-----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, DFsChKIcRHwawGrnRTCqFqAA/3GXN29U+yk6jOlqewpWguo5kaNCpEji58Y2SnqU Zxb1IHXYt68zbfp5Uq6D9g== 0000950123-99-010282.txt : 19991117 0000950123-99-010282.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010282 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-22069 FILM NUMBER: 99756675 BUSINESS ADDRESS: STREET 1: 1 HSN DRIVE CITY: ST PETERSBURG STATE: FL ZIP: 33729 BUSINESS PHONE: 8135728585 10-Q 1 HOME SHOPPING NETWORK, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 333-71305-03 HOME SHOPPING NETWORK, INC. (Exact name of Registrant as specified in its charter) DELAWARE 59-2649518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
152 WEST 57TH STREET NEW YORK, NEW YORK (Address of principal executive offices) 10019 (Zip Code) (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 __ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- 1999 1998 1999 1998 --------- -------- -------- -------- (IN THOUSANDS) NET REVENUES Networks and television production............... $ 307,360 $281,302 $955,725 $757,305 Electronic retailing............................. 281,946 258,038 842,851 766,458 Internet services................................ 5,551 5,934 18,402 14,467 Other............................................ -- 3,144 6,882 9,959 --------- -------- -------- -------- Total net revenues....................... 594,857 548,418 1,823,860 1,548,189 --------- -------- -------- -------- Operating costs and expenses: Cost of sales.................................... 171,982 162,450 530,654 482,030 Program costs.................................... 147,549 151,149 466,896 408,948 Selling and marketing............................ 74,121 63,701 209,859 188,932 General and administrative....................... 60,080 51,306 173,876 129,190 Other operating costs............................ 22,081 22,414 66,400 65,265 Amortization of cable distribution fees.......... 6,938 5,319 19,214 15,883 Depreciation and amortization.................... 44,058 41,818 130,620 110,069 --------- -------- -------- -------- Total operating costs and expenses....... 526,809 498,157 1,597,519 1,400,317 --------- -------- -------- -------- Operating profit................................. 68,048 50,261 226,341 147,872 Other income (expense): Interest income.................................. 12,636 7,452 31,959 12,874 Interest expense................................. (21,066) (24,440) (61,685) (78,522) Gain on sale of securities....................... 39,451 -- 89,721 -- Other, net....................................... (779) (3,553) 879 (16,273) --------- -------- -------- -------- 30,242 (20,541) 60,874 (81,921) --------- -------- -------- -------- Earnings before income taxes and minority interest...................................... 98,290 29,720 287,215 65,951 Income tax expense............................... (18,080) (13,017) (52,234) (26,376) Minority interest................................ (58,973) (22,845) (173,673) (42,239) --------- -------- -------- -------- NET EARNINGS(LOSS)................................. $ 21,237 $ (6,142) $ 61,308 $ (2,664) ========= ======== ======== ========
The accompanying notes are an integral part of these statements. 1 3 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 195,926 $ 234,903 Accounts and notes receivable, net of allowance of $33,820 and $20,572, respectively................................. 305,413 317,298 Inventories, net............................................ 423,511 411,727 Other current assets, net................................... 17,235 14,685 ---------- ---------- Total current assets.............................. 942,085 978,613 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 109,245 95,013 Buildings and leasehold improvements........................ 58,180 55,136 Furniture and other equipment............................... 43,524 30,068 ---------- ---------- 210,949 180,217 Less accumulated depreciation and amortization............ (69,840) (43,262) ---------- ---------- 141,109 136,955 Land........................................................ 10,245 10,242 Projects in progress........................................ 24,127 14,587 ---------- ---------- 175,481 161,784 OTHER ASSETS Intangible assets, net...................................... 5,070,489 5,231,776 Cable distribution fees, net ($36,830 and $39,650, respectively, to related parties)......................... 131,191 100,416 Long-term investments....................................... 48,066 57,830 Notes and accounts receivable, net of current portion ($2,562 and $3,356, respectively, from related parties)... 32,356 41,508 Inventories, net............................................ 151,538 150,293 Deferred income taxes....................................... 111,917 119,110 Advances to USAi and subsidiaries........................... 418,584 120,436 Deferred charges and other, net ($4,671 and $4,357, respectively, from related parties)....................... 42,323 39,075 ---------- ---------- $7,124,030 $7,000,841 ========== ==========
