10-Q 1 a10-q.txt FORM 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 USA NETWORKS, INC. (Exact name of registrant as specified in its charter) ------------------------ COMMISSION FILE NO. 0-20570 DELAWARE 59-2712887 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
152 WEST 57TH STREET, NEW YORK, NEW YORK, 10019 (Address of Registrant's principal executive offices) (212) 314-7300 (Registrant's telephone number, including area code): ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of July 31, 2000, the following shares of the Registrant's capital stock were outstanding: Common Stock................................................ 305,046,756 Class B Common Stock........................................ 63,033,452 ----------- Total..................................................... 368,080,208 Common Stock issuable upon exchange of outstanding exchangeable subsidiary equity............................ 361,152,846 ----------- Total outstanding Common Stock, assuming full exchange of Class B Common Stock and exchangeable subsidiary equity.................................................. 729,233,054 ===========
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 31, 2000 was $4,805,136,742. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant are assumed to be affiliates of the Registrant. Assuming the exchange, as of July 31, 2000, of all equity securities of subsidiaries of the Registrant exchangeable for Common Stock of the Registrant, the Registrant would have outstanding 729,233,054 shares of Common Stock with an aggregate market value of $15,359,471,200. All share numbers set forth above give effect to the two-for-one stock split which became effective on February 24, 2000 for holders of record as of the close of business on February 10, 2000. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS USA NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET REVENUES USA ENTERTAINMENT Networks and television production........................ $ 390,688 $ 316,394 $ 769,641 $ 647,938 Filmed entertainment...................................... 20,773 10,080 51,080 11,775 Broadcasting.............................................. 4,723 2,449 8,357 3,350 Developing networks....................................... 3,709 218 4,271 427 USA ELECTRONIC RETAILING Electronic retailing...................................... 357,722 284,322 736,780 559,832 USA INFORMATION AND SERVICES Ticketing operations...................................... 143,019 119,703 270,980 219,426 Hotel reservations........................................ 78,082 23,018 133,345 23,018 Teleservicing............................................. 70,212 -- 70,212 -- Interactive............................................... 25,024 13,427 47,525 25,540 Electronic commerce and services.......................... 3,730 4,982 8,294 8,188 OTHER..................................................... 395 2,836 395 6,882 ---------- ---------- ---------- ---------- Total net revenues.................................... 1,098,077 777,429 2,100,880 1,506,376 ---------- ---------- ---------- ---------- Operating costs and expenses: Cost of sales............................................. 465,627 227,348 874,418 421,105 Program costs............................................. 173,173 149,280 339,037 319,347 Selling and marketing..................................... 133,117 132,909 259,747 248,330 General and administrative................................ 116,161 110,047 209,677 203,611 Other operating costs..................................... 30,831 23,138 54,525 41,742 Amortization of cable distribution fees................... 8,267 6,186 16,490 12,276 Non-cash distribution and marketing expense............... 1,596 -- 2,359 -- Depreciation and amortization............................. 131,274 76,800 239,266 147,037 ---------- ---------- ---------- ---------- Total operating costs and expenses.................... 1,060,046 725,708 1,995,519 1,393,448 ---------- ---------- ---------- ---------- Operating profit...................................... 38,031 51,721 105,361 112,928 Other income (expense): Interest income........................................... 14,547 5,263 24,279 15,349 Interest expense.......................................... (23,308) (19,613) (41,680) (40,063) Gain on sale of securities................................ -- 2,970 -- 50,270 Other, net................................................ (1,929) (7,470) (2,545) 2,495 ---------- ---------- ---------- ---------- (10,690) (18,850) (19,946) 28,051 ---------- ---------- ---------- ---------- Earnings before income taxes and minority interest.......... 27,341 32,871 85,415 140,979 Income tax expense.......................................... (18,993) (13,855) (50,498) (40,355) Minority interest........................................... (36,903) (28,732) (82,344) (102,797) ---------- ---------- ---------- ---------- NET LOSS.................................................... $ (28,555) $ (9,716) $ (47,427) $ (2,173) ========== ========== ========== ========== Basic loss per common share................................. $ (.08) $ (.03) $ (.14) $ (.01) ========== ========== ========== ========== Diluted loss per common share............................... $ (.08) $ (.03) $ (.14) $ (.01) ========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1 USA NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 457,133 $ 424,239 Marketable securities, available for sale................... 61,105 -- Accounts and notes receivable, net of allowance of $52,478 and $41,993, respectively................................. 560,303 454,341 Inventories, net............................................ 477,786 470,844 Investments held for sale................................... 9,443 11,512 Other current assets, net................................... 50,871 27,519 ----------- ---------- Total current assets.................................... 1,616,641 1,388,455 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 384,657 324,412 Buildings and leasehold improvements........................ 140,638 110,403 Furniture and other equipment............................... 93,226 85,487 Land........................................................ 15,059 16,094 Projects in progress........................................ 55,367 41,438 ----------- ---------- 688,947 577,834 Less accumulated depreciation and amortization.......... (228,554) (221,203) ----------- ---------- 460,393 356,631 OTHER ASSETS Intangible assets, net...................................... 7,718,345 6,831,487 Cable distribution fees, net ($31,884 and $35,181, respectively, to related parties)... 151,059 130,988 Long-term investments....................................... 95,636 121,383 Notes and accounts receivable, net of current portion ($3,283 and $2,562, respectively, from related parties)... 36,247 26,248 Advance to Universal........................................ 132,939 163,814 Inventories, net............................................ 141,948 166,477 Deferred income taxes....................................... 18,548 -- Deferred charges and other, net............................. 90,651 67,669 ----------- ---------- $10,462,407 $9,253,152 =========== ==========
2 USA NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 24,315 $ 10,801 Accounts payable, trade..................................... 213,088 188,343 Accounts payable, client accounts........................... 106,007 98,586 Obligations for program rights and film costs............... 259,679 272,945 Amount due under acquisition agreement...................... 45,639 17,500 Cable distribution fees payable ($18,476 and $18,733, respectively, to related parties)... 38,183 43,993 Deferred revenue............................................ 100,827 83,811 Deferred income taxes....................................... 792 4,050 Other accrued liabilities................................... 386,481 311,724 ----------- ---------- Total current liabilities............................... 1,175,011 1,031,753 LONG-TERM OBLIGATIONS (net of current maturities)........... 574,763 574,979 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of current............................................ 243,692 262,810 OTHER LONG-TERM LIABILITIES................................. 107,242 116,695 DEFERRED INCOME TAXES....................................... -- 5,120 MINORITY INTEREST........................................... 4,823,507 4,492,066 COMMITMENTS AND CONTINGENCIES............................... -- -- STOCKHOLDERS' EQUITY Preferred stock--$.01 par value; authorized 15,000,000 shares; no shares issued and outstanding.................. -- -- Common stock--$.01 par value; authorized 1,600,000,000 shares; issued and outstanding, 304,909,661 and 274,013,418 shares, respectively.......................... 3,049 2,740 Class B--convertible common stock--$.01 par value; authorized, 400,000,000 shares; issued and outstanding, 63,033,452 shares......................................... 630 630 Additional paid-in capital.................................. 3,766,534 2,830,506 Accumulated deficit......................................... (101,785) (54,358) Accumulated other comprehensive income...................... (5,192) 4,773 Treasury stock, at cost..................................... (120,046) (9,564) Note receivable from key executive for common stock issuance.................................................. (4,998) (4,998) ----------- ---------- Total stockholders' equity.............................. 3,538,192 2,769,729 ----------- ---------- $10,462,407 $9,253,152 =========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 USA NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NOTE RECEIVABLE CLASS B ACCUM. FROM KEY CONVERTIBLE ADDIT. OTHER EXECUTIVE FOR COMMON COMMON PAID-IN ACCUM. COMP. TREASURY COMMON STOCK TOTAL STOCK STOCK CAPITAL DEFICIT INCOME STOCK ISSUANCE ---------- -------- ----------- ---------- --------- -------- --------- --------------- (IN THOUSANDS) BALANCE AT DECEMBER 31, 1999.................... $2,769,729 $2,740 $630 $2,830,506 $ (54,358) $ 4,773 $ (9,564) $(4,998) Comprehensive income: Net loss for the six months ended June 30, 2000.................. (47,427) -- -- -- (47,427) -- -- -- Decrease in unrealized gains in available for sale securities....... (8,936) -- -- -- -- (8,936) -- -- Foreign currency translation........... (1,029) -- -- -- -- (1,029) -- -- ---------- Comprehensive loss.... (57,392) Issuance of common stock upon exercise of stock options................. 26,101 33 -- 26,068 -- -- -- -- Income tax benefit related to stock options exercised............... 14,138 -- -- 14,138 -- -- -- -- Issuance of stock in connection with PRC acquisition............. 887,451 322 -- 887,129 -- -- -- -- Issuance of stock in connection with other transactions............ 8,697 4 -- 8,693 -- -- -- -- Purchase of treasury stock in connection with stock repurchase program...... (110,532) (50) -- -- -- -- (110,482) -- ---------- ------ ---- ---------- --------- ------- --------- ------- BALANCE AT JUNE 30, 2000.................... $3,538,192 $3,049 $630 $3,766,534 $(101,785) $(5,192) $(120,046) $(4,998) ========== ====== ==== ========== ========= ======= ========= =======
Comprehensive loss for the three months ended June 30, 2000 was $37,548. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 USA NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 2000 1999 --------- -------- (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................. $ (47,427) $ (2,173) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................. 239,266 147,037 Amortization of cable distribution fees................... 16,490 12,276 Amortization of program rights and film costs............. 334,788 270,530 Amortization of non-cash distribution and marketing costs................................................... 2,359 -- Amortization of deferred financing costs and non-cash interest................................................ 2,179 945 Equity in losses (earnings) of unconsolidated affiliates.............................................. 7,007 (10,112) Gain on sale of subsidiary stock.......................... (3,718) -- Gain on sale of securities................................ -- (50,270) Non-cash interest income.................................. (4,917) (1,110) Non-cash stock compensation............................... 7,557 2,187 Minority interest......................................... 82,344 102,797 Changes in current assets and liabilities: Accounts receivable....................................... 7,954 (4,571) Inventories............................................... 6,498 (18,421) Accounts payable.......................................... (35,213) (12,071) Accrued liabilities and deferred revenue.................. 48,568 7,860 Payment for program rights and film costs................. (386,740) (265,512) Increase in cable distribution fees....................... (27,296) (12,746) Other, net................................................ 5,977 22,974 --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES............... 255,676 189,620 --------- -------- Cash flows from investing activities: Acquisitions, net of cash acquired........................ (148,229) (162,183) Capital expenditures...................................... (76,337) (52,665) Advance to Universal...................................... -- (200,000) Recoupment of advance to Universal........................ 