10-Q 1 a10-q.txt 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 ------------------------ HOME SHOPPING NETWORK, INC. (Exact name of registrant as specified in its charter) COMMISSION FILE NO. 333-71305-01 DELAWARE 52-2649518 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
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 / / -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------------- 2000 1999 2000 1999 --------- --------- ----------- ----------- (IN THOUSANDS) NET REVENUES Networks and television production.......... $ 390,688 $ 316,394 $ 769,641 $ 647,938 Electronic retailing........................ 357,722 284,322 736,780 559,832 Interactive................................. 4,785 6,544 10,311 12,851 Electronic commerce and services............ 1,533 800 2,431 1,073 Developing networks......................... 3,709 218 4,271 427 Other....................................... 395 2,836 395 6,882 --------- --------- ----------- ----------- Total net revenues........................ 758,832 611,114 1,523,829 1,229,003 --------- --------- ----------- ----------- Operating costs and expenses: Cost of sales............................... 221,125 182,586 459,536 358,672 Program costs............................... 173,173 149,280 339,037 319,347 Selling and marketing....................... 94,094 73,107 182,988 135,738 General and administrative.................. 82,940 57,760 155,099 113,796 Other operating costs....................... 31,228 22,190 56,952 44,319 Amortization of cable distribution fees..... 8,267 6,186 16,490 12,276 Depreciation and amortization............... 48,236 43,555 95,974 86,562 --------- --------- ----------- ----------- Total operating costs and expenses........ 659,063 534,664 1,306,076 1,070,710 --------- --------- ----------- ----------- Operating profit.......................... 99,769 76,450 217,753 158,293 Other income (expense): Interest income............................. 9,163 8,708 13,912 19,323 Interest expense............................ (10,651) (20,241) (18,478) (40,619) Gain on sale of securities.................. -- 2,970 -- 50,270 Other, net.................................. (1,529) (7,958) (4,008) 1,658 --------- --------- ----------- ----------- (3,017) (16,521) (8,574) 30,632 --------- --------- ----------- ----------- Earnings before income taxes and minority interest.................................... 96,752 59,929 209,179 188,925 Income tax expense............................ (17,666) (13,962) (42,293) (34,154) Minority interest............................. (56,501) (37,394) (122,511) (114,700) --------- --------- ----------- ----------- NET EARNINGS.................................. $ 22,585 $ 8,573 $ 44,375 $ 40,071 ========= ========= =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 216,670 $ 247,474 Accounts and notes receivable, net of allowance of $44,608 and $33,317, respectively................................. 406,900 381,175 Inventories, net............................................ 450,831 432,520 Investments held for sale................................... 5,735 -- Deferred income taxes....................................... -- 12,077 Other current assets, net................................... 23,752 8,542 ---------- ---------- Total current assets........................................ 1,103,888 1,081,788 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 137,142 123,606 Buildings and leasehold improvements........................ 61,553 59,074 Furniture and other equipment............................... 67,277 67,246 Land........................................................ 10,246 10,246 Projects in progress........................................ 23,573 31,736 ---------- ---------- 299,791 291,908 Less accumulated depreciation and amortization.............. (75,885) (79,350) ---------- ---------- 223,906 212,558 OTHER ASSETS Intangible assets, net...................................... 5,078,984 5,029,769 Cable distribution fees, net ($31,884 and $35,181, respectively, to related parties)......................... 151,059 130,988 Long-term investments....................................... 68,841 93,742 Notes and accounts receivable, net.......................... 23,382 19,506 Inventories, net............................................ 133,722 154,497 Advances to USAI and subsidiaries........................... 339,590 410,107 Deferred income taxes....................................... 75,335 61,755 Deferred charges and other, net............................. 43,538 36,934 ---------- ---------- $7,242,245 $7,231,644 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 16,853 $ 3,758 Accounts payable, trade..................................... 157,791 147,864 Obligations for program rights and film costs............... 245,717 265,235 Cable distribution fees payable ($18,476 and $18,733, respectively, to related parties)......................... 38,183 43,993 Deferred revenue............................................ 42,685 47,536 Deferred income taxes....................................... 3,367 -- Other accrued liabilities................................... 312,400 271,846 ---------- ---------- Total current liabilities................................... 816,996 780,232 LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 527,011 527,339 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF CURRENT................................................... 232,482 256,260 OTHER LONG-TERM LIABILITIES................................. 71,632 81,156 MINORITY INTEREST........................................... 