The accompanying notes are an integral part of these statements. 2 4 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 4,068 $ 28,223 Accounts payable, trade..................................... 115,908 159,288 Obligations for program rights and film costs............... 245,227 184,074 Cable distribution fees payable ($18,567 and $18,633, respectively, to related parties)......................... 41,149 44,588 Deferred revenue............................................ 47,180 30,813 Deferred income taxes....................................... 10,015 10,016 Other accrued liabilities................................... 302,935 248,702 ---------- ---------- Total current liabilities......................... 766,482 705,704 LONG-TERM OBLIGATIONS, net of current....................... 506,565 732,307 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of current................................................... 295,062 409,716 OTHER LONG-TERM LIABILITIES................................. 43,336 49,857 MINORITY INTEREST........................................... 4,193,933 3,783,085 STOCKHOLDERS' EQUITY Common stock................................................ 1,221,408 1,221,408 Additional paid-in capital.................................. 70,755 70,755 Retained earnings........................................... 26,932 18,379 Unrealized gain in available for sale securities............ -- 10,353 Unearned compensation....................................... (443) (723) ---------- ---------- Total stockholders' equity........................ 1,318,652 1,320,172 ---------- ---------- $7,124,030 $7,000,841 ========== ==========
The accompanying notes are an integral part of these statements. 3 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
ADDITIONAL COMMON PAID-IN RETAINED UNREALIZED UNEARNED TOTAL STOCK CAPITAL EARNINGS GAINS COMPENSATION ---------- ---------- ---------- -------- ---------- ------------ (IN THOUSANDS) BALANCE AT JANUARY 1, 1999....... $1,320,172 $1,221,408 $70,755 $ 18,379 $ 10,353 $(723) Comprehensive Income: Net earnings for the nine months ended September 30, 1999......................... 61,308 -- -- 61,308 -- -- Decrease in unrealized gains in available for sale securities................... (10,353) -- -- -- (10,353) -- ---------- Comprehensive income......... 50,955 -- -- -- -- -- Mandatory tax distribution to LLC partners....................... (52,755) -- -- (52,755) -- -- Cancellation of employee equity program........................ 280 -- -- -- -- 280 ---------- ---------- ------- -------- -------- ----- BALANCE AT SEPTEMBER 30, 1999.... $1,318,652 $1,221,408 $70,755 $ 26,932 $ -- $(443) ========== ========== ======= ======== ======== =====
The accompanying notes are an integral part of these statements. 4 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1999 1998 --------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)....................................... $ 61,308 $ (2,664) Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.......................... 130,620 110,069 Amortization of cable distribution fees................ 19,214 15,883 Amortization of program rights and film costs.......... 391,088 356,219 Gain on sale of securities................................ (89,721) -- Minority interest......................................... 173,673 42,239 Changes in current assets and liabilities: Accounts receivable.................................... 16,205 (82,380) Inventories............................................ 375 (72,526) Accounts payable....................................... (43,174) 39,633 Accrued liabilities.................................... 60,120 63,515 Payment for program rights and film costs................. (410,500) (335,005) Increase in cable distribution fees....................... (35,624) (2,365) Other, net................................................ 6,726 (11,898) --------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 280,310 120,720 --------- ----------- Cash flows from investing activities: Acquisition of Universal Transaction, net of cash acquired............................................... -- (1,297,233) Acquisitions, net of cash acquired........................ (7,500) -- Capital expenditures, net................................. (43,781) (34,468) Increase in long-term investments......................... (12,750) (22,542) Proceeds from sale of securities.......................... 107,231 -- Payment of merger and financing costs..................... -- (20,855) Other, net................................................ 6,221 (4,065) --------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...................................... 49,421 (1,379,163) --------- ----------- Cash flows from financing activities: Borrowings................................................ -- 1,741,380 Principal payments on long-term obligations............... (252,182) (990,512) Payment of mandatory tax distribution to LLC Partners..... (52,755) -- Proceeds from issuance of LLC shares...................... 401,319 795,025 Repurchase of LLC shares.................................. (7,226) -- Advances to USAi and subsidiaries......................... (457,864) (185,227) --------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES...................................... (368,708) 1,360,666 --------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS......... (38,977) 102,223 Cash and cash equivalents at beginning of period............ 234,903 23,022 --------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 195,926 $ 125,245 ========= ===========
