10-Q 1 a2080094z10-q.txt 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 MARCH 31, 2002 / / 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 52-2649518 (State or Other Jurisdiction of (IRS Employer Identification Number) 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 / / -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- (IN THOUSANDS) NET REVENUES Product sales............................................... $462,442 $458,898 Service revenue............................................. 384,192 445,884 -------- -------- Net revenues.............................................. 846,634 904,782 Operating costs and expenses: Cost of sales--product sales.............................. 301,742 306,163 Cost of sales--service revenue............................ 11,169 3,575 Program costs............................................. 171,820 201,337 Selling and marketing..................................... 110,286 95,716 General and administrative................................ 64,659 80,954 Other operating costs..................................... 27,535 34,465 Disengagement............................................. 10,681 -- Amortization of cable distribution fees................... 13,000 8,756 Amortization of non-cash compensation..................... 1,024 2,512 Depreciation and amortization............................. 18,339 56,387 -------- -------- Total operating costs and expenses........................ 730,255 789,865 -------- -------- Operating profit............................................ 116,379 114,917 Other income (expense): Interest income............................................. 1,009 12,910 Interest expense............................................ (18,028) (17,788) Miscellaneous............................................... (13,307) (7,075) -------- -------- (30,326) (11,953) -------- -------- Earnings before cumulative effect of accounting change, income taxes and minority interest........................ 86,053 102,964 Minority interest benefit (expense)......................... (44,752) (57,496) Income tax expense.......................................... (14,478) (20,904) -------- -------- Earnings before cumulative effect of accounting change...... 26,823 24,564 Cumulative effect of accounting change...................... -- 1,901 -------- -------- NET EARNINGS................................................ $ 26,823 $ 26,465 ======== ========
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)
MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $1,070,553 $ 779,592 Accounts and notes receivable, net of allowance of $33,137 and $30,586, respectively................................. 480,328 533,869 Inventories, net............................................ 397,799 404,155 Deferred income taxes....................................... 19,701 11,084 Other current assets, net................................... 33,012 26,120 ---------- ---------- Total current assets...................................... 2,001,393 1,754,820 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 140,296 132,712 Buildings and leasehold improvements........................ 79,478 79,043 Furniture and other equipment............................... 97,694 96,941 Land........................................................ 10,386 10,386 Projects in progress........................................ 30,882 40,032 ---------- ---------- 358,736 359,114 Less accumulated depreciation and amortization............ (131,060) (120,468) ---------- ---------- 227,676 238,646 OTHER ASSETS Intangible assets, net...................................... 4,888,856 4,888,545 Cable distribution fees, net................................ 202,727 158,880 Long-term investments....................................... 34,822 39,485 Notes and accounts receivable, net ($86,091 and $99,819, respectively, from related parties)....................... 134,400 130,368 Inventories, net............................................ 513,958 484,679 Advances to USA and subsidiaries............................ (531,926) 70,477 Deferred charges and other, net............................. 64,329 58,475 ---------- ---------- $7,536,235 $7,824,375 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 34,096 $ 32,911 Accounts payable, trade..................................... 148,044 233,063 Obligations for program rights and film costs............... 227,120 272,601 Cable distribution fees..................................... 76,553 32,795 Deferred revenue............................................ 59,618 58,949 Other accrued liabilities................................... 398,437 416,212 ---------- ---------- Total current liabilities................................. 943,868 1,046,531 LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 499,507 499,513 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF CURRENT................................................... 297,841 285,378 OTHER LONG-TERM LIABILITIES................................. 40,655 40,247 DEFERRED INCOME TAXES....................................... 90,117 69,397 MINORITY INTEREST........................................... 4,595,435 4,563,804 COMMITMENTS AND CONTINGENCIES............................... -- -- Stockholders' Equity Common Stock................................................ 1,221,408 1,221,408 Additional paid-in capital.................................. 70,312 70,312 Retained earnings........................................... (213,587) 33,398 Accumulated other comprehensive income...................... (9,321) (5,613) ---------- ---------- Total stockholder's equity................................ 1,068,812 1,319,505 ---------- ---------- $7,536,235 $7,824,375 ========== ==========
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)