35,792 1,343 Advance to Styleclick for promissory note................. (9,000) -- Increase in long-term investments and notes receivable.... (14,338) (12,150) Purchase of marketable securities......................... (64,535) -- Proceeds from sale of securities.......................... -- 61,080 Proceeds from long-term notes receivable.................. -- 3,691 Payment of merger and financing costs..................... (3,216) -- Other, net................................................ (14,127) (2,384) --------- -------- NET CASH USED IN INVESTING ACTIVITIES................... (293,990) (363,268) --------- -------- Cash flows from financing activities: Borrowings................................................ 35,906 -- Principal payments on long-term obligations............... (69,158) (15,472) Purchase of treasury stock................................ (110,532) (4,938) Payment of mandatory tax distribution to LLC partners..... (68,065) (28,830) Proceeds from sale of subsidiary stock.................... 90,969 -- Proceeds from issuance of common stock and LLC shares..... 199,402 34,732 Other, net................................................ (6,285) -- --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... 72,237 (14,508) --------- -------- Effect of exchange rate changes on cash and cash equivalents............................................... (1,029) (475) --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 32,894 (188,631) Cash and cash equivalents at beginning of period............ 424,239 445,356 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 457,133 $256,725 ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION USA Networks, Inc. (the "Company" or "USAi") is a holding company, the subsidiaries of which are focused on the new convergence of entertainment, information and direct selling. On April 5, 2000, the Company acquired Precision Response Corporation ("PRC") (the "PRC Transaction"). See Note 3. On May 10, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of two entities which operate Hotel Reservations Network (the "Hotel Reservations Network Transaction"). See Note 3. On May 28, 1999, the Company acquired October Films, Inc. ("October Films"), in which Universal owned a majority interest, and the domestic film distribution and development business of Universal previously operated by Polygram Filmed Entertainment, Inc. ("PFE") (the "October Films/PFE Transaction"). See Note 3. The Company engages in ten principal areas of business. In the second quarter, the Company reorganized the segments into three units, USA Entertainment, USA Electronic Retailing and USA Information and Services. The units and segments are as follows: USA ENTERTAINMENT - NETWORKS AND TELEVISION PRODUCTION, which includes Networks and Studios USA. Networks operates the USA Network and Sci-Fi Channel cable networks and, Studios USA produces and distributes television programming. - FILMED ENTERTAINMENT, which primarily represents the Company's domestic theatrical film distribution and production businesses. - BROADCASTING, which owns and operates television stations. - DEVELOPING NETWORKS, which primarily represents recently acquired cable television properties Trio and News World International and SciFi.com, a developing Internet content and commerce site. USA ELECTRONIC RETAILING - ELECTRONIC RETAILING, consisting primarily of the Home Shopping Network and America's Store, which are engaged in the electronic retailing business. USA INFORMATION AND SERVICES - TICKETING OPERATIONS, which primarily represents Ticketmaster, the leading provider of automated ticketing services in the United States, and Ticketmaster.com, Ticketmaster's exclusive agent for online ticket sales. - HOTEL RESERVATIONS, consisting of Hotel Reservations Network, a leading consolidator of hotel rooms for resale in the consumer market in the United States. 6 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) - TELESERVICES, consisting of Precision Response Corporation, a leader in outsourced customer care for both large corporations and high-growth internet-focused companies. - INTERACTIVE, which includes Internet Shopping Network, the Company's online retailing networks business, and local city guide business. - ELECTRONIC COMMERCE & SERVICES, which primarily represents the Company's customer and e-care businesses. On January 20, 2000, the Board of Directors declared a two-for-one stock split of USAi's common stock and Class B common stock, payable in the form of a dividend to stockholders of record as of the close of business on February 10, 2000. The 100% stock dividend was paid on February 24, 2000. All share data and earnings per share amounts presented have been adjusted to reflect this stock split. BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of the Company are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the twelve months ended December 31, 1999. Certain amounts in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 1999 have been reclassified to conform to the 2000 presentation. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K") for a summary of all significant accounting policies. NEW ACCOUNTING PRONOUNCEMENTS In June 2000, the Securities and Exchange Commission issued an amendment to Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101") which delayed the effective date for adoption of SAB 101 to the fourth quarter of 2000. SAB 101 provides guidance on revenue recognition criteria for certain types of transactions. SAB 101 also provides guidance on the disclosures that companies should make about their revenue recognition policies and the impact of events and trends on revenue. In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be accounted for under an inventory model. In addition, the SOP considers such topics as revenue recognition (fixed fees and minimum guarantees in variable fee arrangements), fee allocation in multiple 7 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) films, accounting for exploitation costs, and impairment assessment. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2000. The Company is currently evaluating the impact of SAB 101 and SOP 00-2, although the impact is not expected to be material. NOTE 3--BUSINESS ACQUISITIONS PRC TRANSACTION On April 5, 2000, USAi acquired PRC in a tax-free merger by issuing approximately 24.3 million shares of USAi common stock for all of the outstanding stock of PRC for a total value of approximately $708.3 million (the "PRC Transaction"). In connection with the acquisition, the Company repaid approximately $32.3 million of outstanding borrowings under PRC's existing revolving credit facility. The PRC Transaction has been accounted for under the purchase method of accounting. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their respective fair values at the date of purchase. The unallocated excess of acquisition costs over net assets acquired of $647.0 million has been allocated to goodwill, which is being amortized over 20 years. Assets and liabilities as of the acquisition date consist of the following:
(IN THOUSANDS) -------------- Current assets.............................................. $65,335 Non-current assets.......................................... 90,001 Goodwill.................................................... 646,975 Current liabilities......................................... 60,292 Non-current liabilities..................................... 33,739
HOTEL RESERVATIONS NETWORK TRANSACTION On May 10, 1999, the Company completed its acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of two entities which operate Hotel Reservations Network, a leading consolidator of hotel rooms for resale in the consumer market in the United States. The assets acquired and liabilities assumed comprise Hotel Reservations Network, Inc. ("HRN"), a wholly owned subsidiary of USAi. The initial purchase price was $149.2 million, net of a working capital adjustment of $0.8 million, plus contingent payments based on operating performance during the year ended December 31, 1999 and for the twelve month periods ended March 31, 2000, 2001 and 2002. The purchase price was paid in the form of a cash payment of $145.0 million on May 11, 1999 and a promissory note of $5.0 million which was paid on January 30, 2000 and which bore interest at 4.75% per annum. In addition, the Company paid $50.0 million related to HRN's performance during the year ended December 31, 1999. Furthermore, in conjunction with HRN's initial public offering (see below), USAi issued to the sellers the number of shares of HRN class A common stock equal to 10% of the aggregate value of the equity of HRN immediately prior to a transaction, as defined. USAi issued the sellers approximately 4.9 million shares of HRN class A common stock valued at $78.4 million. Pursuant to an amendment of the asset purchase agreement with the sellers of HRN's predecessor business entered into in contemplation of the initial public offering, HRN agreed to issue HRN class A common stock to the sellers in exchange for 8 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) releasing the obligation to make additional performance-based payments covering the twelve month periods ending March 31, 2001 and 2002. HRN issued the sellers approximately 5.1 million shares of HRN class A common stock valued at $81.6 million. The contingent payment for the twelve month period ending March 31, 2000 is currently being finalized and is estimated to be approximately $45.6 million. This estimated amount is reflected as a liability and resulted in additional goodwill which will be amortized over the remaining life of the goodwill. The acquisition has been accounted for under the purchase method of accounting. The purchase price, including the initial contingent payments of $50 million for the year ended December 31, 1999, the stock issued to the sellers in conjunction with the initial public offering, and the estimated contingent payment for the twelve months ended March 31, 2000 has been allocated to the assets acquired and liabilities assumed based on their respective fair values at the date of purchase, resulting in goodwill of approximately $405.9 million which is being amortized over a ten year life. On March 1, 2000, HRN completed an initial public offering for approximately 6.2 million shares of its class A common stock, resulting in net cash proceeds of approximately $90.0 million. At the completion of the offering, USAi owned approximately 70.6% of the outstanding shares of HRN. USAi recorded a gain related to the initial public offering of approximately $3.7 million in the three months ended March 31, 2000. OCTOBER FILMS/PFE TRANSACTION In connection with the acquisition of October Films, Inc., as of May 28, 1999, the Company issued 600,000 shares of Common Stock to Universal and paid cash consideration of approximately $12 million to October Films shareholders (other than Universal) for total consideration of $23.6 million. To fund the cash consideration portion of the transaction, Universal purchased from USAi 600,000 additional shares of Common Stock at $20.00 per share. In addition, the Company assumed $83.2 million of outstanding debt under October Films' credit agreement which was repaid from cash on hand on August 20, 1999. Also on May 28, 1999, USAi acquired from Universal the domestic film distribution and development business previously operated by PFE and PFE's domestic video and specialty video businesses. The acquisition included PFE's domestic production assets such as Interscope Communications and Propaganda Films, as well as the following distribution assets: PolyGram Video, Polygram Filmed Entertainment Canada, Gramercy Pictures, and PolyGram Films. In connection with the transaction, USAi agreed to assume certain liabilities related to the PFE businesses acquired. In addition, USAi advanced $200.0 million to Universal pursuant to an eight year, full recourse, interest-bearing note in connection with a distribution agreement pursuant to which USAi will distribute, in the U.S. and Canada, certain Polygram theatrical films which were not acquired in the transaction. The advance is repaid as revenues are received under the distribution agreement and, in any event, will be repaid in full at maturity. Through June 30, 2000, approximately $78.7 million had been offset against the advance and $11.7 million of interest had accrued. The October Films/PFE Transaction has been accounted for under the purchase method of accounting. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their respective fair values at the date of purchase. The unallocated excess of acquisition costs over net assets acquired of $184.5 million has been allocated to goodwill, which is being amortized over 20 years. 9 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) The following unaudited pro forma condensed consolidated financial information for the three and six months ended June 30, 2000 and 1999, is presented to show the results of the Company, as if the PRC Transaction, the Hotel Reservations Network Transaction and the October Films/ PFE Transaction had occurred on January 1, 1999. 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 January 1, 1999.
SIX MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1999 ------------- ------------- ------------- (IN THOUSANDS EXCEPT SHARE DATA) Net revenues..................... $2,170,529 $ 854,586 $1,657,702 Net loss......................... (54,711) (26,144) (30,368) Basic and diluted loss per (.15) (.07) (.09) share..........................