4,328,704 4,244,114 COMMITMENTS AND CONTINGENCIES............................... -- -- STOCKHOLDERS' EQUITY Common Stock................................................ 1,221,408 1,221,408 Additional paid-in capital.................................. 70,312 70,312 Retained (deficit) earnings................................. (22,971) 50,823 Accumulated other comprehensive income...................... (3,329) -- ---------- ---------- Total stockholders' equity.................................. 1,265,420 1,342,543 ---------- ---------- $7,242,245 $7,231,644 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED ADDITIONAL RETAINED OTHER COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL STOCK CAPITAL (DEFICIT) INCOME ---------- ---------- ---------- --------- ------------- (IN THOUSANDS) Balance at December 31, 1999........ $1,342,543 $1,221,408 $70,312 $ 50,823 $ -- Comprehensive Income: Net earnings for the six months ended June 30, 2000............. 44,375 -- -- 44,375 -- Foreign currency translation...... 978 978 Increase in unrealized gains in available for sale securities... (4,307) -- -- -- (4,307) ---------- Comprehensive income............ 41,046 Mandatory tax distribution to LLC partners.......................... (118,169) -- -- (118,169) -- ---------- ---------- ------- -------- ------- Balance at June 30, 2000............ $1,265,420 $1,221,408 $70,312 $(22,971) $(3,329) ========== ========== ======= ======== =======
Comprehensive income for the three months ended June 30, 2000 was $17,597. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ----------- ----------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 44,375 $ 40,071 ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............................. 95,974 86,562 Amortization of cable distribution fees................... 16,490 12,276 Amortization of program rights and film costs............. 294,026 261,252 Gain on sale of securities................................ -- (50,270) Non-cash compensation..................................... 5,870 1,900 Equity in (earnings) losses of unconsolidated affiliates.............................................. 5,015 (10,112) Minority interest......................................... 122,511 114,700 CHANGES IN CURRENT ASSETS AND LIABILITIES: Accounts receivable....................................... (25,112) 3,108 Inventories............................................... 6,012 (2,177) Accounts payable.......................................... (1,089) (41,286) Accrued liabilities and deferred revenue.................. 31,200 30,759 Payment for program rights and film costs................. (332,891) (255,335) Increase in cable distribution fees....................... (27,296) (12,746) Other, net................................................ 13,270 15,599 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES............... 248,355 194,301 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired.......................... (107,654) (7,500) Capital expenditures........................................ (28,730) (28,862) Increase in long-term investments and notes receivable...... (20,322) (12,150) Advance to Styleclick....................................... (9,000) -- Proceeds from sale of securities............................ -- 61,080 Proceeds from long-term notes receivable.................... -- 3,691 Other, net.................................................. (2,224) 2,163 --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (167,930) 18,422 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings.................................................. 35,769 -- Intercompany................................................ (86,768) (385,065) Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755) Principal payments on long-term obligations................. (33,057) (13,942) Repurchase of LLC shares.................................... (110,532) (4,938) Proceeds from issuance of LLC shares........................ 208,100 22,732 Other....................................................... (7,550) -- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................... (112,207) (433,968) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 978 -- --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (30,804) (221,245) Cash and cash equivalents at beginning of period............ 247,474 234,903 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 216,670 $ 13,658 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION Home Shopping Network, Inc. (the "Company" or "Home Shopping"), is a holding company, whose subsidiary USANi LLC is engaged in diversified media and electronic commerce businesses. In December 1996, the Company consummated a merger with USA Networks, Inc. ("USAi"), formerly known as HSN, Inc., and became a subsidiary of USAi (the "Home Shopping Merger"). On February 12, 1998, USAi acquired USA Networks, a New York general partnership, consisting of cable television networks, USA Network and Sci-Fi Channel ("Networks"), as well as the domestic television production and distribution businesses of Universal Studios ("Studios USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd. ("Seagram") (the "Universal Transaction"). In connection with the Universal Transaction, the Company formed a new subsidiary, USANi LLC, and contributed the operating assets of the Home Shopping Network services ("HSN") to USANi LLC. Furthermore, USAi contributed Networks and Studios USA to USANi LLC on February 12, 1998. The Company is a holding company, the subsidiaries of which are engaged in diversified media and electronic commerce