ADDITIONAL RETAINED FOREIGN CURRENCY COMMON PAID-IN EARNINGS TRANSLATION TOTAL STOCK CAPITAL (DEFICIT) ADJUSTMENT ---------- ---------- ---------- --------- ---------------- (IN THOUSANDS) BALANCE AT DECEMBER 31, 2001............ $1,319,505 $1,221,408 $70,312 $ 33,398 $(5,613) COMPREHENSIVE INCOME: Net earnings for the three months ended March 31, 2002........................ 26,823 -- -- 26,823 -- Foreign currency translation adjustment............................ (3,708) -- -- -- (3,708) ---------- Comprehensive income.................... 23,115 Mandatory tax distribution to LLC partners.............................. (273,808) -- -- (273,808) -- ---------- ---------- ------- --------- ------- BALANCE AT MARCH 31, 2002............... $1,068,812 $1,221,408 $70,312 $(213,587) $(9,321) ========== ========== ======= ========= =======
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)
THREE MONTHS ENDED MARCH 31, ---------------------- 2002 2001 ---------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings before cumulative effect of accounting change.................................................. $ 26,823 $ 24,564 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............................. 18,339 56,387 Amortization of cable distribution fees................... 13,000 8,756 Amortization of program rights and film costs............. 151,717 175,966 Non-cash compensation..................................... 1,024 2,512 Amortization of deferred financing costs.................. 343 465 Equity in losses of unconsolidated affiliates............. 13,459 4,773 Minority interest (benefit) expense....................... 44,752 57,496 CHANGES IN CURRENT ASSETS AND LIABILITIES: Accounts receivable....................................... 38,826 (3,805) Inventories............................................... 7,524 18,463 Accounts payable.......................................... (88,831) (65,919) Accrued liabilities and deferred revenue.................. (16,150) 11,486 Payment for program rights and film costs................. (214,088) (215,251) Increase in cable distribution fees....................... (12,884) (732) Other, net................................................ (35,213) (4,410) ---------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (51,359) 70,751 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired.......................... -- (2,348) Capital expenditures........................................ (12,887) (19,025) Increase in long-term investments and notes receivable...... (603) (30,619) Other, net.................................................. 2,192 (3,957) ---------- --------- NET CASH USED IN INVESTING ACTIVITIES....................... (11,298) (55,949) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings.................................................. 2,857 40,244 Payment of mandatory tax distribution to LLC partners....... (273,808) (30,737) Principal payments on long-term obligations................. (1,547) (2,433) Repurchase of LLC shares.................................... -- (646) Advances from (to) USA and subsidiaries..................... 529,883 (30,943) Proceeds from issuance of LLC shares........................ 96,005 29,495 Other....................................................... 323 (5,829) ---------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 353,713 (849) Effect of exchange rate changes on cash and cash equivalents............................................... (95) (1,680) ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 290,961 12,273 Cash and cash equivalents at beginning of period............ 779,592 71,816 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $1,070,553 $ 84,089 ========== =========
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 Interactive ("USA"), formerly known as USA Networks Inc. and HSN, Inc., and became a subsidiary of USA (the "Home Shopping Merger"). As of March 31, 2002 the Company was organized into two groups, the Interactive Group and the Entertainment Group. The Interactive Group consists of Home Shopping Network (including HSN International and HSN.com; Electronic Commerce Solutions; and Styleclick (OTC: IBUY). The Entertainment Group consists of USA Cable, including USA Network and Sci Fi Channel and Emerging networks TRIO, Newsworld International, and Crime; and Studios USA, which produces and distributes television programming. USA Entertainment was contributed to a joint venture with Vivendi Universal, S.A. ("Vivendi") on May 7, 2002. See Note 7 for further discussion of the VUE transaction. 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, 2001. 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. 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 ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, USA adopted Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets." The new rules eliminate amortization of goodwill and other intangible assets with indefinite lives and establish new measurement criterion for these assets. As disclosed in previous filings, adoption of the new standard had no impact on the 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Company. Goodwill amortization recorded in the three months ended March 31, 2001 was $36.7 million, including $28.3 million related to USA Entertainment. 2001 earnings, adjusted for the add back of goodwill amortization, were $42.5 million. ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS The Company adopted SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2") during the three months ended March 31, 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 after-tax benefit of $1.9 million. The expense is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 2002 presentation. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Form 10-K") for a summary of all significant accounting policies. NOTE 3--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISLCOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002: For the three months ended March 31, 2002, the Company incurred non-cash compensation expense of $1.0 million. For the three months ended March 31, 2002, the Company realized pre-tax losses of $13.5 million on equity losses in unconsolidated subsidiaries, resulting primarily from HOT Networks, which operates electronic retailing operations in Europe. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001: For the three months ended March 31, 2001, the Company incurred non-cash compensation expense of $2.5 million. For the three months ended March 31, 2001, the Company realized pre-tax losses of $4.8 million on equity losses in unconsolidated subsidiaries, resulting primarily from HOT Networks, which operates electronic retailing operations in Europe. 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--INDUSTRY SEGMENTS The Company operates principally in five industry segments: Cable and studios, HSN-US, ECS/ Styleclick, Emerging networks and HSN-International and other. ADJUSTED EBITDA Adjusted earnings before interest, income taxes, depreciation and amortization ("Adjusted EBITDA") is defined as operating profit plus (1) depreciation and amortization, (2) amortization of cable distribution fees (3) amortization of non-cash distribution and marketing expense and (4) disengagement expenses. Adjusted EBITDA is presented here as a management tool and as a valuation methodology. Adjusted EBITDA does not purport to represent cash provided by operating activities. Adjusted EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Adjusted EBITDA may not be comparable to calculations of similarly titled measures presented by other companies. The following is a reconciliation of Operating Income to Adjusted EBITDA for 2002 and 2001. 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- (IN THOUSANDS) Operating profit............................................ $116,379 $114,917 Depreciation and amortization............................... 18,339 56,387 Amortization of cable distribution fees..................... 13,000 8,756 Amortization of non cash compensation expense............... 1,024 2,512 Disengagement expenses...................................... 11,538 -- -------- -------- Adjusted EBITDA............................................. $160,280 $182,572 ======== ======== REVENUE Cable and studios........................................... $367,259 $434,972 HSN-U.S.(a)................................................. 395,326 385,372 Electronic commerce solutions / Styleclick.................. 12,084 8,572 Trio, NWI, Crime, other emerging media...................... 6,976 6,163 HSN-International and other (b)............................. 64,989 69,703 -------- -------- $846,634 $904,782 ======== ======== OPERATING PROFIT (LOSS) Cable and studios........................................... $123,210 $134,603 HSN-U.S. (a)(c)............................................. 21,691 16,646 Electronic commerce solutions / Styleclick.................. (9,306) (19,638) Trio, NWI, Crime, other emerging media...................... (3,637) (4,356) HSN-International and other (b)............................. (6,543) (2,573) Corporate and other......................................... (9,036) (9,765) -------- -------- $116,379 $114,917 ======== ======== ADJUSTED EBITDA Cable and studios........................................... $126,324 $163,406 HSN-U.S.(a)................................................. 57,717 45,380 Electronic Commerce Solutions/Styleclick.................... (8,465) (16,918) Trio, NWI, Crime, other emerging media...................... (3,409) (1,697) HSN-International and other(b).............................. (4,851) (1,705) Corporate & other........................................... (7,036) (5,894) -------- -------- TOTAL....................................................... $160,280 $182,572 ======== ========
------------------------ (a) Includes estimated revenue in 2001 generated by homes lost by HSN following the sale of USA Broadcasting to Univision of $36.2 million. Includes coupons redeemed by customers impacted by disengagement in 2002 of $0.9 million, which is reflected as an offset to revenue. (b) Includes impact of foreign exchange fluctuations, which reduced revenues by $16.5 million and $13.7 million in 2002 and 2001, respectively, if the results are translated from Euros to U.S. dollars at a constant exchange rate, using 1999 as the base year. (c) Includes $11.5 million of costs incurred in 2002 related to the disengagement of HSN from USA Broadcasting stations. Amounts primarily related to payments to cable operators and related marketing expenses in the disengaged markets. 8 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES At March 31, 2002, USA beneficially owned 46.7% of the outstanding common stock of Hot Networks AG, a German stock corporation, the subsidiaries of which operate electronic retailing operations in Europe. This investment is accounted for using the equity method. On May 3, 2002, USA stated that it would no longer fund HOT Networks, which entity USA does not control. The other shareholders have also terminated their funding of the venture As of April 30, 2002, USA has a long-term receivable of $100.5 million from HOT Networks. The Company is evaluating the recoverability of this receivable, but has not completed its evaluation at this time. Home Shopping Network and the other shareholders of HOT Networks are actively discussing alternative arrangements with respect to their relationship, which may include the acquisition of additional equity by USA. Based on these discussions, the Company may determine that carrying value of the receivable is not recoverable. Summary financial information for Hot Networks AG is presented below.