NOTE 4--STOCK-BASED WARRANTS In January 2000, HRN entered into an exclusive affiliate distribution and marketing agreement with Travelocity and issued to Travelocity a performance warrant at the completion of the initial public offering. The performance warrant is subject to vesting based on achieving certain performance targets. If the performance warrant becomes fully vested and exercisable it will entitle the holder to acquire 2,447,955 shares of HRN class A common stock at the initial public offering price. The Company also entered into other exclusive affiliate distribution and marketing agreements and issued 1,428,365 warrants to purchase HRN class A common stock at the initial public offering price at the completion of the public offering. All stock warrants were accounted for in accordance with EITF 96-18. In relation to warrants to purchase 1,428,365 shares of class A common stock, the Company recorded an asset of approximately $14.7 million based on the fair market value of the warrants at the initial public offering price of $16.00 per share. The asset will be amortized ratably as non-cash distribution and marketing expense over the terms of the exclusive affiliation agreements, which range from two to five years. The performance warrant, which will be subject to vesting based on the achievement of defined performance targets will be valued at the time the award is probable of being earned. The portion of the value related to the completed term of the related affiliation agreement will be expensed, and the remaining non-cash deferred distribution and marketing expense will be amortized over the remaining term of the affiliation agreement. The value of such related warrants may be subject to adjustment until such time that the warrant is nonforfeitable, fully vested and exercisable. NOTE 5--INVESTMENTS During the quarter and six months ended June 30, 1999, the Company recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of securities in a publicly traded entity. 10 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000: As of January 1, 2000, the Company presents the operations of HOT Germany, an electronic retailer operating principally in Germany, on a consolidated basis, whereas its investment in HOT Germany was previously accounted for under the equity method of accounting. On January 31, 2000, TMCS completed its acquisition of 2b Technology, Inc. ("2b"), by issuing approximately 458,000 shares of TMCS Class B Common Stock for all the outstanding stock of 2b, for a total value of approximately $16.9 million. On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. On April 5, 2000, USAi completed its acquisition of PRC by issuing approximately 24.3 million shares of USAi common stock for all of the outstanding stock of PRC, for a total value of approximately $708.3 million. On May 26, 2000, TMCS completed its acquisition of Ticketweb, Inc. ("Ticketweb"), by issuing approximately 1.8 million shares of TMCS Class B Common Stock for all the outstanding stock of Ticketweb, for a total value of approximately $33.5 million. For the three and six months ended June 30, 2000, interest accrued on the $200.0 million advance to Universal amounted to $2.5 million and $5.0 million, respectively. For the three and six months ended June 30, 2000, the Company incurred non-cash distribution and marketing expense of $1.6 million and $2.4 million, respectively. During the second quarter, the company recorded $11.6 million of expense related to an agreement with an executive. Of this amount, $3.8 million is a non-cash stock compensation charge related to restricted stock. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999: On March 29, 1999, TMCS completed its acquisition of City Auction, Inc. ("City Auction"), a person-to-person online auction community, by issuing approximately 800,000 shares of its Class B common stock for all the outstanding stock of City Auction, for a total value of $27.2 million. On May 28, 1999, the Company completed the October Films/ PFE Transaction by issuing 600,000 shares of Common Stock, for a value of $11.6 million. On June 14, 1999, TMCS completed its acquisition of Match.com, Inc., ("Match"), an Internet personals company. In connection with the acquisition, TMCS issued 1,924,777 shares of Class B Common Stock to the former owners of Match representing a total purchase price of approximately $45.0 million. During the six months ended June 30, 1999, the Company acquired post-production equipment through a capital lease totaling $2.1 million. NOTE 7--INDUSTRY SEGMENTS For the three and six months ended June 30, 2000, the Company operated principally in ten industry segments: Networks and television production, Electronic retailing, Ticketing operations, Hotel reservations, Teleservices, Interactive, Filmed entertainment, Electronic commerce and services, Broadcasting and 11 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7--INDUSTRY SEGMENTS (CONTINUED) Developing networks. The Networks and television production segment consists of the cable networks USA Network and Sci-Fi Channel and Studios USA, which produces and distributes television programming. The Electronic retailing segment consists principally of the Home Shopping Network, America's Store and HOT Germany, which are engaged in the sale of merchandise through electronic retailing. The Ticketing operations segment provides automated ticketing services primarily in the United States. The Hotel reservations segment was formed on May 10, 1999 in conjunction with the acquisition of Hotel Reservations Network, a leading consolidator of hotel rooms for resale in the consumer market in the United States. The Teleservices segment was formed on April 5, 2000 in conjunction with the acquisition of PRC, a leader in outsourced customer care for both large corporations and high-growth internet-focused companies. The Interactive segment represents the Company's on-line retailing networks business and local city guide business. The Filmed entertainment segment represents USA Films, which consists of domestic theatrical film distribution and production businesses which were acquired May 28, 1999, and Savoy. The Electronic commerce and services segment primarily represents the Company's customer and e-care businesses. The Broadcasting segment includes the operations of broadcast television stations in twelve markets that principally transmit Home Shopping Network programming although three transmit other programming. The Developing networks segment consists primarily of the recently acquired cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com, a developing Internet content and commerce site. In addition, in the second quarter, the Company reorganized the segments into three units, USA Entertainment, USA Electronic Retailing and USA Information and Services. USA Entertainment consists of Networks and television production, Filmed entertainment, Broadcasting and Developing networks. 12 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7--INDUSTRY SEGMENTS (CONTINUED) USA Electronic Retailing consists of Electronic retailing. USA Information and Services consists of Ticketing operations, Hotel reservations, Teleservices, Interactive and Electronic commerce and services.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ----------------------- 2000 1999 2000 1999 ---------- -------- ---------- ---------- (IN THOUSANDS) (IN THOUSANDS) Revenue USA ENTERTAINMENT Networks and television production............ $ 390,688 $316,394 $ 769,641 $ 647,938 Filmed entertainment.......................... 20,773 10,080 51,080 11,775 Broadcasting.................................. 4,723 2,449 8,357 3,350 Developing networks........................... 3,709 218 4,271 427 USA ELECTRONIC RETAILING Electronic retailing.......................... 357,722 284,322 736,780 559,832 USA INFORMATION AND SERVICES Ticketing operations.......................... 143,019 119,703 270,980 219,426 Hotel reservations............................ 78,082 23,018 133,345 23,018 Teleservices.................................. 70,212 0 70,212 0 Interactive................................... 25,024 13,427 47,525 25,540 Electronic commerce and services.............. 3,730 4,982 8,294 8,188 OTHER......................................... 395 2,836 395 6,882 ---------- -------- ---------- ---------- $1,098,077 $777,429 $2,100,880 $1,506,376 ========== ======== ========== ========== Operating profit (loss) USA ENTERTAINMENT Networks and television production............ $ 111,190 $ 77,697 $ 221,977 $ 158,967 Filmed entertainment.......................... (4,638) (441) (4,550) (642) Broadcasting.................................. (19,234) (13,702) (34,003) (25,084) Developing networks........................... (2,528) (543) (2,528) (543) USA ELECTRONIC RETAILING Electronic retailing.......................... 28,728 25,646 65,106 46,986 USA INFORMATION AND SERVICES Ticketing operations.......................... 16,612 13,901 33,677 22,104 Hotel reservations............................ 885 659 1,751 659 Teleservices.................................. (2,989) 0 (2,989) 0 Interactive................................... (62,959) (38,795) (127,448) (68,326) Electronic commerce and services.............. (6,294) 440 (12,510) 290 OTHER......................................... (20,742) (13,141) (33,122) (21,483) ---------- -------- ---------- ---------- $ 38,031 $ 51,721 $ 105,361 $ 112,928 ========== ======== ========== ==========
The Company operates principally within the United States. 13 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 8--SAVOY SUMMARIZED FINANCIAL INFORMATION The Company has not prepared separate financial statements and other disclosures concerning Savoy because management has determined that such information is not material to holders of the Savoy Debentures, all of which have been assumed by the Company as a joint and several obligor. The information presented is reflected at Savoy's historical cost basis. SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, ------------------- 2000 1999 -------- -------- (IN THOUSANDS) Net sales............................................... $ 3,851 $ 3,073 Operating expenses...................................... 1,389 3,201 Operating income (loss)................................. 2,462 (128) Net income.............................................. 3,045 2,120
SUMMARY CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ (IN THOUSANDS) Current assets........................................ $ 591 $ 191 Non-current assets.................................... 152,710 150,236 Current liabilities................................... 14,392 12,273 Non-current liabilities............................... 38,991 39,081
NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION On November 23, 1998, the Company and USANi LLC as co-issuers completed an offering of $500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In May 1999, the Old Notes were exchanged in full for $500.0 million of new 6 3/4% Senior Notes due 2005 (the "Notes") that have terms that are substantially identical to the Old Notes. Interest is payable on the Notes on May 15 and November 15 of each year, commencing May 15, 1999. The Notes are jointly, severally, fully and unconditionally guaranteed by certain subsidiaries of the Company, including Holdco, a non-wholly owned, direct subsidiary of the Company, and all of the subsidiaries of USANi LLC (other than subsidiaries that are, individually and in the aggregate, inconsequential to USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Holdco) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company or USANi LLC, as the case may be. The following tables present condensed consolidating financial information for the three and six months ended June 30, 2000 and 1999 for: (1) the Company on a stand-alone basis, (2) Holdco on a stand-alone basis, (3) USANi LLC on a stand-alone basis, (4) the combined Wholly Owned Subsidiary Guarantors (including Wholly Owned Subsidiary Guarantors that are wholly owned subsidiaries of USANi 14 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED) LLC), (5) the combined non-guarantor subsidiaries of the Company (including the non-guarantor subsidiaries of USANi LLC (collectively, the "Non-Guarantor Subsidiaries")), and (6) the Company on a consolidated basis. Separate financial statements for each of the Wholly Owned Subsidiary Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not filing separate reports under the Securities Exchange Act of 1934 because the Company's management has determined that the information contained in such documents would not be material to investors.
WHOLLY OWNED USANI SUBSIDIARY NON-GUARANTOR USAI USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ---------- ---------- ---------- ------------- ------------ ------------ BALANCE SHEET AS OF JUNE 30, 2000: Current Assets.................. $ 2,412 $ -- $ 171,217 $ 845,192 $ 597,820 $ -- $ 1,616,641 Property and equipment, net..... -- -- 24,956 262,336 173,101 -- 460,393 Goodwill and other intangible assets, net................... 74,741 -- 2,160 5,291,406 2,501,097 -- 7,869,404 Investment in subsidiaries...... 3,501,270 1,265,420 6,631,639 19,717 -- (11,418,046) -- Other assets.................... 132,780 -- 14,505 814,225 99,182 (544,723) 515,969 ---------- ---------- ---------- ---------- ---------- ------------ ----------- TOTAL ASSETS.................... $3,711,203 $1,265,420 $6,844,477 $7,232,876 $3,371,200 $(11,962,769) $10,462,407 ========== ========== ========== ========== ========== ============ =========== Current liabilities............. $ -- $ -- $ -- $ 690,333 $ 484,678 $ -- $ 1,175,011 Long-term debt, less current portion....................... -- -- 518,026 2,244 54,493 -- 574,763 Other liabilities............... 173,011 -- 309,009 505,030 331,140 (967,256) 350,934 Minority interest............... -- -- -- 452,688 585,260 3,785,559 4,823,507 Interdivisional equity.......... -- -- -- 5,582,581 1,915,629 (7,498,210) -- Stockholders' equity............ 3,538,192 1,265,420 6,017,442 -- -- (7,282,862) 3,538,192 ---------- ---------- ---------- ---------- ---------- ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY........... $3,711,203 $1,265,420 $6,844,477 $7,232,876 $3,371,200 $(11,962,769) $10,462,407 ========== ========== ========== ========== ========== ============ =========== STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 Revenue......................... $ -- $ -- $ -- $ 709,807 $ 388,270 $ -- $ 1,098,077 Operating expenses.............. (5,418) -- (15,028) (610,385) (429,215) -- (1,060,046) Interest expense, net........... (6,281) -- 5,664 (8,589) 445 -- (8,761) Other income, expense........... (16,856) 22,585 98,147 (23,000) (1,610) (81,195) (1,929) Income tax expense.............. -- -- (8,108) (10,885) (18,993) Minority interest............... -- -- -- (2,395) 19,975 (54,483) (36,903) ---------- ---------- ---------- ---------- ---------- ------------ ----------- NET (LOSS) INCOME............... $ (28,555) $ 22,585 $ 88,783 $ 57,330 $ (33,020) $ (135,678) $ (28,555) ========== ========== ========== ========== ========== ============ ===========
15 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)