businesses. The five principal areas of business are: - Networks and television production, which includes Networks and Studios USA. Networks operates the USA Network and Sci-Fi Channel cable networks and Studios USA produces and distributes television programming. - Electronic retailing, which consists primarily of the Home Shopping Network and America's Store which are engaged in the electronic retailing business. - Interactive, which represents Internet Shopping Network, the Company's on-line retailing networks business. - Electronic commerce and services, which primarily represents the Company's customer and e-care businesses. - Developing networks, which primarily represents recently acquired cable television properties Trio and News World International and SciFi.com, a developing Internet content and commerce site. BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of the Company are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the three and six months ended June 30, 2000. Certain amounts in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 1999 have been reclassified to conform to the 2000 presentation. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K") for a summary of all significant accounting policies. NEW ACCOUNTING PRONOUNCEMENTS In June 2000, the Securities and Exchange Commission issued an amendment to Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101") which delayed the effective date for adoption of SAB 101 to the fourth quarter of 2000. SAB 101 provides guidance on revenue recognition criteria for certain types of transactions. SAB 101 also provides guidance on the disclosures that companies should make about their revenue recognition policies and the impact of events and trends on revenue. In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be accounted for under an inventory model. In addition, the SOP considers such topics as revenue recognition (fixed fees and minimum guarantees in variable fee arrangements), fee allocation in multiple films, accounting for exploitation costs, and impairment assessment. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2000. The Company is currently evaluating the impact of SAB 101 and SOP 00-2, although the impact is not expected to be material. NOTE 3--INVESTMENTS During the quarter and six months ended June 30, 1999, the Company recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of securities in a publicly traded entity. NOTE 4--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000: As of January 1, 2000 the Company began to consolidate the accounts of HOT Germany, an electronic retailer operating principally in Germany, whereas its investment in HOT Germany was previously accounted for under the equity method of accounting. On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. During the second quarter, the company recorded $8.7 million of expense related to an agreement with an executive. Of this amount, $2.9 million is a non-cash stock compensation charge related to restricted stock. 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999: During the six months ended June 30, 1999, the Company acquired post-production and other equipment through capital leases totaling $2.1 million. NOTE 5--INDUSTRY SEGMENTS For the three and six months ended June 30, 2000 and 1999, the Company operated principally in five industry segments: Networks and television production, Electronic retailing, Interactive, Electronic commerce and services and Developing networks. The Networks and television production segment consists of the cable networks USA Network and Sci-Fi Channel and Studios USA, which produces and distributes television programming. The Electronic-retailing segment consists of Home Shopping Network and America's Store, which are engaged in the sale of merchandise through electronic retailing. The Interactive segment represents the Company's on-line retailing networks business. The Electronic commerce and services segment primarily represents the Company's customer and e-care businesses. The Developing networks segment consists primarily of the recently acquired cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com, a developing Internet content and commerce site.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- (IN THOUSANDS) (IN THOUSANDS) Revenue Networks and television production............. $390,688 $316,394 $ 769,641 $ 647,938 Electronic retailing........................... 357,722 284,322 736,780 559,832 Internet services.............................. 4,785 6,544 10,311 12,851 Electronic commerce and services............... 1,533 800 2,431 1,073 Developing networks............................ 3,709 218 4,271 427 Other.......................................... 395 2,836 395 6,882 -------- -------- ---------- ---------- $758,832 $611,114 $1,523,829 $1,229,003 ======== ======== ========== ========== Operating profit (loss) Networks and television production............. $111,190 $ 77,697 $ 221,977 $ 158,967 Electronic retailing........................... 21,808 18,964 51,820 33,650 Internet services.............................. (11,355) (11,220) (21,412) (19,021) Electronic commerce and services............... (4,022) (500) (7,945) (926) Developing networks............................ (2,528) (543) (3,762) (543) Other.......................................... (15,324) (7,948) (22,925) (13,834) -------- -------- ---------- ---------- $ 99,769 $ 76,450 $ 217,753 $ 158,293 ======== ======== ========== ==========
