-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NHk59HzMQcqFa6jXb+KBTlFyLueIAZptKsRssA8rqoJ1ur0Kh8COs6BTYqADQD5h qoJVTSRtsVJrqgcKRmcfPA== 0000912057-01-528763.txt : 20010815 0000912057-01-528763.hdr.sgml : 20010815 ACCESSION NUMBER: 0000912057-01-528763 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SHOPPING NETWORK INC CENTRAL INDEX KEY: 0000791024 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 592649518 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22069 FILM NUMBER: 1713672 BUSINESS ADDRESS: STREET 1: 1 HSN DRIVE CITY: ST PETERSBURG STATE: FL ZIP: 33729 BUSINESS PHONE: 8135728585 10-Q 1 a2056796z10-q.txt 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 333-71305-03 ------------------------ HOME SHOPPING NETWORK, INC. (Exact name of registrant as specified in its charter) DELAWARE 59-3490970 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification Number)
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 / / - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, ------------------- --------------------- 2001 2000 2001 2000 -------- -------- --------- --------- (IN THOUSANDS) NET REVENUES Cable and Studios................................ $444,203 $390,688 $ 881,854 $ 769,641 Electronic retailing............................. 455,726 398,049 910,801 818,266 Styleclick....................................... 2,438 5,791 6,457 12,408 Electronic commerce solutions.................... 5,994 1,597 10,743 2,597 Emerging networks................................ 6,179 3,709 12,341 4,271 -------- -------- --------- --------- Total net revenues............................... 914,540 799,834 1,822,196 1,607,183 Operating costs and expenses: Cost of sales.................................... 303,911 262,332 613,845 542,876 Program costs.................................... 201,041 173,173 402,506 339,037 Selling and marketing............................ 90,530 94,782 188,829 183,375 General and administrative....................... 93,360 78,932 174,314 150,621 Other operating costs............................ 35,948 31,228 70,380 56,952 Amortization of cable distribution fees.......... 10,642 8,267 19,398 16,490 Amortization of non-cash compensation............ 833 3,195 3,345 4,185 Depreciation and amortization.................... 63,165 48,236 119,552 95,974 -------- -------- --------- --------- Total operating costs and expenses............... 799,430 700,145 1,592,169 1,389,510 -------- -------- --------- --------- Operating profit................................. 115,110 99,689 230,027 217,673 Other income (expense): Interest income.................................. 1,783 9,163 3,093 13,912 Interest expense................................. (10,118) (10,651) (16,306) (18,478) Other, net....................................... (13,605) (1,498) (20,680) (3,977) -------- -------- --------- --------- (21,940) (2,986) (33,893) (8,543) Earnings before income taxes and minority interest and cumulative effect of accounting change........................................... 93,170 96,703 196,134 209,130 Income tax expense................................. (18,237) (17,666) (39,141) (42,293) Minority interest.................................. (50,572) (56,452) (108,068) (122,462) -------- -------- --------- --------- Earnings before cumulative effect of accounting change........................................... 24,361 22,585 48,925 44,375 Cumulative effect of accounting change, net of tax.............................................. -- -- 1,901 -- -------- -------- --------- --------- NET EARNINGS....................................... $ 24,361 $ 22,585 $ 50,826 $ 44,375 ======== ======== ========= =========
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, 2001 2000 ---------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 368,795 $ 71,816 Accounts and notes receivable, net of allowance of $75,369 and $50,646, respectively................................. 541,936 519,365 Inventories, net............................................ 380,927 396,523 Investments held for sale................................... 380 750 Deferred income taxes....................................... 5,265 17,448 Other current assets, net................................... 29,507 18,024 ---------- ---------- Total current assets...................................... 1,326,810 1,023,926 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 147,141 143,559 Buildings and leasehold improvements........................ 76,574 71,979 Furniture and other equipment............................... 84,740 76,623 Land........................................................ 10,302 10,281 Projects in progress........................................ 32,339 32,747 ---------- ---------- 351,096 335,189 Less accumulated depreciation and amortization............ (115,326) (83,549) ---------- ---------- 235,770 251,640 OTHER ASSETS Intangible assets, net...................................... 4,980,912 5,023,735 Cable distribution fees, net................................ 156,890 159,473 Long-term investments....................................... 30,374 29,187 Notes and accounts receivable, net ($57,564 and $22,575, respectively, from related parties)..................................... 74,042 33,571 Inventories, net............................................ 449,931 430,215 Advances to USA and subsidiaries............................ 281,647 547,292 Deferred charges and other, net............................. 42,124 44,011 ---------- ---------- $7,578,500 $7,543,050 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. 35,128 $ 20,053 Accounts payable, trade..................................... 147,688 201,484 Obligations for program rights and film costs............... 257,411 283,812 Cable distribution fees payable............................. 34,886 33,598 Deferred revenue............................................ 59,618 41,335 Other accrued liabilities................................... 319,109 351,331 ---------- ---------- Total current liabilities................................... 853,840 931,613 LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 501,639 504,063 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of current................................................... 277,365 295,210 OTHER LONG-TERM LIABILITIES................................. 90,337 81,925 DEFERRED INCOME TAXES....................................... 30,008 25,821 MINORITY INTEREST........................................... 4,527,393 4,420,252 COMMITMENTS AND CONTINGENCIES............................... -- -- STOCKHOLDER'S EQUITY Common stock................................................ 1,221,408 1,221,408 Additional paid-in capital.................................. 70,312 70,312 Retained earnings........................................... 17,766 (2,320) Accumulated other comprehensive loss........................ (11,568) (5,234) ---------- ---------- Total stockholder's equity................................ 1,297,918 1,284,166 ---------- ---------- $7,578,500 $7,543,050 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
ACCUMULATED ADDITIONAL RETAINED OTHER COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL STOCK CAPITAL (DEFICIT) INCOME ---------- ---------- ---------- --------- ------------- (IN THOUSANDS) BALANCE AT DECEMBER 31, 2000......... $1,284,166 $1,221,408 $70,312 $(2,320) $ (5,234) Comprehensive Income: Net earnings for the six months ended June 30, 2001.............. 50,826 -- -- 50,826 -- Foreign currency translation....... (6,061) -- -- -- (6,061) Increase in unrealized gains in available for sale securities.... (273) -- -- -- (273) ---------- Comprehensive income............... 44,492 ---------- Mandatory tax distribution to LLC partners......................... (30,740) -- -- (30,740) -- ---------- ---------- ------- ------- -------- BALANCE AT JUNE 30, 2001............. $1,297,918 $1,221,408 $70,312 $17,766 $(11,568) ========== ========== ======= ======= ========
Accumulated other comprehensive income is comprised of unrealized gains on available for sale securities of $(5,920) and $(5,647) at June 30, 2001 and December 31, 2000, respectively and foreign currency translation adjustments of $(5,648) and $413 at June 30, 2001 and December 31, 2000, respectively. 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, --------------------- 2001 2000 --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 50,826 $ 44,375 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............................. 119,552 95,974 Amortization of cable distribution fees................... 19,398 16,490 Amortization of program rights and film costs............. 359,131 294,026 Cumulative effect of accounting change.................... (1,901) -- Non-cash compensation..................................... 3,345 4,185 Equity in losses of unconsolidated affiliates............. 10,009 5,015 Minority interest expense................................. 108,068 122,462 CHANGES IN CURRENT ASSETS AND LIABILITIES: Accounts receivable....................................... (41,189) (25,112) Inventories............................................... 16,802 6,012 Accounts payable.......................................... (60,255) (1,089) Accrued liabilities and deferred revenue.................. 22,427 31,200 Payment for program rights and film costs................. (423,595) (332,891) Increase in cable distribution fees....................... (16,933) (27,296) Other, net................................................ (10,897) 15,004 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 154,788 248,355 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired........................ (37,252) (107,654) Capital expenditures...................................... (35,292) (28,730) Increase in long-term investments and notes receivable.... (49,223) (20,322) Advance to Styleclick..................................... -- (9,000) Other, net................................................ 4,899 (2,224) --------- --------- NET CASH USED IN INVESTING ACTIVITIES....................... (116,868) (167,930) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................ 15,707 35,769 Intercompany.............................................. 225,999 (86,768) Payment of mandatory tax distribution to LLC partners..... (30,737) (118,169) Principal payments on long-term obligations............... (3,371) (33,057) Repurchase of LLC shares.................................. (898) (110,532) Proceeds from issuance of LLC shares...................... 60,026 208,100 Other..................................................... (5,824) (7,550) --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 260,902 (112,207) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................. (1,843) 978 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 296,979 (30,804) Cash and cash equivalents at beginning of period.......... 71,816 247,474 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 368,795 $ 216,670 ========= =========
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 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. ("USA"), formerly known as HSN, Inc., and became a subsidiary of USA (the "Home Shopping Merger"). On July 27, 2000, the Company and Styleclick.com Inc., an 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. 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: - CABLE AND STUDIOS, consisting of the cable networks USA Network and Sci Fi Channel and Studios USA, which produces and distributes television programming. - ELECTRONIC RETAILING, consisting primarily of HSN and America's Store, HSN International and HSN Interactive, including HSN.com. - ELECTRONIC COMMERCE SOLUTIONS, which primarily represents the Company's electronic commerce solutions business. - STYLECLICK, a facilitator of e-commerce websites and Internet enabled applications. - EMERGING NETWORKS, consists primarily of the cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com. an emerging Internet content and commence 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, 2000. 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. ACCOUNTING ESTIMATES Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Significant estimates underlying the accompanying consolidated financial statements include the inventory carrying adjustment, program rights and film cost amortization, sales return and other revenue allowances, allowance for doubtful accounts, recoverability of intangibles and other long-lived assets, estimates of film revenue ultimates and various other operating allowances and accruals. NEW ACCOUNTING PRONOUNCEMENTS FILM ACCOUNTING The Company adopted SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2") during the six months ended June 30, 2001. SOP 00-2 established new film accounting standards, including changes in revenue recognition and accounting for advertising, development and overhead costs. Specifically, SOP 00-2 requires advertising costs for theatrical and television product to be expensed as incurred. This compares to the Company's previous policy of first capitalizing these costs and then expensing them over the related revenue streams. In addition, SOP 00-2 requires development costs for abandoned projects and certain indirect overhead costs to be charged directly to expense, instead of those costs being capitalized to film costs, which was required under the previous accounting rules. SOP 00-2 also requires all film costs to be classified in the balance sheet as non-current assets. Provisions of SOP 00-2 in other areas, such as revenue recognition, generally are consistent with the Company's existing accounting policies. SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a one-time, non-cash benefit of $1.9 million. The benefit is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002, and is presently in the process of evaluating the potential impacts of the new rules. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 2001 presentation, including all amounts charged to customers for shipping and handling, which are now presented as revenue. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 Form 10-K") for a summary of all significant accounting policies. 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS The following unaudited pro forma condensed consolidated financial information for the six months ended June 30, 2000 is presented to show the results of the Company as if the Styleclick Transaction had occurred on January 1, 2000. The pro forma results reflect certain adjustments, including increased amortization related to goodwill, and are not necessarily indicative of what the results would have been had the transactions actually occurred on January 1, 2000.