WHOLLY OWNED USANI SUBSIDIARY NON-GUARANTOR USAI USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- -------- ------------ ------------- ------------ ------------ STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 Revenue............................. $ -- $ -- $ -- $ 1,419,262 $ 681,618 $ -- $ 2,100,880 Operating expenses.................. (8,811) -- (23,863) (1,206,689) (756,156) -- (1,995,519) Interest expense, net............... (10,781) -- 9,789 (15,889) (520) -- (17,401) Other income, expense............... (29,177) 44,375 235,327 (26,007) (3,465) (223,598) (2,545) Provision for income taxes.......... 1,342 -- (27,351) (9,588) (14,901) -- (50,498) Minority interest................... -- -- -- (4,691) 43,696 (121,349) (82,344) -- -- -- -- -- -- -- -------- ------- -------- ----------- --------- ---------- ----------- NET (LOSS) INCOME................... $(47,427) $44,375 $193,902 $ 156,398 $ (49,728) $ (344,947) $ (47,427) ======== ======= ======== =========== ========= ========== =========== CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 2000 Cash flow from (used in) operations........................ $(12,806) $ -- $ (9,919) $ 223,613 $ 54,788 $ -- $ 255,676 Cash flow provided (used in) investing activities.............. 23,153 -- (12,604) (158,163) (146,376) -- (293,990) Cash flow from financing activities........................ (10,347) -- (25,632) (64,517) 172,733 -- 72,237 Effect of exchange rate............. -- -- -- -- (1,029) -- (1,029) Cash at beginning of period......... -- -- 276,678 (26,004) 173,565 -- 424,239 -------- ------- -------- ----------- --------- ---------- ----------- CASH AT END OF PERIOD............... $ -- $ -- $228,523 $ (25,071) $ 253,681 $ -- $ 457,133 ======== ======= ======== =========== ========= ========== =========== WHOLLY-OWNED USANI SUBSIDIARY NON-GUARANTOR USAI USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- -------- ------------ ------------- ------------ ------------ STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 Revenue............................. $ -- $ -- $ -- $ 607,988 $ 169,441 $ -- $ 777,429 Operating expenses.................. (4,843) -- (6,362) (529,778) (184,725) -- (725,708) Interest expense, net............... (3,037) -- (6,345) (4,959) (9) -- (14,350) Gain on sale of securities.......... -- -- -- 2,970 -- -- 2,970 Other income (expense), net......... 4,890 8,573 71,572 (17,492) 10,022 (85,035) (7,470) Income tax expense.................. (6,726) -- -- (1,255) (5,874) -- (13,855) Minority interest................... -- -- -- (1,249) 10,102 (37,585) (28,732) -------- ------- -------- ----------- --------- ---------- ----------- NET (LOSS) INCOME................... $ (9,716) $ 8,573 $ 58,865 $ 56,225 $ (1,043) $ (122,620) $ (9,716) ======== ======= ======== =========== ========= ========== =========== STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 Revenue............................. $ -- $ -- $ -- $ 1,220,777 $ 285,599 $ -- $ 1,506,376 Operating expenses.................. (7,298) -- (11,521) (1,058,920) (315,709) -- (1,393,448) Interest expense, net............... (4,761) -- (10,909) (9,469) 425 -- (24,714) Gain on sale of securities.......... -- -- -- 50,270 -- -- 50,270 Other income (expense), net......... 15,011 40,071 230,492 (7,994) 10,489 (285,574) 2,495 Income tax expense.................. (5,125) -- (21,898) (3,138) (10,194) -- (40,355) Minority interest................... -- -- -- (5,553) 17,833 (115,077) (102,797) -------- ------- -------- ----------- --------- ---------- ----------- Net (loss) income................... $ (2,173) $40,071 $186,164 $ 185,973 $ (11,557) $ (400,651) $ (2,173) ======== ======= ======== =========== ========= ========== ===========
16 USA NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)
WHOLLY-OWNED USANI SUBSIDIARY NON-GUARANTOR USAI USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- -------- ------------ ------------- ------------ ------------ CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 1999 Cash flow from operations........... $(33,381) $ -- $ (9,423) $ 216,788 $ 15,636 $ -- $ 189,620 Cash flow from investing activities........................ (372,285) -- 18,498 14,130 (23,611) -- (363,268) Cash flow from financing activities........................ 405,666 -- (67,918) (351,947) (309) -- (14,508) Effect of exchange rate............. -- -- -- -- (475) -- (475) Cash at the beginning of period..... -- -- 151,160 102,308 191,888 -- 445,356 -------- ------- -------- ----------- --------- ---------- ----------- CASH AT THE END OF THE PERIOD....... $ -- $ -- $ 92,317 $ (18,721) $ 183,129 $ -- $ 256,725 ======== ======= ======== =========== ========= ========== ===========
NOTE 10--SUBSEQUENT EVENTS MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com and ISN. Styleclick, Inc. is traded on the Nasdaq market under the symbol "IBUY". In accordance with the terms of the agreement, USAi invested $40 million in cash and will contribute $10 million in dedicated media, and will receive warrants to purchase additional shares of the new company. On a fully diluted basis, USAi owns approximately 75% of the new company and former Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under the bridge loan. 17 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL USAi is a holding company, with subsidiaries focused on the new convergence of entertainment, information and direct selling. USAi adopted its present corporate structure as part of the Universal transaction. USAi maintains control and management of Holdco and USANi LLC, and manages the businesses held by USANi LLC in substantially the same manner as they would be if USAi held them directly through wholly owned subsidiaries. In April 2000, the Company acquired Precision Response Corporation ("PRC"), a leader in outsourced customer care for both large corporations and high-growth internet-focused companies (the "PRC Transaction"). In May 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of two entities which operate Hotel Reservations Network ("HRN") (the "Hotel Reservations Network Transaction"), a leading consolidator of hotel rooms for resale in the consumer market in the United States. Also in May 1999, the Company acquired October Films, Inc. and the domestic film distribution and development business of Universal which was previously operated by Polygram Filmed Entertainment ("USA Films") (the "October Films/PFE Transaction"). In connection with these transactions, the Company established the Teleservices, Hotel reservations and Filmed entertainment business segments. On March 1, 2000, Hotel Reservations Network completed an initial public offering. The Hotel Reservation Network's class A common stock is quoted on the Nasdaq Stock Market under the symbol "ROOM". EBITDA Earnings before interest, income taxes, depreciation and amortization ("EBITDA") is defined as operating profit plus depreciation, amortization of intangibles, amortization of cable distribution fees and non-cash distribution and marketing expense. EBITDA is presented here as a management tool and as a valuation methodology for companies in the media, entertainment and communications industries. EBITDA does not purport to represent cash provided by operating activities. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW DEVELOPMENTS, NEW MERCHANDISING STRATEGIES AND SIMILAR MATTERS. A VARIETY OF FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE, DEVELOPMENT AND RESULTS OF THE COMPANY'S BUSINESS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: MATERIAL ADVERSE CHANGES IN ECONOMIC CONDITIONS IN THE MARKETS SERVED BY THE COMPANY; FUTURE REGULATORY ACTIONS AND CONDITIONS IN THE COMPANY'S OPERATING AREAS; COMPETITION FROM OTHERS; SUCCESSFUL INTEGRATION OF THE COMPANY'S DIVISIONS' MANAGEMENT STRUCTURES; PRODUCT DEMAND AND MARKET ACCEPTANCE; THE ABILITY TO PROTECT PROPRIETARY INFORMATION AND TECHNOLOGY OR TO OBTAIN NECESSARY LICENSES ON COMMERCIALLY REASONABLE TERMS; AND OBTAINING AND RETAINING KEY EXECUTIVES AND EMPLOYEES. TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION During the past three years, we have augmented our media and electronic commerce businesses by acquiring and developing several new businesses. As a result, the changes resulting from the PRC transaction, the Hotel Reservations Network transaction and the October Films/PFE transaction should be considered when comparing the results of operations for the three and six months ended June 30, 2000 to 18 June 30, 1999. To enhance comparability, the discussion of consolidated results of operations is supplemented, where appropriate, with separate pro forma financial information that gives effect to the above transactions as if they had occurred at the beginning of the respective periods presented. The pro forma information is not necessarily indicative of the revenues and cost of revenues which would have actually been reported had the PRC transaction, the Hotel Reservations Network transaction and the October Films/PFE transaction occurred at the beginning of January 1, 1999, nor is it necessarily indicative of future results. Reference should be made to the Consolidated Financial Statements and Summary Financial Data included herein. CONSOLIDATED RESULTS OF OPERATIONS QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 VS. QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 The PRC transaction, the Hotel Reservations Network transaction, the October Films/PFE transaction and the consolidation of electronic retailing operations in Germany as of January 1, 2000, resulted in increases in net revenues, operating costs and expenses, other income (expense), minority interest and income taxes. However, no significant discussion of these fluctuations is presented. NET REVENUES For the three months ended June 30, 2000, revenues increased by $320.6 million, or 41.2%, to $1.1 billion from $777.4 million in 1999 primarily due to increases of $74.3 million, $73.4 million, $70.2 million, $55.1 million and $23.3 million from the Networks and television production, Electronic retailing, Teleservices, Hotel reservations and Ticketing operations businesses, respectively. For the six months ended June 30, 2000, revenues increased by $594.5 million, or 39.5%, to $2.1 billion from $1.5 billion in 1999 primarily due to increases of $176.9 million, $121.7 million, $110.3 million, $70.2 million and $51.6 million from the Electronic retailing, Networks and television production, Hotel reservations, Teleservices and Ticketing operations businesses, respectively. OPERATING COSTS AND EXPENSES For the three months ended June 30, 2000, operating expenses increased by $276.2 million, or 43.0%, to $918.9 million from $642.7 million in 1999, primarily due to increases of $65.5 million, $58.3 million, $45.7 million, $41.0 million, $18.9 million and $13.3 and $11.8 million from the Electronic retailing, Teleservices, Hotel reservations, Networks and television production, Ticketing operations, Filmed entertainment and Interactive businesses, respectively. During the three months ended June 30, 2000, the Company recorded $11.6 million of expense related to an agreement with an executive. Of this amount, $3.8 million is a non-cash stock compensation expense related to restricted stock. For the six months ended June 30, 2000, operating expenses increased by $503.3 million, or 40.8%, to $1.7 billion from $1.2 billion in 1999, primarily due to increases of $148.7 million, $92.8 million, $59.1 million, $58.3 million, $39.7 million, $39.3 million and $30.3 million from the Electronic retailing, Hotel reservations, Networks and television production, Teleservices, Filmed entertainment, Ticketing operations and Interactive businesses, respectively. OTHER INCOME (EXPENSE) For the three and six months ended June 30, 2000, net interest expense decreased by $5.6 million and $7.3 million, respectively, compared to 1999 primarily due to lower borrowing levels as a result of the repayment of bank debt in 1999 from the proceeds of equity transactions involving Universal and Liberty Media Corporation, a subsidiary of AT&T Corporation ("Liberty"). 19 In the six months ended June 30, 2000, the Company realized a gain of $3.7 million related to the initial public offering of its subsidiary, HRN. In the three and six months ended June 30, 1999, the Company realized pre-tax gains of $3.0 million and $50.3 million, respectively, related to the sale of securities. Furthermore, in the six months ended June 30, 1999, the Company recognized other income of $10.4 million from the reversal of equity losses which were recorded in 1998 as a result of the Universal transaction. INCOME TAXES USAi's effective tax rate for the three and six months ended June 30, 2000 of 69.5% and 59.1%, respectively, was higher than the statutory rate due to the impact of non-deductible goodwill, no tax benefits for consolidated subsidiary losses which are not included in the Company's consolidated tax returns taxable income and state income taxes. MINORITY INTEREST For the three and six months ended June 30, 2000, minority interest primarily represented Universal's and Liberty's ownership interest in USANi LLC, Liberty's ownership interest in Holdco, the public's ownership in TMCS, and the public's ownership interest in HRN since February 25, 2000. PRO FORMA QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 VS. PRO FORMA QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 The following unaudited pro forma operating results of USAi present combined results of operations as if the PRC transaction, the Hotel Reservations Network transaction and the October Films/PFE transaction all had occurred on January 1, 1999 and reflect the consolidation of HOT Germany operating results as if voting control was obtained on January 1, 1999. The unaudited combined condensed pro forma statements of operations of USAi are presented below for illustrative purposes only and are not necessarily indicative of the results of operations that would have actually been reported had any of the transactions occurred as of January 1, 1999, nor are they necessarily indicative of future results of operations. 20 UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ----------------------- 2000 1999 2000 1999 ---------- -------- ---------- ---------- (IN THOUSANDS) NET REVENUES: USA ENTERTAINMENT Networks and television production............ $ 390,688 $316,394 $ 769,641 $ 647,938 Filmed entertainment.......................... 20,773 22,367 51,080 29,062 Broadcasting.................................. 4,723 2,449 8,357 3,350 Developing networks........................... 3,709 218 4,271 427 USA ELECTRONIC RETAILING Electronic retailing.......................... 357,722 319,115 736,780 630,982 USA INFORMATION AND SERVICES Ticketing operations.......................... 143,019 119,703 270,980 219,426 Hotel reservations............................ 78,082 37,798 133,345 60,719 Teleservices.................................. 70,212 50,090 139,861 96,338 Interactive................................... 25,024 13,427 47,525 25,540 Electronic commerce and services.............. 3,730 4,982 8,294 8,188 OTHER......................................... 395 2,836 395 6,882 ---------- -------- ---------- ---------- Total net revenues........................ 1,098,077 889,379 2,170,529 1,728,852 ---------- -------- ---------- ---------- Operating costs and expenses: Cost of sales................................. 465,627 319,422 928,439 601,718 Program costs................................. 173,173 149,280 339,037 319,347 Selling and marketing......................... 133,117 132,909 259,747 248,330 General and administrative.................... 116,161 118,407 215,844 222,082 Other operating costs......................... 30,831 23,138 54,525 41,742 Amortization of non cash distribution and marketing expense........................... 1,596 -- 2,359 -- Amortization of cable distribution fees....... 8,267 6,186 16,490 12,276 Depreciation and amortization................. 131,274 101,002 254,739 195,458 ---------- -------- ---------- ---------- Total operating costs and expenses........ 1,060,046 850,344 2,071,180 1,640,953 ---------- -------- ---------- ---------- Operating profit................................ $ 38,031 $ 39,035 $ 99,349 $ 87,899 ========== ======== ========== ========== EBITDA.......................................... $ 179,168 $146,223 $ 372,937 $ 295,633 ========== ======== ========== ==========