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- (IN THOUSANDS) Current assets.......................................... $ 25,808 $ 5,932 Noncurrent assets....................................... 168,993 41,344 Current liabilities..................................... 47,469 32,267 Noncurrent liabilities.................................. 234,815 22,871 Net sales............................................... 5,069 5,931 Gross profit............................................ 277 1,236 Net loss................................................ (27,094) (19,250)
Through April 30, 2002, the Company has contributed approximately $137.5 million, including $12.2 million in April 2002, and recorded equity losses in unconsolidated subsidiaries of $39.9 million, including $12.2 million in the three months ended March 31, 2002. Note that USA consolidates the operations of HOT Germany, a separate entity that USA controls pursuant to a pooling agreement with Georg Kofler. Home Shopping Network, a subsidiary of USA, Georg Kofler and the other shareholders of HOT Germany are actively discussing alternative arrangements with respect to their relationship, which may include the acquisition of additional equity by USA. Home Shopping Network has guaranteed certain bank loans to Mr. Kofler by agreeing to purchase, at a price not to exceed $50 million, Mr. Kofler's shares in HOT Germany that have been pledged to the banks providing the loans in the event of a default by Mr. Kofler. The Company is evaluating these provisions at this time. NOTE 6--GUARANTEE OF NOTES USA 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 USA, 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. 9 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE On May 7, 2002, USA completed its previously announced transaction with Vivendi to create a joint venture called Vivendi Universal Entertainment ("VUE") (the "VUE Transaction"). VUE is controlled by Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi, 5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA. In connection with the Vivendi Transaction, USA and its subsidiaries received the following at the closing: (i) approximately $1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment for a 15-year period, (ii) a $750 million face value Class A preferred interest in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled in cash at its then face value at maturity; (iii) a $1.75 billion face value Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a 3.6% annual cash dividend, callable and puttable after 20 years, to be settled by Universal at its then face value with a maximum of approximately 56.6 million USA common shares, provided that Universal may substitute cash in lieu of shares of USA common stock (but not USA Class B common stock), at its election; (iv) a 5.44% common interest in VUE, generally callable by Universal after five years and puttable by USA after eight years, which may be settled in either Vivendi stock or cash, at Universal's election, and (v) a cancellation of Universal's USANi LLC interests that were exchangeable into USA common shares including USANi LLC interests obtained from Liberty in connection with a related transaction. In connection with the transaction, USA has retired approximately 321 million shares previously owned by Vivendi, thereby reducing USA's fully diluted shares to 477 million shares. Related to the transaction, Liberty exchanged 7,079,726 shares of USANi LLC for shares of USA common stock, and subsequently transferred to Universal 25,000,000 shares of USA common stock, its remaining 38,694,982 shares of USANi LLC, as well as the assets and liabilities of Liberty Programming France (which consist primarily of 4,921,250 shares of multiThematiques S.A., a French entity), in exchange for 37,386,436 Vivendi ordinary shares. USA contributed to VUE USA Cable, which includes USA Network, SCI FI Channel, TRIO and Newsworld International; Studios USA, which produces and distributes television programming; USA Films, which produces and distributes films. Vivendi contributed the film, television and theme park businesses of its subsidiary, Universal Studios, Inc. In addition, USA issued to Universal ten-year warrants to acquire shares of USA common stock as follows: 24,187,094 shares at $27.50 per share; 24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per share. Barry Diller, USA's chairman and chief executive officer, will receive a common interest in VUE with a 1.5% profit sharing percentage, with a minimum value of $275.0 million, in return for his agreeing to specified non-competition provisions and agreeing to serve as chairman and chief executive officer of VUE. USA and Mr. Diller have agreed that they will not compete with Vivendi's television and filmed entertainment businesses (including VUE) for a minimum of 18 months. 