SIX MONTHS ENDED JUNE 30, 2000 ---------- Net revenues............................................ $1,608,929 Net income.............................................. 32,046
NOTE 4--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000: On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USA common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. NOTE 5--INDUSTRY SEGMENTS The Company operates principally in five industry segments: Cable and studios, Electronic retailing, Electronic commerce solutions, Styleclick and Emerging networks. The Cable and studios 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, America's Store, HSN International and HSN Interactive, including HSN.com, which are engaged in the sale of merchandise through electronic retailing. The Electronic commerce solutions segment primarily represents the Company's customer and e-care businesses. The Styleclick segment represents Styleclick, Inc., a facilitator of e-commerce websites and Internet enabled applications. The Emerging networks segment consists primarily of the cable television properties Trio 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--INDUSTRY SEGMENTS (CONTINUED) and NewsWorld International, which were acquired on May 19, 2000, and SciFi.com, an emerging Internet content and commerce site.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2001 2000 2001 2000 -------- -------- ---------- ---------- (IN THOUSANDS) (IN THOUSANDS) REVENUE Cable and studios................................ $444,203 $390,688 $ 881,854 $ 769,641 Electronic retailing............................. 455,726 398,048 910,801 818,265 Styleclick....................................... 2,438 5,792 6,457 12,409 Electronic commerce solutions.................... 5,994 1,597 10,743 2,597 Emerging networks................................ 6,179 3,709 12,341 4,271 -------- -------- ---------- ---------- $914,540 $799,834 $1,822,196 $1,607,183 ======== ======== ========== ========== OPERATING PROFIT (LOSS) Cable and studios................................ $142,468 $111,190 $ 277,071 $ 221,977 Electronic retailing............................. 12,332 21,515 26,405 51,527 Styleclick....................................... (17,923) (11,441) (30,971) (19,232) Electronic commerce solutions.................... (8,737) (4,026) (15,327) (7,949) Emerging networks................................ (4,782) (2,534) (9,138) (4,800) Other............................................ (8,248) (15,015) (18,013) (23,850) -------- -------- ---------- ---------- $115,110 $ 99,689 $ 230,027 $ 217,673 ======== ======== ========== ==========
NOTE 6--GUARANTEE OF NOTES On November 23, 1998, USA and the USANi LLC 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 USA, including Holdco, 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 USA 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 USA's and the Company's management has determined that the information contained in such documents would not be material to investors. The Company and its subsidiaries have no material restrictions on their ability to transfer amounts to fund USA's operations. 8 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Home Shopping Network, Inc. (the "Company" or "Holdco") 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. ("USA"), and became a subsidiary of USA (the "Home Shopping Merger"). On July 27, 2000, the Company and Styleclick.com Inc., an 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". 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: - CABLE AND STUDIOS, consisting of the cable networks USA Network and Sci Fi Channel and Studios USA, which produces and distributes television programming. - ELECTRONIC RETAILING, consisting primarily of HSN and America's Store, HSN International and HSN Interactive, including HSN.com. - ELECTRONIC COMMERCE SOLUTIONS, which primarily represents the Company's electronic commerce solutions business. - STYLECLICK, a facilitator of e-commerce websites and Internet enabled applications. - EMERGING NETWORKS, consists primarily of the cable television properties Trio and NewsWorld International, which were acquired on May 19, 2000, and SciFi.com. an emerging Internet content and commence site. 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. CONSOLIDATED RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2001 VS. THREE AND SIX MONTHS ENDED JUNE 30, 2000 NET REVENUES For the three months ended June 30, 2001, revenues increased by $114.7 million, or 14.3%, to $914.5 million from $799.8 million in 2000 primarily due to increases of $57.7 million, $53.5 million, $4.4 million and $2.5 million from the Electronic retailing, Cable and studios, Electronic commerce solutions and Emerging networks operations, respectively, offset partially by a decrease in Styleclick revenues of $3.4 million. For the six months ended June 30, 2001, revenues increased by $215.0 million, or 13.4%, to $1.82 billion from $1.61 billion in 2000 primarily due to increases of $112.2 million, $92.5 million, $8.1 million and $8.1 million from the Cable and studios, Electronic retailing, Electronic commerce services and Emerging networks operations, respectively, offset partially by a decrease in 9 Styleclick revenues of $6.0 million. The Electronic retailing increases primarily resulted from Home Shopping