care businesses. The Emerging networks
segment
42
<PAGE>
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--INDUSTRY SEGMENTS (CONTINUED)
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
emerging Internet content and commerce site.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Networks and television production............. $336,047 $307,094 $1,105,688 $ 955,032
Electronic retailing........................... 426,549 314,718 1,243,756 941,467
Internet services.............................. 5,147 6,660 17,555 21,489
Electronic commerce and services............... 2,524 543 5,121 1,731
Emerging networks.............................. 8,591 266 12,862 693
Other.......................................... 509 -- 1,568 6,894
-------- -------- ---------- ----------
$779,367 $629,281 $2,386,550 $1,927,306
======== ======== ========== ==========
Operating profit (loss)
Networks and television production............. $ 90,394 $ 64,555 $ 312,371 $ 223,170
Electronic retailing........................... 21,949 20,553 73,769 55,036
Internet services.............................. (15,970) (9,167) (37,382) (27,815)
Electronic commerce and services............... (4,315) (645) (12,260) (1,576)
Emerging networks.............................. (2,907) (787) (6,669) (1,885)
Other.......................................... (7,804) (6,461) (30,729) (20,589)
-------- -------- ---------- ----------
$ 81,347 $ 68,048 $ 299,100 $ 226,341
======== ======== ========== ==========
</TABLE>
The Company operating principally within the United States.
NOTE 7--GUARANTEE OF NOTES
USAi issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi
LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of USAi,
including the Company and all of the subsidiaries of USANi LLC (other than
subsidiaries that are, individually and in the aggregate, inconsequential to
USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors").
All of the Subsidiary Guarantors (other than the Company) (the "Wholly Owned
Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company
or USANi LLC, as the case may be.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because the
Company's management has determined that the information contained in such
documents would not be material to investors.
43
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Networks and television production............. $336,047 $307,094 $1,105,688 $ 955,032
Electronic retailing........................... 426,549 314,718 1,243,756 941,467
Interactive.................................... 5,147 6,660 17,555 21,489
Electronic commerce and services............... 2,524 543 5,121 1,731
Emerging networks.............................. 8,591 266 12,862 693
Other.......................................... 509 -- 1,568 6,894
-------- -------- ---------- ----------
Total net revenues........................... 779,367 629,281 2,386,550 1,927,306
-------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales.................................. 280,851 206,406 823,741 634,100
Program costs.................................. 146,000 147,549 485,037 466,896
Selling and marketing.......................... 97,940 74,121 280,928 209,859
General and administrative..................... 72,022 60,080 227,121 173,876
Other operating costs.......................... 33,391 22,081 90,343 66,400
Amortization of cable distribution fees........ 8,845 6,938 25,335 19,214
Depreciation and amortization.................. 58,971 44,058 154,945 130,620
-------- -------- ---------- ----------
Total operating costs and expenses........... 698,020 561,233 2,087,450 1,700,965
-------- -------- ---------- ----------
Operating profit............................. 81,347 68,048 299,100 226,341
Other income (expense):
Interest income................................ 5,283 12,636 19,195 31,959
Interest expense............................... (6,329) (21,066) (24,807) (61,685)
Gain on sale of securities..................... -- 39,451 -- 89,721
Other, net..................................... 70,575 (779) 66,567 879
-------- -------- ---------- ----------
69,529 30,242 60,955 60,874
-------- -------- ---------- ----------
Earnings before income taxes and minority
interest....................................... 150,876 98,290 360,055 287,215
Income tax expense............................... (7,562) (1,938) (18,525) (5,076)
Minority interest................................ 4,706 135 392 512
-------- -------- ---------- ----------
NET EARNINGS..................................... $148,020 $ 96,487 $ 341,922 $ 282,651
======== ======== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
44
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 135,335 $ 247,474
Accounts and notes receivable, net of allowance of $48,734
and $33,317, respectively................................. 453,277 381,175
Inventories, net............................................ 553,677 432,520
Investments held for sale................................... 2,062 --
Other current assets, net................................... 28,267 8,542
---------- ----------
Total current assets.................................... 1,172,618 1,069,711
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 133,148 123,606
Buildings and leasehold improvements........................ 66,050 59,074
Furniture and other equipment............................... 71,249 67,246
Land........................................................ 10,275 10,246
Projects in progress........................................ 19,948 31,736
---------- ----------
300,670 291,908
Less accumulated depreciation and amortization.......... (66,643) (79,350)
---------- ----------
234,027 212,558
OTHER ASSETS
Intangible assets, net...................................... 5,280,021 5,105,510
Cable distribution fees, net
($30,235 and $35,181, respectively, to related parties)... 146,155 130,988
Long-term investments....................................... 37,272 93,742
Notes and accounts receivable, net ($3,283 and $2,562,