The accompanying notes are an integral part of these statements. 5 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Home Shopping Network, Inc. (the "Company", "Holdco" or "Home Shopping"), is a holding company, whose subsidiary USANi LLC is engaged in diversified media and electronic commerce businesses. In December 1996, the Company consummated a merger with USA Networks, Inc. ("USAi"), formerly known as HSN, Inc., and became a subsidiary of USAi (the "Home Shopping Merger"). On February 12, 1998, USAi acquired USA Networks, a New York general partnership, consisting of cable television networks, USA Network and The Sci-Fi Channel ("Networks"), as well as the domestic television production and distribution businesses of Universal Studios ("Studios USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd. ("Seagram") (the "Universal Transaction"). In connection with the Universal Transaction, the Company formed a new subsidiary, USANi LLC, and contributed the operating assets of the Home Shopping Network services ("HSN") to USANi LLC. Furthermore, USAi contributed Networks and Studios USA to USANi LLC on February 12, 1998. As of September 30, 1999, the Company engages in three principal areas of business: - NETWORKS AND TELEVISION PRODUCTION, which includes Networks and Studios USA. Networks operates the USA Network and The Sci-Fi Channel cable networks and Studios USA produces and distributes television programming. - ELECTRONIC RETAILING, consisting primarily of the Home Shopping Network and America's Store, which are engaged in the electronic retailing business. - INTERNET SERVICES, which represents the Company's on-line retailing networks business. 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 year ended December 31, 1998 contained in the Form S-4 Registration Statement (File No. 333-71305) for the $500.0 million 6 3/4% Senior Notes. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Form S-4 Registration Statement (File No. 333-71305) for the fiscal year ended December 31, 1998 for a summary of all significant accounting policies. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. 6 8 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant estimates underlying the accompanying consolidated financial statements and notes include the inventory carrying adjustment, program rights and film cost amortization, sales return accrual and other revenue allowances, allowance for doubtful accounts, recoverability of intangibles and other long-lived assets, management's forecast of anticipated revenues from the distribution of television product in order to evaluate the ultimate recoverability of film inventory and amortization of program usage. NOTE 3 -- BUSINESS ACQUISITIONS UNIVERSAL TRANSACTION In connection with the Universal Transaction, USAi paid Universal approximately $4.1 billion in the form of a cash payment of approximately $1.6 billion, a portion of which ($300 million plus interest) was deferred until no later than September 30, 1998, and an effective 45.8% interest in USAi through shares of common stock, par value $.01 per share, of USAi (the "Common Stock") and Class B common stock, par value $.01 per share, of USAi (the "Class B Common Stock"), and shares ("LLC Shares") of a newly formed limited liability company ("USANi LLC") which are exchangeable (subject to regulatory restrictions) into shares of Common Stock and Class B Common Stock. At the closing of the Universal Transaction, USAi contributed its Home Shopping business to USANi LLC, a subsidiary of USAi. Simultaneously with this transaction, the remaining 1,178,322 shares of Class B Common Stock were issued in accordance with Liberty Media Corporation's ("Liberty") contingent right to receive such shares as part of the Home Shopping Merger in 1996. The Investment Agreement, as amended and restated as of December 18, 1997, among USAi, Home Shopping, Universal and Liberty, a subsidiary of AT&T Corporation (the "Investment Agreement"), relating to the Universal Transaction also contemplated that, on or prior to September 30, 1998, USAi and Liberty, would complete a transaction involving a $300 million cash investment, plus an interest factor, by Liberty in USAi through the purchase of Common Stock or LLC Shares. The transaction closed on September 30, 1998 with Liberty making a cash payment of $308.5 million in exchange for 15,000,000 LLC shares. The following unaudited pro forma condensed combined financial information for the nine months ended September 30, 1998, is presented to show the results of the Company, as if the Universal Transaction had occurred as of January 1, 1998. The pro forma results include certain adjustments, including increased amortization related to goodwill and other intangibles, changes in programming and film costs amortization and an increase in interest expense, and are not necessarily indicative of what the results would have been had the transactions actually occurred on the aforementioned dates.