10 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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. ("USAi"), and became a subsidiary of USAi (the "Home Shopping Merger"). As of March 31, 2002 USANi LLC was organized into two groups, the Interactive Group and the Entertainment Group. The Interactive Group consists of Home Shopping Network (including HSN International and HSN.com); Electronic Commerce Solutions; and Styleclick (OTC: IBUY). The Entertainment Group consists of USA Cable, including USA Network and Sci Fi Channel and Emerging networks TRIO, Newsworld International, and Crime; and Studios USA, which produces and distributes television programming. SUBSEQUENT EVENTS CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE On May 7, 2002, USA completed its previously announced transaction with Vivendi to create a joint venture called Vivendi Universal Entertainment ("VUE") (the "VUE Transaction"). VUE is controlled by Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi, 5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA. In connection with the Vivendi Transaction, USA and its subsidiaries received the following at the closing: (i) approximately $1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment for a 15-year period, (ii) a $750 million face value Class A preferred interest in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled in cash at its then face value at maturity; (iii) a $1.75 billion face value Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a 3.6% annual cash dividend, callable and puttable after 20 years, to be settled by Universal at its then face value with a maximum of approximately 56.6 million USA common shares, provided that Universal may substitute cash in lieu of shares of USA common stock (but not USA Class B common stock), at its election; (iv) a 5.44% common interest in VUE, generally callable by Universal after five years and puttable by USA after eight years, which may be settled in either Vivendi stock or cash, at Universal's election, and (v) a cancellation of Universal's USANi LLC interests that were exchangeable into USA common shares including USANi LLC interests obtained from Liberty in connection with a related transaction. In connection with the transaction, USA has retired approximately 321 million shares previously owned by Vivendi, thereby reducing USA's fully diluted shares to 477 million shares. Related to the transaction, Liberty exchanged 7,079,726 shares of USANi LLC for shares of USA common stock, and subsequently transferred to Universal 25,000,000 shares of USA common stock, its remaining 38,694,982 shares of USANi LLC, as well as the assets and liabilities of Liberty Programming France (which consist primarily of 4,921,250 shares of multiThematiques S.A., a French entity), in exchange for 37,386,436 Vivendi ordinary shares. USA contributed to VUE USA Cable, which includes USA Network, SCI FI Channel, TRIO and Newsworld International; Studios USA, which produces and distributes television programming; USA Films, which produces and distributes films. Vivendi contributed the film, television and theme park businesses of its subsidiary, Universal Studios, Inc. In addition, USA issued to Universal ten-year warrants to acquire shares of USA common stock as follows: 24,187,094 shares at $27.50 per share; 24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per share. Barry Diller, USA's chairman and chief executive officer, will receive a common interest in VUE with a 1.5% profit sharing percentage, with a minimum value of $275.0 million, in return for his agreeing to specified non-competition provisions and agreeing to serve as chairman and chief executive officer of VUE. USA 11 and Mr. Diller have agreed that they will not compete with Vivendi's television and filmed entertainment businesses (including VUE) for a minimum of 18 months. The transaction has been accounted for as an asset sale. The after-tax gain associated with this transaction is preliminarily estimated at $3.5 billion. ADOPTION OF NEW ACCOUNTING RULES FOR GOODWILL Effective January 1, 2002, USA adopted Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets." The new rules eliminate amortization of goodwill and other intangible assets with indefinite lives and establish new measurement criterion for these assets. As disclosed in previous filings, the adoption did not result in any write-offs. Goodwill amortization recorded in the three months ended March 31, 2001 was $36.7 million, including $28.3 million related to USA Entertainment. ADJUSTED EBITDA Adjusted earnings before interest, income taxes, depreciation and amortization ("Adjusted EBITDA") is defined as operating profit plus (1) depreciation and amortization, (2) amortization of cable distribution fees (3) amortization of non-cash distribution and marketing expense and (4) disengagement expenses. Adjusted EBITDA is presented here as a management tool and as a valuation methodology. Adjusted EBITDA does not purport to represent cash provided by operating activities. Adjusted EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Adjusted EBITDA may not be comparable to calculations of similarly titled measures presented by other companies. The following is a reconciliation of Operating Income to Adjusted EBITDA for 2002 and 2001.