respectively, from related parties)....................... 29,121 19,506
Inventories, net............................................ 182,422 154,497
Advances to USAI and subsidiaries........................... 856,659 649,480
Deferred charges and other, net............................. 39,494 36,934
---------- ----------
$7,977,789 $7,472,926
========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 20,829 $ 3,758
Accounts payable, trade..................................... 139,149 147,864
Obligations for program rights and film costs............... 295,561 265,235
Cable distribution fees payable
($18,431 and $18,733, respectively, to related parties)... 28,993 43,993
Deferred revenue............................................ 63,684 47,536
Other accrued liabilities................................... 327,309 257,575
---------- ----------
Total current liabilities................................... 875,525 765,961
LONG-TERM OBLIGATIONS (net of current maturities)........... 525,406 527,339
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS,
net of current............................................ 279,260 256,260
OTHER LONG-TERM LIABILITIES................................. 85,758 81,156
MINORITY INTEREST........................................... 64,531 531
COMMITMENTS AND CONTINGENCIES............................... -- --
MEMBERS' EQUITY
Class A (252,326,640 and 245,601,782 shares,
respectively)............................................. 2,004,891 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........................................... 708,031 484,278
Accumulated other comprehensive income...................... (10,500) --
---------- ----------
Total members' equity................................... 6,147,309 5,841,679
---------- ----------
$7,977,789 $7,472,926
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
45
<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 nine months ended
September 30, 2000........................... 341,922 -- -- -- 341,922 --
Foreign currency translation................... (2,521) -- -- -- -- (2,521)
Increase in unrealized gains in available for
sale securities.............................. (7,979) -- -- -- -- (7,979)
----------
Comprehensive income......................... 331,422 -- -- -- -- --
Issuance of LLC shares........................... 222,284 222,284 -- -- -- --
Repurchase of LLC shares......................... (129,907) (129,907) -- -- -- --
Mandatory tax distribution to LLC partners....... (118,169) -- -- -- (118,169) --
---------- ---------- ---------- -------- --------- --------
BALANCE AT SEPTEMBER 30, 2000.................... $6,147,309 $2,004,891 $2,978,635 $466,252 $ 708,031 ($10,500)
========== ========== ========== ======== ========= ========
</TABLE>
Comprehensive income for the three months ended September 30, 2000 was
$140,849.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
46
<PAGE>
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 341,922 $ 282,651
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 154,945 130,620
Amortization of cable distribution fees................... 25,335 19,214
Amortization of program rights and film costs............. 428,537 391,088
Gain on sale of subsidiary stock.......................... (104,625) --
Gain on sale of securities................................ -- (89,721)
Non-cash compensation..................................... 5,954 1,890
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 38,260 754
Minority interest......................................... (392) (512)
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (67,348) 16,205
Inventories............................................... (1,615) 375
Accounts payable.......................................... (28,228) (43,174)
Accrued liabilities and deferred revenue.................. 45,153 15,295
Payment for program rights and film costs................. (528,053) (410,500)
Increase in cable distribution fees....................... (39,251) (35,624)
Other, net................................................ 20,430 1,749
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 291,024 280,310
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (107,934) (7,500)
Capital expenditures........................................ (49,247) (43,781)
Increase in long-term investments and notes receivable...... (21,769) (12,750)
Proceeds from sale of securities............................ -- 107,231
Other, net.................................................. (2,806) 6,221
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (181,756) 49,421
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. 50,029 --
Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755)
Principal payments on long-term obligations................. (44,890) (252,182)
Repurchase of LLC shares.................................... (129,907) (7,226)
Proceeds from issuance of LLC shares........................ 216,493 401,319
Advances to USAi and subsidiaries........................... (181,052) (457,864)
Other....................................................... (13,309) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................... (220,805) (368,708)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (602) --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (112,139) (38,977)
Cash and cash equivalents at beginning of period............ 247,474 234,903
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 135,335 $ 195,926
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
47
<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.
On July 27, 2000, the Company and Styleclick.com Inc., a leading enabler of
e-commerce for manufacturers and retailers ("Styleclick.com"), completed the
merger of Internet Shopping Network ("ISN") and Styleclick.com (the "Styleclick
Transaction"). See Note 3.
COMPANY BUSINESS
The Company is a holding company, the subsidiaries of which are focused on
the new convergence of entertainment, information and direct selling.