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS) Net revenues.......................... $1,705,553 Net earnings.......................... $ 1,091
NOTE 4 -- LONG-TERM OBLIGATIONS On February 12, 1998, the Company entered into an Unsecured Senior Credit Facility, which included a $750.0 million Tranche A Term Loan maturing on December 31, 2002. In November 1998, in conjunction with the offering of $500.0 million 6 3/4% Senior Notes, the Company permanently repaid $500.0 million of the Tranche A Term Loan. In September 1999, the Company permanently repaid the remaining balance. In conjunction with the September 1999 repayment, the Company wrote off deferred financing costs of $0.6 million. 7 9 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: During the nine months ended September 30, 1999, the Company acquired post-production equipment through a capital lease totaling $2.5 million. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
(IN THOUSANDS) ACQUISITION OF USA NETWORKS AND STUDIOS USA Acquisition price......................................... $ 4,115,531 Less: Amount paid in cash................................. (1,300,983) ----------- Total Non-Cash Consideration...................... $ 2,814,548 =========== Components of Non-Cash Consideration: Deferred purchase price liability......................... $ 300,000 Issuance of Common Shares and Class B Shares.............. 277,898 Issuance of USANi LLC Shares.............................. 2,236,650 ----------- $ 2,814,548 ----------- Exchange of Minority Interest in USANi LLC for Deferred Purchase Price Liability.................................. $ 304,636 ===========
As of March 1, 1998, the 5 7/8% Convertible Subordinated Debentures were converted to 7,499,022 shares of USAi Common Stock. During the nine months ended September 30, 1998, the Company acquired computer equipment through a capital lease totaling $15.5 million. NOTE 6 -- INVENTORIES
SEPTEMBER 30, 1999 DECEMBER 31, 1998 --------------------- --------------------- INVENTORIES CONSIST OF: CURRENT NONCURRENT CURRENT NONCURRENT ----------------------- -------- ---------- -------- ---------- (IN THOUSANDS) Film costs: Released, less amortization............... $ 67,237 $ 41,799 $ 98,082 $ 61,310 In process and unreleased................. 33,740 8,591 138 -- Programming costs, net of amortization...... 166,539 99,905 151,192 88,983 Merchandise held for sale................... 155,995 -- 162,315 -- Other....................................... -- 1,243 -- -- -------- -------- -------- -------- Inventories, net.................. $423,511 $151,538 $411,727 $150,293 ======== ======== ======== ========
The Company estimates that approximately 90% of unamortized film costs at September 30, 1999 will be amortized within the next three years. NOTE 7 -- PROGRAM RIGHTS AND FILM COSTS As of September 30, 1999, the liability for program rights, representing future payments to be made under program contract agreements amounted to $485.4 million. Annual payments required are approximately $54.9 million for the remainder of 1999, $207.6 million in 2000, $108.4 million in 2001, $66.7 million in 2002, 8 10 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $27.8 million in 2003 and $20.0 million in 2004 and thereafter. Amounts representing interest are $59.1 million and the present value of future payments is $426.3 million. As of September 30, 1999, the liability for film costs amounted to $114.0 million. Annual payments required are approximately $15.9 million for the remainder of 1999, $55.0 million in 2000, $25.1 million in 2001, $13.0 million in 2002 and $5.0 million in 2003. Unrecorded commitments for program rights consist of programs for which the license period has not yet begun or the program is not yet available to air. As of September 30, 1999, the unrecorded commitments amounted to $687.6 million. Annual commitments are $10.0 million for the remainder of 1999, $92.9 million in 2000, $139.6 million in 2001, $134.5 million in 2002, $109.0 million in 2003 and $201.6 million in 2004 and thereafter. NOTE 8 -- GUARANTEE OF NOTES On November 23, 1998, USAi and USANi LLC issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes") as joint and several co-obligors. Home Shopping is a guarantor of the Notes. Substantially all of the significant subsidiaries of USANi LLC and substantially all of the significant wholly-owned subsidiaries of USAi (principally subsidiaries engaged in the broadcasting and ticketing operations) have jointly and severally guaranteed USAi's indebtedness. Certain insignificant subsidiaries of USANi LLC