Net revenues for the three months ended June 30, 2000 increased by $208.7 million, or 23.5%, to $1.1 billion from $889.4 million in 1999. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $175.8 million, or 23.6%, to $918.9 million from $743.2 million in 1999. EBITDA for the three months ended June 30, 2000 increased by $32.9 million, or 22.5%, to $179.2 million from $146.2 million in 1999. Net revenues for the six months ended June 30, 2000 increased by $441.7 million, or 25.5%, to $2.2 billion from $1.7 billion in 1999. Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $364.4 million, or 25.4%, to $1.8 billion from $1.4 billion in 1999. 21 EBITDA for the six months ended June 30, 2000 increased by $77.3 million, or 26.1%, to $372.9 million from $295.6 million in 1999. The following discussion provides an analysis of the pro forma revenues and costs related to revenues and other costs and expenses by significant business segment. NETWORKS AND TELEVISION PRODUCTION Net revenues for the three months ended June 30, 2000 increased by $74.3 million, or 23.5%, to $390.7 million from $316.4 million in 1999. The increase primarily resulted from an increase in advertising and affiliate revenues at USA Network and the Sci-Fi Channel, and increased revenue from Studios USA related principally to one-hour dramas. Net revenues for the six months ended June 30, 2000 increased by $121.7 million, or 18.8%, to $769.6 million from $647.9 million in 1999. The increase primarily resulted from an increase in advertising and affiliate revenues at USA Network and the Sci-Fi Channel due to an increase in subscribers and higher ratings at Sci-Fi. Revenue of Studios USA also increased due to increased revenues from one-hour dramas, talk shows and movie productions, offset by fewer network pick-ups for comedy productions. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $41.0 million, or 19.5%, to $251.3 million from $210.3 million in 1999. This increase resulted primarily from marketing and development costs. Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $59.1 million, or 13.7%, to $491.5 million from $432.4 million in 1999. This increase resulted primarily from marketing, development and distribution costs. EBITDA for the three months ended June 30, 2000 increased by $33.3 million, or 31.4%, to $139.4 million from $106.1 million in 1999. EBITDA for the six months ended June 30, 2000 increased by $62.6 million, or 29.0%, to $278.1 million from $215.5 million in 1999. ELECTRONIC RETAILING Net revenues for the three months ended June 30, 2000 increased by $38.6 million, or 12.1%, to $357.7 million from $319.1 million in 1999. The increase primarily resulted from Home Shopping Network's core domestic business, which generated increased sales of $25.7 million, including HSN.com, which began operations in late 1999 and generated sales of $5.7 million. Also, core international business increased $12.9 million due primarily to operations in Germany, which generated increased revenue of $12.1 million. The increase in net revenues also reflected a decrease in the return rate to 19.6% from 20.4% in 1999. Net revenues for the six months ended June 30, 2000 increased by $105.8 million, or 16.8%, to $736.8 million from $631.0 million in 1999. The increase primarily resulted from Home Shopping Network's core domestic business, which generated increased sales of $73.0 million due primarily to the increase from the Home Shopping service of $58.5 million and HSN.com, which generated revenue of $9.9 million. Also, core international business increased $33.0 million due primarily to operations in Germany, which generated increased revenue of $30.6 million. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $32.6 million, or 12.1%, to $303.3 million from $270.6 million in 1999. The increase resulted primarily from higher sales volume. The gross profit margin increased to 39.9% as compared to 39.0% in the prior year. 22 Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $83.0 million, or 15.5%, to $620.5 million from $537.4 million in 1999. The increase resulted primarily from higher sales volume. EBITDA for the three months ended June 30, 2000 increased by $6.0 million, or 12.4%, to $54.5 million from $48.5 million in 1999. EBITDA for the six months ended June 30, 2000 increased by $22.8 million, or 24.3%, to $116.3 million from $93.5 million in 1999. TICKETING OPERATIONS Net revenues for the three months ended June 30, 2000 increased by $23.3 million, or 19.5%, to $143.0 million from $119.7 million in 1999. The increase resulted from an increase of 12.1% in the number of tickets sold, including an increase in the percentage of tickets sold online to 25.8% from 13.5% in 1999, and an increase in revenue per ticket to $5.89 from $5.36 in 1999. Net revenues for the six months ended June 30, 2000 increased by $51.6 million, or 23.5%, to $271.0 million from $219.4 million in 1999. The increase resulted from an increase of 13.1% in the number of tickets sold and an increase in revenue per ticket to $5.67 from $5.03 in 1999. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $18.9 million, or 20.4%, to $111.5 million from $92.6 million in 1999. The increase resulted primarily from higher ticketing operations costs as a result of higher ticketing volume and increased secondary commissions. Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $39.3 million, or 22.7%, to $212.0 million from $172.8 million in 1999. The increase resulted primarily from higher ticketing operations costs as a result of higher ticketing volume and increased secondary commissions. EBITDA for the three months ended June 30, 2000 increased by $4.4 million, or 16.3%, to $31.6 million from $27.2 million in 1999. EBITDA for the six months ended June 30, 2000 increased by $12.3 million, or 26.3%, to $59.0 million from $46.7 million in 1999. TELESERVICES Net revenues for the three months ended June 30, 2000 increased by $20.1 million, or 40.2%, to $70.2 million from $50.1 million in 1999. The increase resulted from growth of new business and prcnetcare, PRC's fully integrated suite of e-commerce customer care services, which increased more than 450% to $6.7 million of revenue. Net revenues for the six months ended June 30, 2000 increased by $43.5 million, or 45.2%, to $139.9 million from $96.4 million in 1999 due to the growth of new business and prcnetcare. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $14.7 million, or 33.6%, to $58.3 million from $43.6 million in 1999 due primarily to increased operations. Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $34.4 million, or 41.0%, to $118.5 million from $84.1 million in 1999. EBITDA for the three months ended June 30, 2000 increased by $5.5 million, or 84.4%, to $11.9 million from $6.5 million in 1999. 23 EBITDA for the six months ended June 30, 2000 increased by $9.1 million, or 74.0%, to $21.4 million from $12.3 million in 1999. INTERACTIVE Net revenues for the three months ended June 30, 2000 increased by $11.6 million, or 86.4%, to $25.0 million from $13.4 million in 1999. The increase primarily resulted from an increase in online city guide and sponsorship revenue of $13.3 million, or 193%, due to the growth in its combined national reach to 9.1% (7.2 million unique users) in June 2000 versus 6.6% (4.1 million unique users) one year ago due to the expansion into new cities as well as the expansion into the online personals business. Net revenues for the six months ended June 30, 2000 increased by $22.0 million, or 86.1%, to $47.5 million from $25.5 million in 1999. The increase primarily resulted from an increase in online city guide and sponsorship revenue of $24.5 million, or 193%, due to expansion into new cities and expansion into the online personals business. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $11.8 million, or 30.5%, to $50.3 million from $38.5 million in 1999. The increase resulted primarily from increased costs of city guide revenue, costs to expand the local city guides into new markets and costs related to the online personal business. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $30.3 million, or 45.6%, to $96.6 million from $66.3 million in 1999. EBITDA loss for the three months ended June 30, 2000 increased by $0.2 million, or .6%, to $25.3 million from $25.1 million in 1999. EBITDA loss for the six months ended June 30, 2000 increased by $8.3 million, or 20.3%, to $49.1 million from $40.8 million in 1999. HOTEL RESERVATIONS Net revenues for the three months ended June 30, 2000 increased by $40.3 million, or 106.6%, to $78.1 million from $37.8 million in 1999. The increase resulted from expansion of affiliate marketing programs, an increase in the number of hotels for existing cities and expansion into 62% more cities as compared to the prior year. The number of room nights sold increased 101.7% as compared to the prior year. Internet generated sales for the three months ended June 30, 2000 increased to 91.8% in 2000 from 80.5% in 1999. Net revenues for the six months ended June 30, 2000 increased by $72.6 million, or 119.6%, to $133.3 million from $60.7 million in 1999. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $33.2 million, or 103.7%, to $65.2 million from $32.0 million in 1999. The increase in costs is primarily due to increased sales, including an increased percentage of revenue attributable to affiliate and travel agent sales (for which commissions are paid), increased credit card charge backs, and increased staffing levels and systems to support increased operations, partially offset by lower telephone and telephone operator costs due to the increase in Internet-related bookings. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $60.7 million, or 117.9%, to $112.2 million from $51.5 million in 1999. EBITDA for the three months ended June 30, 2000 increased by $7.1 million, or 122.7%, to $12.9 million from $5.8 million in 1999. EBITDA for the six months ended June 30, 2000 increased by $11.9 million, or 128.9%, to $21.1 million from $9.2 million in 1999. 24 FILMED ENTERTAINMENT Net revenues for the three months ended June 30, 2000 decreased by $1.6 million, or 7.1%, to $20.8 million from $22.4 million in 1999. The decrease resulted primarily from a reduction in revenues from the Savoy library. Net revenues for the six months ended June 30, 2000 increased by $22.0 million, or 75.8%, to $51.1 million from $29.1 million in 1999. The increase resulted primarily from increased theatrical, foreign and television revenues of $17.1 million and home entertainment video of $6.8 million, offset partially by a reduction in revenues from the Savoy library. Cost related to revenues and other costs and expenses for the three months ended June 30, 2000 increased by $1.9 million or 9.0%, to $23.1 million from $21.2 million in 1999 due principally to higher overhead costs. Cost related to revenues and other costs and expenses for the six months ended June 30, 2000 increased by $22.3 million or 77.0%, to $51.2 million from $28.9 million in 1999 due to the amortization costs due to increased theatrical releases, costs related to the home entertainment and higher overhead costs. EBITDA for the three months ended June 30, 2000 decreased by $3.5 million to a loss of $2.3 million from $1.2 million in 1999. EBITDA for the six months ended June 30, 2000 decreased by $0.3 million to a loss of $0.2 million from $0.1 million in 1999. ELECTRONIC COMMERCE AND SERVICES Net revenues for the three months ended June 30, 2000 decreased by $1.3 million, or 25.1%, to $3.7 million compared to $5.0 million in 1999 due to a decrease in ECS teleservices, while net revenues for the six months ended June 30, 2000 increased by $0.1 million, or 1.3%, to $8.3 million compared to $8.2 million in 1999. Cost related to revenues and other costs and expenses for the three and six months ended June 30, 2000 increased by $5.5 million and $12.2 million due primarily from start-up costs incurred to launch the business initiatives and other overhead expenses. EBITDA loss for the three and six months ended June 30, 2000 increased by $6.7 million and $12.1 million, respectively. BROADCASTING Net revenues increased by $2.3 million to $4.7 million from $2.4 million for the three months ended June 30, 2000 and $5.0 million to $8.4 million from $3.4 million for the six months ended June 30, 2000 as compared to the respective periods in 1999 due to increased advertising revenue at the television station in the Miami/Ft. Lauderdale market and the launch of stations in the Dallas and Atlanta markets in November 1999. Cost related to revenue increased by $6.5 million and $11.8 million for the three and six months ended June 30, 2000 as compared to the respective periods in 1999, due to increased program costs and operating expenses. An increased loss is expected in the broadcasting segment in 2000 as costs are incurred to launch more local television stations. DEVELOPING NETWORKS Net revenues increased by $3.5 million to $3.7 million from $0.2 million for the three months ended June 30, 2000 and $3.8 million to $4.2 million from $0.4 million for the six months ended June 30, 2000 as compared to the respective periods in 1999 due to the acquisition of Trio and News World International on May 19, 2000. Prior to this acquisition, the results reflect only SciFi.com. Cost related to revenue increased by $4.9 million and $7.0 million for the three and six months ended June 30, 2000 as compared to the 25 respective periods in 1999. EBITDA loss for the three and six months ended June 30, 2000 increased by $1.5 million and $3.2 million, as compared to the respective periods in 1999. OTHER Other revenue relates to a business that was sold in 1999, which resulted in decreased revenue of $2.8 million and $6.9 million in the three and six months ended June 30, 2000 as compared to the respective periods in 1999. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $255.7 million for the six months ended June 30, 2000 compared to $189.6 million for the six months ended June 30, 1999. These cash proceeds and available cash and borrowings were used to pay for acquisitions of $148.2 million, to make capital expenditures of $76.3 million, and to make mandatory tax distribution payments to the LLC partners of $68.1 million. On April 5, 2000, the Company acquired Precision Response Corp. ("PRC") in a tax-free merger by issuing approximately 24.3 million shares of USAi common stock in exchange for all outstanding equity of PRC. In conjunction with the acquisition, USAi repaid $32.3 of outstanding borrowing under PRC's existing credit facility. On March 1, 2000, HRN completed an initial public offering for approximately 6.2 million shares of its class A common stock, resulting in net cash proceeds of approximately $90.0 million. USAi recorded a gain related to the initial public offering of approximately $3.7 million in the three months ended June 30, 2000. Pursuant to an agreement between USAi and HRN, USAi made a contingent payment of $12.5 million in the three months ended June 30, 2000. Furthermore, USAi is required to make a contingent cash payment to the sellers of the two entities which operated HRN based on the results of HRN for the twelve month period ending March 31, 2000, which payment is expected to be finalized in the third quarter. The amount is estimated to be approximately $45.6 million. The obligation for contingent payments for the twelve month periods ending March 31, 2001 and 2002 was released by the sellers in exchange for 5.1 million shares of HRN common stock. On February 29, 2000, the Company made a mandatory tax distribution payment to Universal and Liberty in the amount of $68.1 million. In connection with the 1999 acquisition of Universal's domestic film distribution and development business previously operated by PFE and PFE's domestic video and specialty video businesses transaction, USAi advanced $200.0 million to Universal in 1999 pursuant to an eight year, full recourse, interest-bearing note in connection with a distribution agreement, under which USAi will distribute, in the United States and Canada, certain Polygram Filmed Entertainment, Inc. theatrical films that were not acquired in the transaction. The advance is repaid as revenues are received under the distribution agreement and, in any event, will be repaid in full at maturity. Through June 30, 2000, approximately $78.7 million has been offset against the advance. In July 1999, USAi announced that its Board of Directors authorized the extension of the Company's stock repurchase program providing for the repurchase of up to 20 million shares of USAi's common stock, on the open market or in negotiated transactions. In July 2000, USAi announced that its Board of Directors authorized the extension of the Company's stock repurchase program providing for the repurchase of up to 20 million shares of USAi's common stock over an indefinite period of time, on the open market or in negotiated transactions. The amount and timing of purchases, if any, will depend on market conditions and other factors, including USAi's overall capital structure. Funds for these purchases will come from cash on hand or borrowings under the Company's credit facility. During the six months ended 26 June 30, 2000, the Company purchased 4.9 million shares of its common stock for aggregate consideration of $106.2 million. Under the investment agreement relating to the Universal Transaction, USAi has granted to Universal and Liberty preemptive rights with respect to future issuances of USAi's common stock and Class B common stock. These preemptive rights generally allow Universal and Liberty the right to maintain an ownership percentage in USAi equal to the ownership percentage that entity held, on a fully converted basis, immediately prior to the issuance. In May 2000, Liberty exercised its preemptive right for approximately 7.9 million shares related principally to the PRC transaction, resulting in proceeds of approximately $179.1 million to USAi. On February 12, 1998, USAi and USANi LLC, as borrower, entered into a credit agreement that provided for a $1.6 billion credit facility. $1.0 billion was permanently repaid in prior years. The $600.0 million revolving credit facility expires on December 31, 2002. As of June 30, 2000, there was $597.4 million available for borrowing after taking into account outstanding letters of credit. On July 28, 2000 USAi and Styleclick.com Inc., a leading enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com Inc. and ISN. In accordance with the terms of the agreement, USAi invested $40 million in cash and will contribute $10 million in dedicated media, and will receive warrants to purchase additional shares of the new company. On a fully diluted basis, USAi owns approximately 75% of the new company and Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under the bridge loan provided by USAi. USAi implemented its plan to disaffiliate its television stations in the Miami/Ft. Lauderdale, Dallas and the Atlanta markets in prior years. USAi has incurred and will continue to incur expenditures to develop programming for these stations, which during the development and transitional stage, may not be offset by sufficient advertising revenues. USAi believes that the process of disaffiliation can be successfully managed so as not to have a material adverse effect but rather to maximize the value of the broadcasting stations. USAi anticipates that it will need to invest working capital towards the development and expansion of its overall operations. Due primarily to the expansion of its Internet businesses and the roll-out of new television stations, future capital expenditures may be higher than current amounts. In management's opinion, available cash, internally generated funds and available borrowings will provide sufficient capital resources to meet USAi's foreseeable needs. During the six months ended June 30, 2000, USAi did not pay any cash dividends, and none are permitted under USAi's existing credit facility. USAi's subsidiaries have no material restrictions on their ability to transfer amounts to fund USAi's operations. SEASONALITY USAi's businesses are subject to the effects of seasonality. Networks and Television Production revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. USAi believes seasonality impacts its Electronic Retailing segment but not to the same extent it impacts the retail industry in general. Ticketing Operations revenues are occasionally impacted by fluctuation in the availability of events for sale to the public. 27 Hotel reservations revenues are influenced by the seasonal nature of holiday travel in the markets it serves, and has historically peaked in the fall. As the business expands into new markets, the impact of seasonality is expected to lessen. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's short-term investment portfolio and issuance of debt. The Company does not use derivative financial instruments in its investment portfolio. The Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers. To further mitigate risk, the vast majority of the securities have a maturity date within 60 days. The portfolio is reviewed on a periodic basis and adjusted in the event that the credit rating of a security held in the portfolio has deteriorated. At June 30, 2000, the Company's outstanding debt approximated $599.1 million, substantially all of which is fixed rate obligations. If market rates decline, the Company runs the risk that the related required payments on the fixed rate debt will exceed those based on the current market rate. FOREIGN CURRENCY EXCHANGE RISK The Company conducts business in certain foreign markets. However, the level of operations in foreign markets is insignificant to the consolidated results. EQUITY PRICE RISK The Company has a minimal investment in equity securities of a publicly-traded Company. This investment, as of June 30, 2000, was considered available-for-sale, with the unrealized gain deferred as a component of stockholders' equity. It is not customary for the Company to make investments in equity securities as part of its investment strategy. 28 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the Ticketmaster Consumer Class Action litigation previously reported in the Company's 1999 Form 10-K, a hearing date for class certification has been set by the United States District Court for the Eastern District of Missouri for December 15, 2000, and a trial date has been set for October 29, 2001. In the Home Shopping Network Consumer Class Action litigation previously reported in the Company's 1999 Form 10-K, the plaintiffs filed an amended class action complaint that, among other things, added an additional named plaintiff, added Home Shopping Club LP, Warrantech Helpdesk, Inc., Banctech Service, Inc. and Timespace Internet, Inc. as named defendants, and removed two individuals as named defendants. On May 9, 2000, Home Shopping Network, Inc. and Home Shopping Club LP (the "HSN Defendants") filed a motion to dismiss the amended complaint. On May 23, 2000, the Cook County Circuit Court addressed the HSN Defendants' motion to dismiss by entering an Order that, in pertinent part, required the plaintiffs to file a second amended complaint. On June 6, 2000, the plaintiffs filed a second amended class action complaint that, among other things, added an additional named plaintiff and asserted two new causes of action for negligent misrepresentation and breach of contract. The HSN Defendants have filed an answer and affirmative defenses to the second amended complaint and intend to continue to vigorously defend this action. In the Urban litigation previously reported in the Company's 1999 Form 10-K and the Company's 1st Quarter Form 10-Q, the Virginia Supreme Court entered an Order denying Urban's Petition for Appeal on June 2, 2000. On June 16, 2000, Urban filed a Petition for Rehearing with the Virginia Supreme Court requesting that the Court reconsider its Order dated June 2, 2000. On July 21, 2000, the Virginia Supreme Court entered an Order denying Urban's Petition for Rehearing. On August 1, 2000, Urban and Mr. Theodore M. White, President and owner of all of the voting stock of Urban, filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Columbia. In addition, by order dated May 3, 2000, the U.S. Bankruptcy Court for the Eastern District of Virginia denied Urban's motion to reopen Urban's prior chapter 11 case and clarify certain factual and legal matters contained within the Court's September 30, 1996 confirmation order, which motion had been joined in by Amresco Funding Corporation, the entity that provided Urban with bankruptcy exit financing. On May 15, 2000, Urban filed a motion requesting that the U.S. Bankruptcy Court reconsider its May 3, 2000 ruling, or, in the alternative, amend findings of fact. By Memorandum Opinion and Order dated June 9, 2000, the U.S. Bankruptcy Court denied Urban's motion to reconsider, or, in the alternative, to amend findings of fact. In the Anthony Martin litigation, previously reported in the Company's 1999 Form 10-K, the parties have agreed to a settlement that will not have a material effect on the Company. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. In the Ticketmaster Cash Discount Litigation previously reported in the Company's 1999 Form 10-K and the Company's 1st Quarter Form 10-Q, the plaintiff filed an amended class action petition in state court on June 20, 2000 asserting an additional claim that the cash discount program in question violates a provision in a Merchant Services Bankcard Agreement between Ticketmaster and Chase Merchant Services L.L.C. and First Financial Bank. Plaintiff claims all consumers using VISA and Mastercard to purchase tickets from Ticketmaster are third-party beneficiaries of this contract. Plaintiff also filed on July 14, 2000 an amended class certification motion. In addition to the nine-state class sought by Plaintiff's original class certification request, the amended motion seeks the certification of a nationwide class of VISA and Mastercard customers since approximately April 1998 to prosecute the alleged third-party beneficiary claim. Ticketmaster filed a summary judgment motion on May 1, 2000 and Plaintiff filed a second amended motion for partial summary judgment on May 24, 2000. Currently no hearing is set on any of these motions. On July 20, 2000, Ticketmaster removed the case to federal court in McAllen, Texas on 29 the grounds that the newly added third-party beneficiary claim raises a federal question under the Truth-in-Lending Act. On August 1, 2000, Plaintiff filed a motion to remand the case to state court. Hearing on the motion to remand is currently anticipated to occur on September 7, 2000. Ticketmaster continues to believe that plaintiff's claims lack merit and expects to continue to vigorously defend itself in this case. In the N2K litigation previously reported in the Company's 1st Quarter Form 10-Q, the Court denied Ticketmaster's motion for summary adjudication as to N2K's Cross-Complaint on June 29, 2000. Trial is currently scheduled to commence on September 20, 2000. In the Polygram Filmed Entertainment litigation, previously reported in the Company's 1999 Form 10-K and the Company's 1st Quarter 10-Q, the parties have agreed to a settlement for an amount that is not material to the financial condition of the Company. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. In the World Wrestling Federation litigation, previously reported in the Company's 1st Quarter Form 10-Q, in a decision dated June 27, 2000, the Delaware Chancery Court dismissed USA Cable's complaint, holding that while USA Cable had no obligation to match the terms of the Viacom/CBS offer pertaining to matters other than the four wrestling entertainment programs, USA had failed to match the terms of the Viacom Inc. and CBS Corporation offer. USA Cable is pursuing an expedited appeal of the decision of the Chancery Court in the Delaware Supreme Court. Oral argument of the appeal is scheduled for August 14, 2000. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 4, 2000, the annual meeting of stockholders was held. Stockholders present in person or by proxy, representing 199,274,084 shares of Common Stock and 63,033,452 shares of Class B Common Stock, voted on the following matters: 1. The stockholders elected the following thirteen directors of the Company to hold office until the next annual meeting of stockholders or until their successors have been duly elected: Elected by holders of Common Stock voting as a separate class:
NUMBER OF SHARES CAST NUMBER OF SHARES AGAINST OR FOR WHICH CAST IN FAVOR AUTHORITY WITHHELD ---------------- --------------------- Anne M. Busquet........................... 198,498,633 775,451 Donald R. Keough.......................... 198,485,663 788,421 William D. Savoy.......................... 198,491,279 782,805 Gen. H. Norman Schwarzkopf................ 187,831,102 11,442,982
30 Elected by holders of Common Stock and Class B Common Stock voting as a single class:
NUMBER OF SHARES CAST NUMBER OF SHARES AGAINST OR FOR WHICH CAST IN FAVOR AUTHORITY WITHHELD ---------------- --------------------- Paul G. Allen............................. 828,826,704 781,900 Barry Baker............................... 828,827,033 781,571 Edgar Bronfman, Jr. ...................... 828,818,274 790,330 Barry Diller.............................. 828,829,356 779,248 Victor A. Kaufman......................... 828,826,697 782,007 Robert W. Matschullat..................... 828,816,211 792,393 Samuel Minzberg........................... 828,664,249 944,355 Brian Mulligan............................ 828,822,697 785,097 Diane Von Furstenberg..................... 828,653,737 954,867
2. The holders of the Common Stock and Class B Common Stock, voting as separate classes, approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock and Class B Common Stock, as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES CAST IN FAVOR CAST AGAINST ABSTAINING --------------------- ---------------- ---------------- 245,380,545 16,790,165 136,829
3. The holders of Common Stock and Class B Common Stock, voting as a single class, approved the Company's 2000 Stock and Annual Incentive Plan, as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES CAST IN FAVOR CAST AGAINST ABSTAINING BROKER NON-VOTES --------------------- ---------------- ---------------- ---------------- 754,915,322 56,465,650 174,115 18,053,515
4. The holders of Common Stock and Class B Common Stock, voting as a single class, approved the Company's Deferred Compensation Plan for Non-Employee Directors, as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES CAST IN FAVOR CAST AGAINST ABSTAINING --------------------- ---------------- ---------------- 828,105,732 1,306,288 196,582
5. The holders of Common Stock and Class B Common Stock, voting as a single class, also ratified the appointment of Ernst & Young LLP as the Company's independent auditors for the year ended December 31, 2000, as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES CAST IN FAVOR CAST AGAINST ABSTAINING --------------------- ---------------- ---------------- 829,443,324 50,683 114,596
31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION --------------------- ----------- 3.1 Restated Certificate of Incorporation 10.1 USA Networks, Inc. 2000 Stock and Annual Incentive Plan 10.2 USA Networks, Inc. Deferred Compensation Plan For Non-Employee Directors 10.3* Consulting Agreement, dated June 21, 2000, between USA Networks,Inc. and Barry Baker 10.5* Employment Agreement, dated August 9, 2000, between USA Networks, Inc. and Julius Genachowski 27.1 Financial Data Schedule (for SEC use only) 27.2 Financial Data Schedule (for SEC use only) 27.3 Financial Data Schedule (for SEC use only) 27.4 Financial Data Schedule (for SEC use only)