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, HSN International and HSN.com, which are
engaged in the electronic retailing business.
- Interactive, which includes Styleclick, Inc. (see Note 3 for more
information), a facilitator of e commerce websites and Internet enabled
applications, and the Company's online retailing networks First Auction
and First Jewelry.
- Electronic commerce and services, which primarily represents the Company's
customer and e-care businesses.
- Emerging networks, which primarily represents recently acquired cable
television properties Trio and News World International, and SciFi.com, an
emerging 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 twelve months ended
December 31,1999. Certain amounts in the Condensed Consolidated Financial
Statements for the three and nine months ended September 30, 1999 have been
48
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
reclassified to conform to the 2000 presentation, including all amounts charged
to customers for shipping and handling, which are now presented as revenue.
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--BUSINESS ACQUISITIONS
STYLECLICK TRANSACTION
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 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 agreed to contribute $10 million in dedicated media, and
received warrants to purchase additional shares of the new company. At closing,
Styleclick.com repaid the $10 million of borrowing outstanding under the bridge
loan.
49
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
The aggregate purchase price, including transaction costs, of
$211.9 million was determined as follows:
<TABLE>
<S> <C>
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USAi.......... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs..................................... 211,914
========
</TABLE>
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In conjunction with the transaction, the Company
recorded a pre-tax gain of $104.6 million based upon the 25% of ISN exchanged
for 75% of Styleclick.com.
The Styleclick 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 $170.5 million has been allocated to goodwill, which is being
amortized over 3 years. Assets and liabilities as of the acquisition date
consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Current assets.............................................. $39,095
Non-current assets.......................................... 4,039
Goodwill.................................................... 170,526
Current liabilities......................................... 1,746
Non-current liabilities..................................... --
</TABLE>
The following unaudited pro forma condensed consolidated financial
information for the three and nine months ended September 30, 2000 and 1999 is
presented to show the results of the Company as if the Styleclick Transaction
had occurred on January 1, 1999. The pro forma results reflect certain
adjustments, including increased amortization related to goodwill and other
intangibles, and are not necessarily indicative of what the results would have
been had the transactions actually occurred on January 1, 1999.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 1999 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues.............. $2,388,439 $779,511 $1,932,458 $630,068
Net income................ 299,258 141,539 251,336 85,045
</TABLE>
NOTE 4--INVESTMENTS
During the quarter and nine months ended September 30, 1999, the Company
recognized pre-tax gains of $39.5 and $89.7 million, respectively, on the sale
of securities in a publicly traded entity.
50
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999:
During the nine months ended September 30, 1999, the Company acquired
post-production and other equipment through capital leases totaling
$2.5 million.
NOTE 6--INDUSTRY SEGMENTS
For the three and nine months ended September 30, 2000 and 1999, the Company
operated principally in five industry segments: Networks and television
production, Electronic retailing, Interactive, Electronic commerce and services
and Emerging 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 Styleclick. The Electronic commerce and services segment primarily
represents the Company's customer and e-care businesses. The Emerging networks
segment
51
<PAGE>
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--INDUSTRY SEGMENTS (CONTINUED)
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
emerging Internet content and commerce site.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Networks and television production............. $336,047 $307,094 $1,105,688 955,032
Electronic retailing........................... 426,549 314,718 1,243,756 941,467
Internet services.............................. 5,147 6,660 17,555 21,489
Electronic commerce and services............... 2,524 543 5,121 1,731
Emerging networks.............................. 8,591 266 12,862 693
Other.......................................... 509 -- 1,568 6,894
-------- -------- ---------- ----------
$779,367 $629,281 $2,386,550 $1,927,306
======== ======== ========== ==========
Operating profit (loss)
Networks and television production............. $ 90,394 $ 64,555 $ 312,371 $ 223,170
Electronic retailing........................... 21,949 20,553 73,769 55,036
Internet services.............................. (15,970) (9,167) (37,382) (27,815)
Electronic commerce and services............... (4,315) (645) (12,260) (1,576)
Emerging networks.............................. (2,907) (787) (6,669) (1,885)
Other.......................................... (7,804) (6,461) (30,729) (20,589)
-------- -------- ---------- ----------
$ 81,347 $ 68,048 $ 299,100 $ 226,341
======== ======== ========== ==========
</TABLE>
The Company operates principally within the United States.
NOTE 7-- 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.
52
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.1* Employment Agreement, dated September 21, 2000, between USA
Networks, Inc. and Dara Khosrowshahi
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.