NOTE 6--GUARANTEE OF NOTES USAi issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly, severally, fully and unconditionally guaranteed by certain 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6--GUARANTEE OF NOTES (CONTINUED) subsidiaries of USAi, including the Company and all of the subsidiaries of USANi LLC (other than subsidiaries that are, individually and in the aggregate, inconsequential to USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than the Company) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company or USANi LLC, as the case may be. Separate financial statements for each of the Wholly Owned Subsidiary Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not filing separate reports under the Securities Exchange Act of 1934 because the Company's management has determined that the information contained in such documents would not be material to investors. NOTE 7--SUBSEQUENT EVENTS MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com Inc. and ISN. Styleclick, Inc. is traded on the Nasdaq market under the symbol "IBUY". In accordance with the terms of the agreement, USAi invested $40 million in cash and will contribute $10 million in dedicated media, and will receive warrants to purchase additional shares of the new company. On a fully diluted basis, USAi owns approximately 75% of the new company and Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under the bridge loan. 8 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Home Shopping Network, Inc., a Delaware limited liability company (the "Company" or "Holdco"), is a subsidiary of USA Networks, Inc. ("USAi"). The Company is a holding company, whose subsidiary USANi LLC is engaged in diversified media and electronic commerce businesses. CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 NET REVENUES For the three months ended June 30, 2000, net revenues increased $147.7 million, or 24.2%, to $758.8 million from $611.1 million compared to 1999 primarily due to increases of $74.3 million and $73.4 million from the Networks and television production and Electronic retailing businesses, respectively. As of January 1, 2000, the Company presents the operations of HOT Germany on a consolidated basis whereas the investment was previously accounted for under the equity method of accounting. Revenues for the German operations were $46.9 million in the three months ended June 30, 2000 as compared to $34.8 million in 1999. The increase in electronic retailing primarily resulted from Home Shopping Network's core domestic business, which generated increased sales of $25.7 million, including HSN.com, which began operations in late 1999 and generated sales of $5.7 million in the quarter, as well as the consolidation of the German operations, which resulted in increased sales of $46.9 million. The increase in net revenues also reflected a decrease in the return rate to 19.6% from 20.4% in 1999. The increase in Networks and television production primarily resulted from an increase in advertising and affiliate revenues at USA Network and the Sci-Fi Channel, and increased revenue from Studios USA related principally to one-hour dramas. OPERATING COSTS AND EXPENSES For the three months ended June 30, 2000, total operating costs and expenses increased $124.4 million, or 23.3%, to $659.1 million from $534.7 million compared to 1999, primarily due to increased costs of $65.8 million and $41.0 million from the Electronic retailing and Networks and television production businesses, respectively. The increased costs are related to the higher revenue of all of the businesses, the consolidation of the German electronic retailing operations as of January 1, 2000. During the three months ended June 30, 2000, 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 expense related to restricted stock. Amortization of cable distribution fees increased by $2.1 million due to higher cost distribution arrangements. OTHER INCOME (EXPENSE), NET For the three months ended June 30, 2000, net interest expense decreased by $10.0 million, compared to 1999 primarily due to lower borrowing levels as a result of the repayment of bank debt in prior years from the proceeds of equity transactions involving Universal and Liberty Media Corporation, a subsidiary of AT&T Corporation ("Liberty"). In the three months ended June 30, 1999, the Company realized gains of $3.0 million related to the sale of securities and $10.4 million from the reversal of equity losses that were recorded in 1998 as a result of the Universal transaction. In the three months ended June 30, 2000, other expense relates primarily to equity losses in unconsolidated subsidiaries. 9 SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 NET REVENUES For the six months ended June 30, 2000, net revenues increased $294.8 million, or 24%, to $1.5 billion from $1.2 billion compared to 1999 primarily due to increases of $176.9 million and $121.7 million from the Electronic retailing and Networks and television production businesses, respectively. As of January 1, 2000, the Company presents the operations of HOT Germany on a consolidated basis whereas the investment was previously accounted for under the equity method of accounting. Revenues for the German operations were $101.0 million in the six months ended June 30, 2000 as compared to $71.2 million in 1999. The increase in electronic retailing primarily resulted from Home Shopping Network's core domestic business, which generated increased sales of $73.0 million due primarily to the increase from the Home Shopping service of $58.5 million and HSN.com, which generated revenue of $9.9 million, as well as the consolidation of the German operations, which resulted in