------------------------ * Reflects management contracts and compensatory plans. (b) Forms 8-K USAi filed a report on Form 8-K/A, dated April 14, 2000, reporting items 5 and 7, containing the audited consolidated financial statements of Precision Response Corporation as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, and the unaudited pro forma condensed combined financial statements, giving effect to the acquisition by USAi of Precision Response Corporation as well as other transactions completed by USAi in 1999. 32 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. USA NETWORKS, INC. (REGISTRANT) By: /s/ BARRY DILLER -------------------------------------- Barry Diller CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SIGNATURE TITLE DATE --------- ----- ---- /s/ BARRY DILLER ------------------------------- Chairman of the Board and Chief Executive August 14, 2000 Barry Diller Officer /s/ MICHAEL SILECK Senior Vice President, ------------------------------- Chief Financial Officer August 14, 2000 Michael Sileck (Principal Financial Officer) /s/ WILLIAM J. SEVERANCE ------------------------------- Vice President and Controller August 14, 2000 William J. Severance (Chief Accounting Officer)
33 CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------------- 2000 1999 2000 1999 --------- --------- ----------- ----------- (IN THOUSANDS) NET REVENUES Networks and television production.......... $ 390,688 $ 316,394 $ 769,641 $ 647,938 Electronic retailing........................ 357,722 284,322 736,780 559,832 Interactive................................. 4,785 6,544 10,311 12,851 Electronic commerce and services............ 1,533 800 2,431 1,073 Developing networks......................... 3,709 218 4,271 427 Other....................................... 395 2,836 395 6,882 --------- --------- ----------- ----------- Total net revenues........................ 758,832 611,114 1,523,829 1,229,003 --------- --------- ----------- ----------- Operating costs and expenses: Cost of sales............................... 221,125 182,586 459,536 358,672 Program costs............................... 173,173 149,280 339,037 319,347 Selling and marketing....................... 94,094 73,107 182,988 135,738 General and administrative.................. 82,940 57,760 155,099 113,796 Other operating costs....................... 31,228 22,190 56,952 44,319 Amortization of cable distribution fees..... 8,267 6,186 16,490 12,276 Depreciation and amortization............... 48,236 43,555 95,974 86,562 --------- --------- ----------- ----------- Total operating costs and expenses........ 659,063 534,664 1,306,076 1,070,710 --------- --------- ----------- ----------- Operating profit.......................... 99,769 76,450 217,753 158,293 Other income (expense): Interest income............................. 9,163 8,708 13,912 19,323 Interest expense............................ (10,651) (20,241) (18,478) (40,619) Gain on sale of securities.................. -- 2,970 -- 50,270 Other, net.................................. (1,529) (7,958) (4,008) 1,658 --------- --------- ----------- ----------- (3,017) (16,521) (8,574) 30,632 --------- --------- ----------- ----------- Earnings before income taxes and minority interest.................................... 96,752 59,929 209,179 188,925 Income tax expense............................ (17,666) (13,962) (42,293) (34,154) Minority interest............................. (56,501) (37,394) (122,511) (114,700) --------- --------- ----------- ----------- NET EARNINGS.................................. $ 22,585 $ 8,573 $ 44,375 $ 40,071 ========= ========= =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 34 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 216,670 $ 247,474 Accounts and notes receivable, net of allowance of $44,608 and $33,317, respectively................................. 406,900 381,175 Inventories, net............................................ 450,831 432,520 Investments held for sale................................... 5,735 -- Deferred income taxes....................................... -- 12,077 Other current assets, net................................... 23,752 8,542 ---------- ---------- Total current assets........................................ 1,103,888 1,081,788 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 137,142 123,606 Buildings and leasehold improvements........................ 61,553 59,074 Furniture and other equipment............................... 67,277 67,246 Land........................................................ 10,246 10,246 Projects in progress........................................ 23,573 31,736 ---------- ---------- 299,791 291,908 Less accumulated depreciation and amortization.............. (75,885) (79,350) ---------- ---------- 223,906 212,558 OTHER ASSETS Intangible assets, net...................................... 5,078,984 5,029,769 Cable distribution fees, net ($31,884 and $35,181, respectively, to related parties)......................... 151,059 130,988 Long-term investments....................................... 68,841 93,742 Notes and accounts receivable, net.......................... 23,382 19,506 Inventories, net............................................ 133,722 154,497 Advances to USAI and subsidiaries........................... 339,590 410,107 Deferred income taxes....................................... 75,335 61,755 Deferred charges and other, net............................. 43,538 36,934 ---------- ---------- $7,242,245 $7,231,644 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 16,853 $ 3,758 Accounts payable, trade..................................... 157,791 147,864 Obligations for program rights and film costs............... 245,717 265,235 Cable distribution fees payable ($18,476 and $18,733, respectively, to related parties)......................... 38,183 43,993 Deferred revenue............................................ 42,685 47,536 Deferred income taxes....................................... 3,367 -- Other accrued liabilities................................... 312,400 271,846 ---------- ---------- Total current liabilities................................... 816,996 780,232 LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES)........... 527,011 527,339 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF CURRENT................................................... 232,482 256,260 OTHER LONG-TERM LIABILITIES................................. 71,632 81,156 MINORITY INTEREST........................................... 4,328,704 4,244,114 COMMITMENTS AND CONTINGENCIES............................... -- -- STOCKHOLDERS' EQUITY Common Stock................................................ 1,221,408 1,221,408 Additional paid-in capital.................................. 70,312 70,312 Retained (deficit) earnings................................. (22,971) 50,823 Accumulated other comprehensive income...................... (3,329) -- ---------- ---------- Total stockholders' equity.................................. 1,265,420 1,342,543 ---------- ---------- $7,242,245 $7,231,644 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 35 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED ADDITIONAL RETAINED OTHER COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL STOCK CAPITAL (DEFICIT) INCOME ---------- ---------- ---------- --------- ------------- (IN THOUSANDS) Balance at December 31, 1999........ $1,342,543 $1,221,408 $70,312 $ 50,823 $ -- Comprehensive Income: Net earnings for the six months ended June 30, 2000............. 44,375 -- -- 44,375 -- Foreign currency translation...... 978 978 Increase in unrealized gains in available for sale securities... (4,307) -- -- -- (4,307) ---------- Comprehensive income............ 41,046 Mandatory tax distribution to LLC partners.......................... (118,169) -- -- (118,169) -- ---------- ---------- ------- -------- ------- Balance at June 30, 2000............ $1,265,420 $1,221,408 $70,312 $(22,971) $(3,329) ========== ========== ======= ======== =======
Comprehensive income for the three months ended June 30, 2000 was $17,597. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 36 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ----------- ----------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 44,375 $ 40,071 ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............................. 95,974 86,562 Amortization of cable distribution fees................... 16,490 12,276 Amortization of program rights and film costs............. 294,026 261,252 Gain on sale of securities................................ -- (50,270) Non-cash compensation..................................... 5,870 1,900 Equity in (earnings) losses of unconsolidated affiliates.............................................. 5,015 (10,112) Minority interest......................................... 122,511 114,700 CHANGES IN CURRENT ASSETS AND LIABILITIES: Accounts receivable....................................... (25,112) 3,108 Inventories............................................... 6,012 (2,177) Accounts payable.......................................... (1,089) (41,286) Accrued liabilities and deferred revenue.................. 31,200 30,759 Payment for program rights and film costs................. (332,891) (255,335) Increase in cable distribution fees....................... (27,296) (12,746) Other, net................................................ 13,270 15,599 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES............... 248,355 194,301 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired.......................... (107,654) (7,500) Capital expenditures........................................ (28,730) (28,862) Increase in long-term investments and notes receivable...... (20,322) (12,150) Advance to Styleclick....................................... (9,000) -- Proceeds from sale of securities............................ -- 61,080 Proceeds from long-term notes receivable.................... -- 3,691 Other, net.................................................. (2,224) 2,163 --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (167,930) 18,422 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings.................................................. 35,769 -- Intercompany................................................ (86,768) (385,065) Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755) Principal payments on long-term obligations................. (33,057) (13,942) Repurchase of LLC shares.................................... (110,532) (4,938) Proceeds from issuance of LLC shares........................ 208,100 22,732 Other....................................................... (7,550) -- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................... (112,207) (433,968) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 978 -- --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (30,804) (221,245) Cash and cash equivalents at beginning of period............ 247,474 234,903 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 216,670 $ 13,658 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 37 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION Home Shopping Network, Inc. (the "Company" or "Home Shopping"), is a holding company, whose subsidiary USANi LLC is engaged in diversified media and electronic commerce businesses. In December 1996, the Company consummated a merger with USA Networks, Inc. ("USAi"), formerly known as HSN, Inc., and became a subsidiary of USAi (the "Home Shopping Merger"). On February 12, 1998, USAi acquired USA Networks, a New York general partnership, consisting of cable television networks, USA Network and Sci-Fi Channel ("Networks"), as well as the domestic television production and distribution businesses of Universal Studios ("Studios USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd. ("Seagram") (the "Universal Transaction"). In connection with the Universal Transaction, the Company formed a new subsidiary, USANi LLC, and contributed the operating assets of the Home Shopping Network services ("HSN") to USANi LLC. Furthermore, USAi contributed Networks and Studios USA to USANi LLC on February 12, 1998. The Company is a holding company, the subsidiaries of which are engaged in diversified media and electronic commerce businesses. The five principal areas of business are: - Networks and television production, which includes Networks and Studios USA. Networks operates the USA Network and Sci-Fi Channel cable networks and Studios USA produces and distributes television programming. - Electronic retailing, which consists primarily of the Home Shopping Network and America's Store which are engaged in the electronic retailing business. - Interactive, which represents Internet Shopping Network, the Company's on-line retailing networks business. - Electronic commerce and services, which primarily represents the Company's customer and e-care businesses. - Developing networks, which primarily represents recently acquired cable television properties Trio and News World International and SciFi.com, a developing Internet content and commerce site. BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of the Company are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the three and six months ended June 30, 2000. Certain amounts in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 1999 have been reclassified to conform to the 2000 presentation. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and 38 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K") for a summary of all significant accounting policies. NEW ACCOUNTING PRONOUNCEMENTS In June 2000, the Securities and Exchange Commission issued an amendment to Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101") which delayed the effective date for adoption of SAB 101 to the fourth quarter of 2000. SAB 101 provides guidance on revenue recognition criteria for certain types of transactions. SAB 101 also provides guidance on the disclosures that companies should make about their revenue recognition policies and the impact of events and trends on revenue. In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be accounted for under an inventory model. In addition, the SOP considers such topics as revenue recognition (fixed fees and minimum guarantees in variable fee arrangements), fee allocation in multiple films, accounting for exploitation costs, and impairment assessment. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2000. The Company is currently evaluating the impact of SAB 101 and SOP 00-2, although the impact is not expected to be material. NOTE 3--INVESTMENTS During the quarter and six months ended June 30, 1999, the Company recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of securities in a publicly traded entity. NOTE 4--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000: As of January 1, 2000 the Company began to consolidate the accounts of HOT Germany, an electronic retailer operating principally in Germany, whereas its investment in HOT Germany was previously accounted for under the equity method of accounting. On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. During the second quarter, the company recorded $8.7 million of expense related to an agreement with an executive. Of this amount, $2.9 million is a non-cash stock compensation charge related to restricted stock. 39 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999: During the six months ended June 30, 1999, the Company acquired post-production and other equipment through capital leases totaling $2.1 million. NOTE 5--INDUSTRY SEGMENTS For the three and six months ended June 30, 2000 and 1999, the Company operated principally in five industry segments: Networks and television production, Electronic retailing, Interactive, Electronic commerce and services and Developing networks. The Networks and television production segment consists of the cable networks USA Network and Sci-Fi Channel and Studios USA, which produces and distributes television programming. The Electronic-retailing segment consists of Home Shopping Network and America's Store, which are engaged in the sale of merchandise through electronic retailing. The Interactive segment represents the Company's on-line retailing networks business. The Electronic commerce and services segment primarily represents the Company's customer and e-care businesses. The Developing networks segment consists primarily of the recently acquired cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com, a developing Internet content and commerce site.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- (IN THOUSANDS) (IN THOUSANDS) Revenue Networks and television production............. $390,688 $316,394 $ 769,641 $ 647,938 Electronic retailing........................... 357,722 284,322 736,780 559,832 Internet services.............................. 4,785 6,544 10,311 12,851 Electronic commerce and services............... 1,533 800 2,431 1,073 Developing networks............................ 3,709 218 4,271 427 Other.......................................... 395 2,836 395 6,882 -------- -------- ---------- ---------- $758,832 $611,114 $1,523,829 $1,229,003 ======== ======== ========== ========== Operating profit (loss) Networks and television production............. $111,190 $ 77,697 $ 221,977 $ 158,967 Electronic retailing........................... 21,808 18,964 51,820 33,650 Internet services.............................. (11,355) (11,220) (21,412) (19,021) Electronic commerce and services............... (4,022) (500) (7,945) (926) Developing networks............................ (2,528) (543) (3,762) (543) Other.......................................... (15,324) (7,948) (22,925) (13,834) -------- -------- ---------- ---------- $ 99,769 $ 76,450 $ 217,753 $ 158,293 ======== ======== ========== ==========