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- Operating profit........................................ $116,379 $114,917 Depreciation and amortization........................... 18,339 56,387 Amortization of cable distribution fees................. 13,000 8,756 Amortization of non-cash compensation expense........... 1,024 2,512 Disengagement expenses.................................. 11,538 -- -------- -------- Adjusted EBITDA......................................... $160,280 $182,572 ======== ========
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 GENERALLY OR IN THE MARKETS SERVED BY THE COMPANY; FUTURE REGULATORY AND LEGISLATIVE 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; THE ABILITY TO EXPAND INTO AND SUCCESSFULLY OPERATE IN FOREIGN MARKET; AND OBTAINING AND RETAINING KEY EXECUTIVES AND EMPLOYEES. 12 THREE MONTHS ENDED MARCH 31, 2002 VS. THREE MONTHS ENDED MARCH 31, 2001 INTERACTIVE HSN-U.S. OPERATING RESULTS Net revenues in 2002 increased by $9.9 million, or 2.6%, to $395.3 million from $385.4 million in 2001 due primarily from $19.4 million of revenue generated by the Improvements business, a specialty catalogue retailer purchased in 2001, offset partially by lower revenue of HSN on-air and HSN.com of $7.2 million, as the Company focused on higher margin products in 2002, resulting in an increased margin of 35.5% compared to 33.5% in 2001, at lower revenue levels. As previously disclosed, 2002 revenue was impacted by the disengagement of former USAB broadcast stations that aired Home Shopping programming in late 2001 and early 2002 (see below for further discussion). On a pro forma basis based on the estimated impact of disengagement, net revenues in 2002 increased by $47.0 million, or 13.4%, to $396.2 million from $349.2 million. For 2002, total units shipped domestically increased to 9.6 million units compared to 8.6 million units in 2001, while the on-air return rate decreased slightly to 19.0% from 19.6% in 2001. The average price point in 2001 was $45.41, compared to $50.06 in 2001, resulting from a shift from computers in 2002 to higher margin products as discussed above. Cost related to revenues and other costs and expenses for 2002 decreased slightly by $2.4 million, or 1.2%, to $337.6 million from $340.0 million in 2001 due to lower broadcasting costs offset partially by higher sales volume. Adjusted EBITDA in 2002 increased $12.3 million, to $57.7 million from $45.4 million in 2001, due to increased Adjusted EBITDA of on-air and HSN.com of $11.4 million and $1.7 million of Adjusted EBITDA generated by the Improvements business. Adjusted EBITDA excludes amortization of cable distribution fees of $13.0 million in 2002 and $8.8 million in 2001 and disengagement costs of $11.5 million in 2002. DISENGAGEMENT As noted in the Company's previous filings, the majority of the USAB stations sold to Univision are located in the largest markets in the country and aired HSN on a 24-hour basis. As of January 2002, HSN switched its distribution in these markets directly to cable carriage. As a result, HSN lost approximately 12 million homes and accordingly, HSN's operating results were affected. Fortunately, sales from broadcast only homes are much lower than sales from cable homes. As a result, HSN's losses attributable to disengagement are expected to be limited. HSN estimates that lost sales, translated on a pro forma basis for the first quarter of 2001, were $36.2 million and Adjusted EBITDA of $6.0 million. In addition, in order to effectively transfer HSN's distribution to cable (which has been accomplished), USA incurred charges of approximately $11.5 million in the form of payments to cable operators and related marketing expenses, including $0.9 million of coupon redemptions related to customers impacted by disengagement. USA expects that total disengagement expenses will be approximately $100 million ($35.9 million to be incurred in 2002), which payment will reduce USA's pre-tax proceeds from the Univision transaction to $1 billion. These disengagement costs are excluded from Adjusted EBITDA. Note that the total proceeds of $1.1 billion from the Univision transaction have been collected. The Company has supplemented its discussion of HSN's results by including a comparison of 2002 to 2001, adjusted for the estimated impact of disengagement on revenues and Adjusted EBITDA. HSN-INTERNATIONAL AND OTHER HSN-International consists primarily of HSN-Germany and Home Shopping Espanol, which operates Spanish language electronic retailing operations serving customers primarily in the United States and Mexico. HSN-Germany had decreased sales of $5.6 million in 2002 as compared to 2001, related in part to a decline in the Euro, resulting in $2.8 million of lower sales upon translation from 13 Euro to dollars, and lower sales due to the lingering effects of the conversion to a new order management system. Home Shopping Espanol had slightly increased revenues of $1.6 million, to $5.3 million in 2002 compared to $3.7 million in 2001, resulting from increased sales in existing markets and expansion into Mexico. Overall, international costs decreased $1.6 million due primarily due to lower sales volume, although gross margins declined to 29.1% from 36.2% in 2001 due to high return rates and high fulfillment costs. Adjusted EBITDA for electronic retailing in Germany decreased $3.7 million in 2002, to $1.0 million from $4.7 million in 2001, due to lower margins and higher operating expense. Adjusted EBITDA loss for Espanol and International administration, narrowed to $4.8 million in 2002 from $5.2 million, due to a reduction in the number of live hours of programming produced for live airing. ELECTRONIC COMMERCE SOLUTIONS/ STYLECLICK Net revenues in 2002 increased by $3.5 million to $12.1 million compared to $8.6 million in 2001 due primarily to increases in revenue of ECS of $7.3 million offset partially by lower Styleclick revenue of $3.8 million caused by the shut-down of the First Jewelry and FirstAuction.com websites. Cost related to revenues and other costs and expenses in 2002 decreased by $4.9 million, due primarily to initiatives to reduce operating costs of Styleclick. Adjusted EBITDA loss in 2002 narrowed by $8.4 million to $8.5 million in 2002 from $16.9 million in 2001. As previously disclosed, in 2001, Styleclick began to focus on e-commerce services and technology while eliminating its online retail business. During this transition, Styleclick continued to incur significant net losses from operations that raise substantial doubt about Styleclick's ability to continue as a going concern. Styleclick is considering its options with respect to the situation. ENTERTAINMENT CABLE AND STUDIOS Net revenues in 2002 decreased by $67.7 million to $367.3 million from $435.0 million in 2001 due to the continued softness in the US advertising market and lower syndication revenue. Note that the cable networks provided $3.5 million of advertising to USA affiliates in 2002. In addition, the networks recognized $8.7 million of barter revenue pursuant to agreements with unaffiliated third parties. Cost related to revenues and other costs and expenses in 2002 decreased by $30.7 million, or 11.3%, to $240.9 billion from $271.6 million in 2000 due to lower revenue and efficient use of programming by Cable and increased usage of internally developed product by Cable, resulting in reduced program amortization. Adjusted EBITDA in 2002 decreased by $37.1 million, or 22.7%, to $126.3 million from $163.4 million in 2001. EMERGING NETWORKS Net revenues in 2002 increased by $0.8 million to $7.0 million from $6.2 million in 2001. Cost related to revenue increased by $2.5 million to $10.4 million from $7.9 million in 2002 as compared to 2001 due primarily to higher programming costs of Trio. Adjusted EBITDA loss in 2002 increased by $1.7 million, to a loss of $3.4 million. DEPRECIATION AND AMORTIZATION, NON-CASH COMPENSATION AND OTHER INCOME (EXPENSE) Depreciation and amortization decreased $38.0 million to $18.3 million from $56.4 million, due primarily to the impact of the adoption of FAS 141/ 142 in the first quarter or 2002, resulting in no goodwill amortization in 2002. Goodwill amortized in the first quarter of 2001 was $36.7 million. Amortization of non-cash compensation expense decreased $1.5 million due to lower non-cash expense related to the Company's bonus stock program. Amortization of cable distribution fees increased $4.2 million, to $13.0 million in 2002, due to increased up-front payments made to cable operators. 14 For the three months ended March 31, 2002, net interest expense was $17.0 million compared to $4.9 million in 2001 primarily due to lower interest earned due to lower rates. In the three months ended March 31, 2002 and 2001, the Company realized pre-tax losses of $13.5 million and $4.8 million, respectively, on equity losses in unconsolidated subsidiaries resulting primarily from HOT Networks, which operates electronic retailing operations in Europe. On May 3, 2002, USA stated that it would no longer fund HOT Networks. The other shareholders have also terminated their funding of the venture. As of April 30, 2002, USA has a long-term receivable of $100.5 million from HOT Networks. The Company is evaluating the recoverability of this receivable, but has not completed its evaluation at this time. Home Shopping Network and the other shareholders of HOT Networks are actively discussing alternative arrangements with respect to their relationship, which may include the acquisition of additional equity by USA. Based on these discussions, the Company may determine that the carrying value of the receivable is not recoverable. INCOME TAXES The Company's effective tax rate of 35.05% for the three months ended March 31, 2002 was higher than the statutory rate due to the impact on taxable income of non-deductible goodwill, consolidated book losses not consolidated into taxable income and state income taxes. MINORITY INTEREST Minority interest primarily represents the public's ownership interest in Styleclick since July 27, 2000 and the public's ownership interest in HSN-Germany since its consolidation as of January 1, 2000, and Vivendi's and Liberty's ownership in USANi LLC. Upon completion of the Vivendi Transaction, Holdco and USA owned 100% of the member's interest in USANi LLC. USA has the contractual right to require the exchange of the Holdco shares held by Liberty for shares of USA. Following such exchange and after giving effect to the Vivendi Transaction, Holdco and USANi LLC will become wholly owned by USA, thereby simplifying USA's corporate structure. These transactions will reduce the amount of minority interest recorded by USA. 