do not guarantee the indebtedness. NOTE 9 -- INDUSTRY SEGMENTS For the three and nine months ended September 30, 1999 and 1998, the Company operated principally in three industry segments: Networks and television production, Electronic retailing and Internet services. Networks and television production segment consists of the cable networks USA Network and The Sci-Fi Channel and Studios USA, which produces and distributes television programming, which were acquired on February 12, 1998. The Electronic retailing segment consists of Home Shopping Network and America's Store, which are engaged in the sale of merchandise through electronic retailing. Internet services segment represents the Company's on-line retailing networks business.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------------- 1999 1998 1999 1998 -------- -------- ---------- ---------- (IN THOUSANDS) Net revenues Networks and television production..... $307,360 $281,302 $ 955,725 $ 757,305 Electronic retailing................... 281,946 258,038 842,851 766,458 Internet services...................... 5,551 5,934 18,402 14,467 Other.................................. -- 3,144 6,882 9,959 -------- -------- ---------- ---------- $594,857 $548,418 $1,823,860 $1,548,189 ======== ======== ========== ========== Operating profit (loss) Networks and television production..... $ 65,028 $ 43,187 $ 222,897 $ 128,376 Electronic retailing................... 19,908 17,551 53,460 42,873 Internet services...................... (10,541) (4,317) (29,541) (10,705) Other.................................. (6,347) (6,160) (20,475) (12,672) -------- -------- ---------- ---------- $ 68,048 $ 50,261 $ 226,341 $ 147,872 ======== ======== ========== ==========
9 11 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Home Shopping Network, Inc. (the "Company" or "Holdco"), is a holding company, the subsidiaries of which are engaged in diversified media and electronic commerce businesses. On February 12, 1998, USAi acquired USA Networks, a New York general partnership, consisting of cable television networks, USA Network and The Sci-Fi Channel ("Networks"), as well as the domestic television production and distribution businesses of Universal Studios ("Studios USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd. ("Seagram") (the "Universal Transaction"). 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 The following discussions present the material changes in the consolidated results of operations of the Company for the quarter and nine months ended September 30, 1999, compared with the quarter and nine months ended September 30, 1998. The operations for the quarter and nine months ended September 30, 1998, consist of the operations of Home Shopping and, since February 12, 1998, the results of USA Networks and Studios USA. Reference should also be made to the unaudited Condensed Consolidated Financial Statements included herein. The Universal Transaction resulted in significant increases in net revenues, operating costs and expenses and other income (expense) for the nine months ended September 30, 1999 when compared to 1998. NET REVENUES For the quarter ended September 30, 1999, revenues increased $46.4 million, or 8.5%, to $594.9 million from $548.5 million compared to 1998 primarily due to increases of $26.1 million and $23.9 million from the Networks and television production and Electronic retailing businesses, respectively. The increase in Networks and television production resulted principally from higher affiliate and advertising revenues due to higher ratings and subscriber levels. The increase in Electronic retailing is due to increased sales volume and continuity (off-air) sales. For the nine months ended September 30, 1999, revenues increased $275.7 million, or 17.8%, to $1.82 billion from $1.55 billion compared to 1998 primarily due to increases of $198.4 million and $76.4 million from the Networks and television production business and the Electronic retailing businesses, respectively. On a proforma basis, revenues increased $118.3 million, or 6.9%, as 1998 proforma revenue was $1.71 billion. 