Network's domestic business, which generated increased sales in the three and six months ended June 30, 2001 of $37.9 million and $64.7 million, respectively, including increased sales of $22.5 million and $36.7 million, respectively, from HSN.com. For the three months ended June 30, 2001, total units shipped domestically increased to 9.1 million units compared to 8.1 million units in 2000, while the return rate increased slightly to 20.0% from 19.6% in 2000. Electronic retailing operations in Germany generated increased sales in the three and six months ended June 30, 2001 of $15.9 million and $23.2 million, respectively, although sales were hindered by the conversion to a new order management system, which delayed certain shipments, and the negative impact of the Euro exchange rate. The Cable and studios increases resulted from an increase in advertising revenues at USA Network, including the satisfaction of makegood liabilities at a higher level in 2001, offset partially by slightly lower advertising revenues at Sci Fi Channel. The cable networks provided $3.9 million of advertising to Citysearch in the three months ended June 30, 2001. In addition, the networks recognized $5.3 million of barter revenue pursuant to agreements with third parties. Affiliate revenues increased due to a higher number of subscribers as compared to the prior year. Net revenues at Studios USA increased significantly due to increased license fees earned in secondary markets, increased drama productions for the broadcast networks and increased productions for USA Network and Sci Fi Channel. Note that Studios USA defers revenue recognition for internally produced series for USA Network and Sci Fi Channel until the product is aired on the networks. Electronic commerce services revenue increased due primarily to increases in revenue for the transactional sites that ECS manages, offset partially by a decrease in ECS teleservices. Emerging networks increased primarily due to the acquisition of Trio and NewsWorld International, which were acquired on May 19, 2000. Styleclick net revenues decreased due to the shutdown of the transactional web sites, First Auction and First Jewelry, in connection with its increased focus on its e-commerce service provider business. OPERATING COSTS AND EXPENSES For the three months ended June 30, 2001, operating expenses increased by $99.3 million, or 14.2%, to $799.4 million from $700.1 million in 2000, primarily due to increases in costs related to revenues and other costs of $84.3 million, including $58.8 million from Electronic retailing, $21.6 million from Cable and studios, $9.0 million from Electronic commerce solutions and $2.8 million from Emerging networks, offset partially by a reduction from Styleclick of $2.7 million. In addition, for the three months ended June 30, 2001, depreciation and amortization increased $14.9 million. For the six months ended June 30, 2001, operating expenses increased by $202.7 million, or 14.6%, to $1.59 billion from $1.39 billion in 2000, primarily due to increases in costs related to revenues and other costs of $177.0 million, including $105.5 million from Electronic retailing, $55.6 million from Cable and studios, $15.3 from Electronic commerce solutions, $7.9 million from Emerging networks, offset partially by a reduction from Styleclick of $1.2 million. In addition, for the six months ended June 30, 2001, depreciation and amortization increased $51.2 million. The increase in Electronic retailing resulted primarily from higher international costs related to the Company's expansion efforts and increased live broadcasting hours, higher costs related to other lines of business, and the impact of selling goods at a lower margin (33.3% in 2001 as compared to 34.7% in 2000). The increase in Cable and Studios was due primarily from costs associated with the increased revenues of all of the businesses, including the costs of providing increased product to the broadcast networks, for which programs generally run a deficit in the early years, and $5.3 million of higher expense for prints, freight and dubbing in 2001 in relation to the new film accounting rules in Q2 2001, offset partially by efficient use of programming by USA Network, resulting in reduced program amortization, and increased usage of internally developed product. Costs for Electronic commerce solutions increased primarily to higher operating expenses, while costs for Emerging networks increased due to the acquisition of Trio and NewsWorld International on May 19, 2000. Styleclick's operating costs were reduced due to the overall scale back in the transactional business. Note that Styleclick recorded a one-time restructuring charge of $10.6 million in the three months ended June 30, 2001 consisting of costs related to consolidating 10 Styleclick's operations in Chicago and write-offs related to closing the Firstauction.com website. In addition, primarily in conjunction with the shut down of First Jewelry, Styleclick recorded a $2 million write-down of its inventory in the six months ended June 30, 2001. Depreciation and amortization increased principally as a result of acquisitions and capital investments. OTHER INCOME (EXPENSE) For the three and six months ended June 30, 2001, net interest expense increased by $6.8 million and $8.6 million, respectively, compared