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. The portfolio is reviewed on a periodic basis and adjusted in the event that the credit rating of a security held in the portfolio has deteriorated. At March 31, 2002, the Company's outstanding debt approximated $533.6 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, primarily in the European Union. The Company has exposure to exchange rate fluctuations of the U.S. dollar to the Euro. However, the Company intends to reinvest profits from international operations in order to grow the businesses. As the Company increases its operations in international markets it becomes increasingly exposed to potentially volatile movements in currency exchange rates. The economic impact of currency 15 exchange rate movements on the Company are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause the Company to adjust its financing and operating strategies. As currency exchange rates change, translation of the income statements of the Company's international businesses into U.S. dollars affects year-over-year comparability of operating results. The Company does not hedge translation risks because cash flows from international operations are generally reinvested locally. Further, the Company does not enter into hedges to minimize volatility of reported earnings because the Company does not believe it is justified by the attendant cost. Foreign exchange gains and losses were not material to the Company's earnings for the three months ended March 31, 2002 or 2001. EQUITY PRICE RISK The Company has a minimal investment in equity securities of publicly-traded companies. This investment, as of March 31, 2002, 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 significant investments in equity securities as part of its investment strategy. 16 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has described the Home Shopping Network Consumer Class Action litigation in the 2001 Form 10-K, which litigation related to an action in Illinois. In May of 2002, Home Shopping Network, Inc. and Home Shopping Club LP (the "HSN Defendants") were named as defendants in a consumer class action lawsuit entitled SUSAN DICICCO, ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED V. HOME SHOPPING NETWORK, INC. D/B/A THE HOME SHOPPING NETWORK AND HOME SHOPPING CLUB, L.P. D/B/A THE HOME SHOPPING NETWORK, filed in the Civil Division of the Circuit Court of Pinellas County, Florida, Case No. 02-3625-CI-19. The Florida action is substantially similar to the Illinois action and is purportedly brought on behalf of consumers who were alleged to have purchased a Proteva personal computer from the HSN Defendants and experienced one of the three following conditions: (a) the computer was or became defective upon purchase or soon thereafter, (b) the HSN Defendants refused or failed to honor the rebate offer which was offered as part of the sale, or (c) the HSN Defendants refused or failed to provide customer and warranty service as purportedly advertised. In the complaint, the plaintiff asserts causes of action for deceptive trade practices in violation of the Florida Deceptive and Unfair Trade Practices Act, breach of contract, breach of express and implied warranties and unjust enrichment and seek damages, disgorgement of profits, costs and expenses (including reasonable attorneys' and experts' fees) and such other relief as the Court may deem proper. The HSN Defendants have not been served with the complaint, and when served, intend to vigorously defend the action. 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 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. 3.2 Amendment to Restated Certificate of Incorporation of USA, filed as Exhibit A to USA's Definitive Information Statement, filed on November 19, 2001, is incorporated herein by reference. 3.3 Certificate of Ownership and Merger Merging Taiwan Travel, Inc. into USA Networks, Inc., filed as Exhibit 3.3 to USA's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002, is incorporated herein by reference. 3.4 Amended and Restated By-Laws of USA filed as Exhibit 3.4 to USA's Form 10-K for the fiscal year ended December 31, 2001, is incorporated herein by reference. 3.5 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. 3.6 By-Laws of Home Shopping Network, Inc., filed as Exhibit 3.16 to USANi LLC's Registration Statement on Form S-4 (No. 333-71305), is incorporated herein by reference
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.7 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. 3.8 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 March 31, 2002. None. 18 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. By: /s/ BARRY DILLER ----------------------------------------- Barry Diller Chairman and Chief Executive Officer May 15, 2002
SIGNATURE TITLE DATE --------- ----- ---- /s/ BARRY DILLER ------------------------------------------- Chairman of the Board, Chief May 15, 2002 Barry Diller Executive Officer and Director /s/ DARA KHOSROWSHAHI Executive Vice President and ------------------------------------------- Chief Financial Officer May 15, 2002 Dara Khosrowshahi (Principal Financial Officer) /s/ WILLIAM J. SEVERANCE ------------------------------------------- Vice President and Controller May 15, 2002 William J. Severance (Chief Accounting Officer)
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