10 12 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATING COSTS AND EXPENSES For the quarter ended September 30, 1999, total operating costs and expenses, including depreciation and amortization, increased $28.7 million, or 5.8% to $526.8 million from $498.1 million compared to 1998 primarily due to increased costs of $21.6 million and $5.8 million from the Electronic retailing and Internet services businesses, respectively. The increase in Electronic retailing resulted primarily from higher sales volume and higher merchandising personnel costs. The increase in Internet services relates to increased costs to maintain and enhance services; costs incurred to develop a new electronic commerce site, FirstJewelry.com, which was launched in September 1999; and increased costs of shipping product due to an expanded product mix. The increases were partially offset by lower advertising and promotion costs for Internet services. For the nine months ended September 30, 1999, total operating costs and expenses increased $197.2 million, or 14.1%, to $1.60 billion from $1.40 billion compared to 1998, primarily due to increased costs of $103.9 million, $65.8 million and $22.8 million from the Networks and television production, Electronic retailing and Internet services businesses, respectively. On a proforma basis, total operating costs and expenses increased $67.0 million, or 4.4%, as 1998 proforma total operating costs and expenses was $1.53 billion. OTHER INCOME (EXPENSE), NET For the quarter and nine months ended September 30, 1999, interest expense, net decreased $8.6 million and $35.9 million, respectively, compared to 1998, primarily due to lower borrowing levels as a result of the repayment of bank debt in the fourth quarter of 1998 and in 1999 from the proceeds of equity transactions involving Universal and Liberty Media Corporation ("Liberty"). In addition, the conversion of the Convertible Subordinated Debentures to equity as of March 1, 1998 and lower interest rates resulted in decreased interest expense. For the quarter ended September 30, 1999, other, net totaled $0.8 million of expense compared to $3.6 million of expense in 1998. For the nine months ended September 30, 1999, other, net totaled $0.9 million of income compared to $16.3 million of expense in 1998 primarily due to the reversal of equity losses in the quarter ended March 31, 1999 which were recorded in 1998 as a result of the Universal Transaction. Other expense in 1999 relates primarily to losses on investments accounted for under the equity method. In the quarter and nine months ended September 30, 1999, the Company realized gains of $39.5 million and $89.7 million, respectively, from the sale of securities. INCOME TAXES The Company pays income taxes based on its allocation of earnings from its ownership of USANi LLC. The Company's effective tax rate for the quarter and nine months ended September 30, 1999 is higher than the statutory rate as a result of non-deductible goodwill and other acquired intangible assets and state income taxes. MINORITY INTEREST For the quarter and nine months ended September 30, 1999 and 1998, minority interest primarily represents Universal's and Liberty's ownership interest in USANi LLC (for 1998 beginning February 12, 1998). FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The operating results and capital resources and liquidity requirements of USAi, Holdco and USANi LLC are dependent on each other. The investment agreement, among Universal Studios, Inc. ("Universal"), 11 13 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Liberty Media Corporation, a subsidiary of AT&T Corporation, ("Liberty"), USAi and Holdco requires that no less frequently than monthly, (1) all cash generated by entities not owned by USANi LLC be transferred to USANi LLC and (2) any cash needs by entities not owned by USANi LLC be funded by USANi LLC. In addition, USAi and USANi LLC are jointly and severally obligated under the $500.0 million 6 3/4% Senior Notes due 20005 (the "Notes"). Net cash provided by operating activities was $280.3 million for the nine months ended September 30, 1999 compared to $120.7 million for the nine months ended September 30, 1998. These cash proceeds were used to pay for capital expenditures of $43.8 million, to make principal payments on long-term obligations of $252.2 million, to make mandatory tax distribution payments to LLC partners of $52.8 million, including $23.9 million to USAi, and to provide funding to USAi. The Company generated cash proceeds of $107.2 million from the sale of securities in a publicly traded entity during the nine months ended September 30, 1999. Under the investment agreement, transfers of cash between USAi and USANi LLC are evidenced by a demand note and accrue interest at USANi LLC's borrowing rate under the existing credit agreement. Certain transfers of funds between Holdco, USANi LLC and USAi are not evidenced by a demand note and do not accrue interest, primarily relating to the establishment of the operations of USANi LLC and capital contributions from USAi into USANi