to 2000 primarily due to lower short-term investment levels. Other expense, net for the three and six months ended June 30, 2001 increased $12.1 million and $16.7 million, respectively, due primarily to higher equity losses in unconsolidated subsidiaries. MINORITY INTEREST Minority interest primarily represents Universal's and Liberty's ownership interest in USANi LLC, the public's ownership interest in Styleclick since July 27, 2000 and partner's interest in HOT Germany, which the Company began to consolidate as of January 1, 2000. INCOME TAXES The Company's effective tax rate of 42.8% and 44.4% for the three and six months ended June 30, 2001 is higher than the statutory rate due to the effects of state taxes and non-deductible goodwill. SEASONALITY USANi LLC's businesses are subject to the effects of seasonality. Cable and Studios revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. USANi LLC 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, 2001, the Company's outstanding debt approximated $536.8 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 a publicly-traded companies. It is not customary for the Company to make investments in equity securities as part of its investment strategy. 11 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the Home Shopping Network Consumer Class Action litigation, previously reported in the Company's Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"), on June 1, 2001, the Court entered an Order granting plaintiffs' motion to voluntarily dismiss plaintiffs Henrietta Buck and Anastasia Kolias from the lawsuit. On July 2, 2001, the HSN Defendants together with certain other defendants filed a consolidated brief in opposition to plaintiffs' motion for class certification. A hearing on the motion for class certification is scheduled to occur August 16, 2001. In the Urban litigation, previously reported in the 2000 Form 10-K and the Company's Form 10-Q for the quarter ended March 31, 2001 (the "2001 Form 10-Q"), on April 6, 2001, the U.S. Bankruptcy Court for the Eastern District of Virginia approved a sale of Urban Broadcasting Corporation's "Urban" assets for the sum of $60,000,000. On July 13, 2001, the Court entered an Order that requires the closing of the sale to be held on August 15, 2001, unless the debtor and the purchaser agree to some other date. If the sale closes, the proceeds will be sufficient to pay all of Urban's creditors in full, including USA Station Group of Virginia, Inc.'s judgment claim, and leave substantial funds for distribution to Urban's equity holders. In the Marketingworks litigation, previously reported in the 2000 Form 10-K and 2001 Form 10-Q, the parties have reached a settlement and the matter has been concluded. The outcome of this litigation did not have a material impact on the Company's financial results. In the RTL litigation, previously reported in the 2000 Form 10-K, on July 18, 2001, the Court in The Netherlands permitted USA to join USI as a co-defendant in the proceeding, but not to intervene as an independent party capable of asserting rights on its own behalf. In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving property, personal injury, contract and other claims. The amounts that may be recovered in these matters may be subject to insurance coverage. Although amounts recovered in litigation are not expected to be material to the financial position or operations of the Company, this litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- a. Restated Certificate of Incorporation of USA filed as Exhibit 3.1 to USA's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000, is incorporated herein by reference. b. Amended and Restated By-Laws of USA filed as Exhibit 3.1 to USA's Form 8-K, dated January 9, 1998, is incorporated herein by reference. c. Restated Certificate of Incorporation of Home Shopping Network, Inc., as amended, filed as Exhibit 3.15 to USANi LLC's Registration Statement on Form S-4 (No. 333-71305), is incorporated herein by reference. d. By-Laws of Home Shopping Network, Inc., filed as Exhibit to USANi LLC's Registration Statement on Form S-4 (No. 333-71305), is incorporated herein bay reference. e. Certificate of Formation of USANi LLC, filed as Exhibit 3.3 to USANi LLC's Registration Statement on Form S-4 (No. 333-71305), is incorporated herein by reference. f. Amended and Restated Limited Liability Company Agreement of USANi LLC, filed a Exhibit 10.59 to USA's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, is incorporated herein by reference.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2001. None. 13 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. August 14, 2001 HOME SHOPPING NETWORK, INC. By: /s/ BARRY DILLER ----------------------------------------- CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NAME TITLE DATE ---- ----- ---- ------------------------------------------- Chairman of the Board and August 14, 2001 Barry Diller Chief Executive Officer Senior Vice President and Chief Financial Officer ------------------------------------------- (Principal Financial August 14, 2001 Michael Sileck Officer) ------------------------------------------- Vice President and Controller August 14, 2001 William J. Severance (Chief Accounting Officer)
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