increased sales of $101.0 million. The increase in Networks and television production 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. OPERATING COSTS AND EXPENSES For the six months ended June 30, 2000, total operating costs and expenses increased $235.4 million, or 22.0%, to $1.3 billion from $1.1 billion compared to 1999, primarily due to increased costs of $148.6 million and $59.1 million from the Electronic retailing and Networks and television production businesses, respectively. The increased costs are related to the higher revenue of all of the businesses, the consolidation of the German electronic retailing operations as of January 1, 2000. Amortization of cable distribution fees increased by $4.2 million due to higher cost distribution arrangements. OTHER INCOME (EXPENSE), NET For the six months ended June 30, 2000, net interest expense decreased by $16.7 million, compared to 1999 primarily due to lower borrowing levels as a result of the repayment of bank debt in prior years from the proceeds of equity transactions involving Universal and Liberty Media Corporation, a subsidiary of AT&T Corporation ("Liberty"). In the six months ended June 30, 1999, the Company realized gains of $50.3 million related to the sale of securities and $10.4 million from the reversal of equity losses that were recorded in 1998 as a result of the Universal transaction. In the six months ended June 30, 2000, other expense relates primarily to equity losses in unconsolidated subsidiaries. INCOME TAXES The Company's effective tax rate, calculated after deducting the effects of USANi LLC minority interest, of 41.8% and 46.5% for the three and six months ended June 30, 2000 is higher than the statutory rate due to the effects of state taxes and non-deductible goodwill. SEASONALITY The Company'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. 10 The Company believes seasonality impacts its Electronic Retailing segment but not to the same extent it impacts the retail industry in general. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's short-term investment portfolio and issuance of debt. The Company does not use derivative financial instruments in its investment portfolio. The Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers. To further mitigate risk, the vast majority of the securities have a maturity date within 60 days. The portfolio is reviewed on a periodic basis and adjusted in the event that the credit rating of a security held in the portfolio has deteriorated. At June 30, 2000, the Company's outstanding debt approximated $543.9 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 no investments in equity securities of publicly-traded companies. It is not customary for the Company to make investments in equity securities as part of its investment strategy. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the Home Shopping Network Consumer Class Action litigation previously reported in the Company's 1999 Form 10-K, the plaintiffs filed an amended class action complaint that, among other things, added an additional named plaintiff, added Home Shopping Club LP, Warrantech Helpdesk, Inc., Banctech Service, Inc. and Timespace Internet, Inc. as named defendants, and removed two individuals as named defendants. On May 9, 2000, Home Shopping Network, Inc. and Home Shopping Club LP (the "HSN Defendants") filed a motion to dismiss the amended complaint. On May 23, 2000, the Cook County Circuit Court addressed the HSN Defendants' motion to dismiss by entering an Order that, in pertinent part, required the plaintiffs to file a second amended complaint. On June 6, 2000, the plaintiffs filed a second amended class action complaint that, among other things, added an additional named plaintiff and asserted two new causes of action for negligent misrepresentation and breach of contract. The HSN Defendants have filed an answer and affirmative defenses to the second amended complaint and intend to continue to vigorously defend this action. In the World Wrestling Federation litigation, in a decision dated June 27, 2000, the Delaware Chancery Court dismissed USA Cable's complaint, holding that while USA Cable had no obligation to match the terms of the Viacom/CBS offer pertaining to matters other than the four wrestling entertainment programs, USA had failed to match the terms of the Viacom Inc. and CBS Corporation offer. USA Cable is pursuing an expedited appeal of the decision of the Chancery Court in the Delaware Supreme Court. Oral argument of the appeal is scheduled for August 14, 2000. 11 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
EXHIBIT NUMBER DESCRIPTION --------------------- ----------- 27.1 Financial Data Schedule (for SEC use only) 27.2 Financial Data Schedule (for SEC use only)
------------------------ * Reflects management contracts and compensatory plans 12 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. HOME SHOPPING NETWORK, INC. (Registrant) By: /s/ BARRY DILLER ----------------------------------------- Barry Diller Chairman and Chief Executive Officer
SIGNATURE TITLE DATE --------- ----- ---- /s/ BARRY DILLER --------------------------------- Chairman of the Board, Chief Executive August 14, 2000 Barry Diller Officer and Director /s/ MICHAEL SILECK Senior Vice President and Chief --------------------------------- Financial Officer (Principal August 14, 2000 Michael Sileck Financial Officer) /s/ WILLIAM J. SEVERANCE --------------------------------- Vice President and Controller (Chief August 14, 2000 William J. Severance Accounting Officer)
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