LLC. During the nine months ended September 30, 1999, net transfers from USANi LLC to USAi totaling approximately $452.7 million, including $371.4 million related to the Hotel Reservations Network Transaction and the October Films/PFE Transaction, $46.8 million to fund the operations of USAi's television broadcast operations, $98.6 million to repay the outstanding borrowings assumed in the October Films/PFE Transaction and $22.5 million to fund the operations of USA Films. Funds were also transferred to USAi to purchase shares of treasury stock. These amounts were offset by $69.5 million and $40.0 million of funds transferred to USANi LLC from the Ticketing operations business and the Hotel reservations business, respectively. On February 12, 1998, USAi and USANi LLC, as borrower, entered into the credit agreement which provides for a $1.6 billion credit facility. The credit facility was used to finance the Universal Transaction and to refinance USAi's then-existing $275.0 million revolving credit facility. The credit facility consists of (1) a $600.0 million revolving credit facility with a $40.0 million sub-limit for letters of credit, (2) a $750.0 million Tranche A Term Loan and, (3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and the Tranche B Term Loan have been permanently repaid as of September 30, 1999, as described below. The revolving credit facility expires on December 31, 2002. In 1999 the Company permanently repaid the Tranche A Term Loan in the amount of $250.0 million from cash on hand, including payments of $237.5 million in September 1999. On November 23, 1998, USAi and USANi LLC completed an offering of the Notes. Proceeds received from the sale of the Notes together with available cash were used to repay and permanently reduce $500.0 million of the Tranche A Term Loan. On August 5, 1998, USANi LLC permanently repaid the Tranche B Term Loan in the amount of $250.0 million from cash on hand. The existing credit facility is guaranteed by substantially all of USAi's material subsidiaries. The interest rate on borrowings under the existing credit facility is tied to an alternate base rate or the London InterBank Rate, in each case, plus an applicable margin. As of September 30, 1999, there was $599.4 million available for borrowing after taking into account outstanding letters of credit. Under the investment agreement relating to the Universal transaction, USAi has granted to Universal and Liberty preemptive rights with respect to future issuances of USAi's common stock and Class B common stock. These preemptive rights generally allow Universal and Liberty the right to maintain an ownership percentage in USAi equal to the ownership percentage that entity held, on a fully converted basis, immediately prior to the issuance. In July 1999, Universal and Liberty exercised their preemptive rights, 12 14 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) resulting in total cash proceeds to the Company of $362.6 million. Universal purchased 7.4 million USANi LLC Shares and Liberty purchased 3.6 million shares of USAi common stock. As part of the Universal transaction, USAi entered into a joint venture agreement relating to the development of international general entertainment television channels, including international versions of USA Network, The Sci-Fi Channel and Universal's action/adventure channel, 13th Street. USAi has elected to have Universal buy out its 50% interest in the venture. Accordingly, during the nine months ended September 30, 1999, USANi LLC reversed amounts previously recorded for its share of losses of the joint venture. The Company anticipates that it will need to invest working capital towards the development and expansion of its overall operations. Due primarily to the expansion of the Internet business, future capital expenditures are projected to be higher than current amounts. On March 1, 1999, the Company made a mandatory tax distribution payment to the LLC partners in the amount of $52.8 million, including $23.9 million to USAi. Under the terms of the investment agreement, USAi loaned that amount to USANi LLC. In management's opinion, available cash, internally generated funds and available borrowings will provide sufficient capital resources to meet the Company's foreseeable needs. OTHER MATTERS The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by its computerized information systems. Although assessment of non-critical systems is an ongoing process, the Company has substantially completed its detailed assessment of all of its information technology and non-information technology hardware and software to assess the scope of its year 2000 issue. The Company has potential exposure in technological operations within its sole control and in technological operations which are dependent in some way on one or more third parties. The Company believes that it has identified all significant technological areas within its control. The Company has ongoing communications with significant vendors and customers to confirm their plans to become Year 2000 compliant and is assessing any possible risk to or effects on its operations. The Company believes that, with respect to technological operations which are dependent on third parties, the significant areas of potential risk are the ability of satellite and cable operators to receive the signal transmission of USA Network, The Sci-Fi Channel and the Home Shopping Network and America's Store services and the ability of banks and credit card processors to process credit card transactions. Remediation and testing of critical systems that were not Year 2000 compliant is substantially complete as of the end of October 1999. The Company believes that the total costs associated with the Year 2000 assessment, remediation, implementation and testing will not exceed $10 million of which approximately $8 million has been spent through October 31, 1999. This amount is exclusive of capital expenditures that have either been made or are currently planned to be made to replace existing hardware and software systems, all as part of its ongoing efforts to upgrade its infrastructure and systems. Accordingly, based on existing information, the Company believes that the costs of addressing potential problems will not have a material adverse effect on its financial position, results of operations or cash flows. However, if the Company, its customers or vendors were unable to resolve the issues in a timely manner, it could result in a material adverse effect on its financial position, results of operations or cash flows. The Company has devoted and plans to continue to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. 13 15 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the second quarter of 1999, the Company developed contingency plans in the event it does not successfully complete all phases of its Year 2000 program for each of its significant operating divisions. SEASONALITY The Company's businesses are subject to the effects of seasonality. Networks and television production revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. The Company believes seasonality impacts its Electronic retailing segment but not to the same extent it impacts the retail industry in general. 14 16 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is engaged in various other lawsuits either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these various lawsuits should not have a material impact on the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 -- Financial Data Schedule (for SEC use only) 27.2 -- Financial Data Schedule (for SEC use only)
- --------------- * Reflects management contracts and compensatory plans. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOME SHOPPING NETWORK, INC. ----------------------------- (Registrant) Dated: November 15, 1999 /s/ BARRY DILLER -------------------------------------------------------- Barry Diller Chairman of the Board and Chief Executive Officer Dated: November 15, 1999 /s/ VICTOR A. KAUFMAN -------------------------------------------------------- Victor A. Kaufman Office of the Chairman, Chief Financial Officer (Principal Financial Officer) Dated: November 15, 1999 /s/ MICHAEL P. DURNEY -------------------------------------------------------- Michael P. Durney Vice President, Controller (Chief Accounting Officer)
15 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 195,926 0 305,413 0 423,511 942,085 175,481 69,840 7,124,030 766,482 497,173 0 0 0 1,318,652 7,124,030 594,857 594,857 319,531 319,531 207,278 0 8,430 30,242 18,080 21,237 0 0 0 21,237 0 0
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 195,926 0 305,413 0 423,511 942,085 175,481 69,840 7,124,030 766,482 497,173 0 0 0 1,318,652 7,124,030 1,823,860 1,823,860 997,550 997,550 599,969 0 29,726 287,215 52,234 61,308 0 0 0 61,308 0 0
EX-27.3 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 548,418 548,418 313,599 313,599 184,558 0 16,988 29,720 13,017 (6,142) 0 0 0 (6,142) 0 0
EX-27.4 5 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,548,189 1,548,189 890,978 890,978 509,339 0 65,648 65,951 26,376 (2,664) 0 0 0 (2,664) 0 0
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