NOTE 6--GUARANTEE OF NOTES USAi issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly, severally, fully and unconditionally guaranteed by certain 40 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6--GUARANTEE OF NOTES (CONTINUED) subsidiaries of USAi, including the Company and all of the subsidiaries of USANi LLC (other than subsidiaries that are, individually and in the aggregate, inconsequential to USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than the Company) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company or USANi LLC, as the case may be. Separate financial statements for each of the Wholly Owned Subsidiary Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not filing separate reports under the Securities Exchange Act of 1934 because the Company's management has determined that the information contained in such documents would not be material to investors. NOTE 7--SUBSEQUENT EVENTS MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com Inc. and ISN. Styleclick, Inc. is traded on the Nasdaq market under the symbol "IBUY". In accordance with the terms of the agreement, USAi invested $40 million in cash and will contribute $10 million in dedicated media, and will receive warrants to purchase additional shares of the new company. On a fully diluted basis, USAi owns approximately 75% of the new company and Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under the bridge loan. 41 CONSOLIDATED FINANCIAL STATEMENTS USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ----------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- (IN THOUSANDS) NET REVENUES Networks and television production............ $ 390,688 $ 316,394 $ 769,641 $ 647,938 Electronic retailing.......................... 357,722 284,322 736,780 559,832 Interactive................................... 4,785 6,544 10,311 12,851 Electronic commerce and services.............. 1,533 800 2,431 1,073 Developing networks........................... 3,709 218 4,271 427 Other......................................... 395 2,836 395 6,882 --------- --------- ---------- ---------- Total net revenues.......................... 758,832 611,114 1,523,829 1,229,003 --------- --------- ---------- ---------- Operating costs and expenses: Cost of sales................................. 221,125 182,586 459,536 358,672 Program costs................................. 173,173 149,280 339,037 319,347 Selling and marketing......................... 94,094 73,107 182,988 135,738 General and administrative.................... 82,940 57,760 155,099 113,796 Other operating costs......................... 31,228 22,190 56,952 44,319 Amortization of cable distribution fees....... 8,267 6,186 16,490 12,276 Depreciation and amortization................. 48,236 43,555 95,974 86,562 --------- --------- ---------- ---------- Total operating costs and expenses.......... 659,063 534,664 1,306,076 1,070,710 --------- --------- ---------- ---------- Operating profit............................ 99,769 76,450 217,753 158,293 Other income (expense): Interest income............................... 9,163 8,708 13,912 19,323 Interest expense.............................. (10,651) (20,241) (18,478) (40,619) Gain on sale of securities.................... -- 2,970 -- 50,270 Other, net.................................... (1,529) (7,958) (4,008) 1,658 --------- --------- ---------- ---------- (3,017) (16,521) (8,574) 30,632 --------- --------- ---------- ---------- Earnings before income taxes and minority interest...................................... 96,752 59,929 209,179 188,925 Income tax expense.............................. (5,951) (1,255) (10,963) (3,138) Minority interest............................... (2,018) 191 (4,314) 377 --------- --------- ---------- ---------- NET EARNINGS.................................... $ 88,783 $ 58,865 $ 193,902 $ 186,164 ========= ========= ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 42 USANI LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 216,670 $ 247,474 Accounts and notes receivable, net of allowance of $44,608 and $33,317, respectively..................................... 406,900 381,175 Inventories, net............................................ 450,831 432,520 Investments held for sale................................... 5,735 -- Other current assets, net................................... 23,752 8,542 ---------- ---------- Total current assets.................................... 1,103,888 1,069,711 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 137,142 123,606 Buildings and leasehold improvements........................ 61,553 59,074 Furniture and other equipment............................... 67,277 67,246 Land........................................................ 10,246 10,246 Projects in progress........................................ 23,573 31,736 ---------- ---------- 299,791 291,908 Less accumulated depreciation and amortization.......... (75,885) (79,350) ---------- ---------- 223,906 212,558 OTHER ASSETS Intangible assets, net...................................... 5,154,725 5,105,510 Cable distribution fees, net ($31,884 and $35,181, respectively, to related parties)... 151,059 130,988 Long-term investments....................................... 68,841 93,742 Notes and accounts receivable, net.......................... 23,382 19,506 Inventories, net............................................ 133,722 154,497 Advances to USAI and subsidiaries........................... 756,891 649,480 Deferred charges and other, net............................. 43,538 36,934 ---------- ---------- $7,659,952 $7,472,926 ========== ========== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations................. $ 16,853 $ 3,758 Accounts payable, trade..................................... 157,791 147,864 Obligations for program rights and film costs............... 245,717 265,235 Cable distribution fees payable ($18,476 and $18,733, respectively, to related parties)... 38,183 43,993 Deferred revenue............................................ 42,685 47,536 Other accrued liabilities................................... 298,729 257,575 ---------- ---------- Total current liabilities................................... 799,958 765,961 LONG-TERM OBLIGATIONS (net of current maturities)........... 527,011 527,339 OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of current............................................ 232,482 256,260 OTHER LONG-TERM LIABILITIES................................. 68,859 81,156 MINORITY INTEREST........................................... 14,200 531 COMMITMENTS AND CONTINGENCIES............................... -- -- MEMBERS' EQUITY Class A (245,393,314 and 245,601,782 shares, respectively)............................................. 2,015,873 1,912,514 Class B (282,161,532 shares)................................ 2,978,635 2,978,635 Class C (45,774,708 shares)................................. 466,252 466,252 Retained earnings........................................... 560,011 484,278 Accumulated other comprehensive income...................... (3,329) -- ---------- ---------- Total members' equity................................... 6,017,442 5,841,679 ---------- ---------- $7,659,952 $7,472,926 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 43 USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (UNAUDITED)
ACCUMULATED CLASS A CLASS B CLASS C OTHER LLC LLC LLC RETAINED COMPREHENSIVE TOTAL SHARES SHARES SHARES EARNINGS INCOME ---------- ---------- ---------- -------- --------- -------------- (IN THOUSANDS) BALANCE AT DECEMBER 31, 1999............ $5,841,679 $1,912,514 $2,978,635 $466,252 $ 484,278 $ -- Comprehensive income: Net earnings for the six months ended June 30, 2000....................... 193,902 -- -- -- 193,902 -- Foreign currency translation.......... 978 -- -- -- -- 978 Increase in unrealized gains in available for sale securities....... (4,307) -- -- -- -- (4,307) ---------- Comprehensive income................ 190,573 -- -- -- -- -- Issuance of LLC shares.................. 213,891 213,891 -- -- -- -- Repurchase of LLC shares................ (110,532) (110,532) -- -- -- -- Mandatory tax distribution to LLC partners.......................... (118,169) -- -- -- (118,169) -- ---------- ---------- ---------- -------- --------- ------- BALANCE AT JUNE 30, 2000................ $6,017,442 $2,015,873 $2,978,635 $466,252 $ 560,011 $(3,329) ========== ========== ========== ======== ========= =======
Comprehensive income for the three months ended June 30, 2000 was $83,795. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 44 USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 2000 1999 --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 193,902 $ 186,164 ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization............................. 95,974 86,562 Amortization of cable distribution fees................... 16,490 12,276 Amortization of program rights and film costs............. 294,026 261,252 Gain on sale of securities................................ -- (50,270) Non-cash compensation..................................... 5,870 1,900 Equity in (earnings) losses of unconsolidated affiliates.............................................. 5,015 (10,112) Minority interest......................................... 4,314 (377) CHANGES IN CURRENT ASSETS AND LIABILITIES: Accounts receivable....................................... (25,112) 3,108 Inventories............................................... 6,012 (2,177) Accounts payable.......................................... (1,089) (41,286) Accrued liabilities and deferred revenue.................. (130) (257) Payment for program rights and film costs................. (332,891) (255,335) Increase in cable distribution fees....................... (27,296) (12,746) Other, net................................................ 13,270 15,599 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES............... 248,355 194,301 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired.......................... (107,654) (7,500) Capital expenditures........................................ (28,730) (28,862) Increase in long-term investments and notes receivable...... (20,322) (12,150) Advance to Styleclick....................................... (9,000) -- Proceeds from sale of securities............................ -- 61,080 Proceeds from long-term notes receivable.................... -- 3,691 Other, net.................................................. (2,224) 2,163 --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (167,930) 18,422 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings.................................................. 35,769 -- Intercompany................................................ (86,768) (385,065) Payment of mandatory tax distribution to LLC partners....... (118,169) (52,755) Principal payments on long-term obligations................. (33,057) (13,942) Repurchase of LLC shares.................................... (110,532) (4,938) Proceeds from issuance of LLC shares........................ 208,100 22,732 Other....................................................... (7,550) -- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................... (112,207) (433,968) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 978 -- --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (30,804) (221,245) Cash and cash equivalents at beginning of period............ 247,474 234,903 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 216,670 $ 13,658 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 45 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION COMPANY FORMATION USANi LLC (the "Company" or "LLC"), a Delaware limited liability company, was formed on February 12, 1998 and is a subsidiary of Home Shopping Network, Inc. ("Home Shopping" or "Holdco"), which is a subsidiary of USA Networks, Inc. ("USAi"), formerly known as HSN, Inc. At its formation, USAi and Home Shopping contributed substantially all of the operating assets and liabilities of Home Shopping to the Company in exchange for Class A LLC Shares of the Company. On February 12, 1998, the Company acquired USA Networks, a New York general partnership, consisting of cable television networks, USA Network and Sci-Fi Channel ("Networks"), as well as the domestic television production and distribution businesses of Universal Studios ("Studios USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd. ("Seagram"). On January 20, 2000, the Board of Directors declared a two-for-one stock split of USANi LLC's members' equity interests, payable in the form of a dividend to shareholders of record as of the close of business on February 10, 2000. The stock dividend was paid on February 24, 2000. All share numbers give effect to such stock split. COMPANY BUSINESS The Company is a holding company, the subsidiaries of which are engaged in diversified media and electronic commerce businesses. The five principal areas of business are: - Networks and television production, which includes Networks and Studios USA. Networks operates the USA Network and Sci-Fi Channel cable networks and Studios USA produces and distributes television programming. - Electronic retailing, which consists primarily of the Home Shopping Network and America's Store which are engaged in the electronic retailing business. - Interactive, which represents Internet Shopping Network, the Company's on-line retailing networks business. - Electronic commerce and services, which primarily represents the Company's customer and e-care businesses. - Developing networks, which primarily represents recently acquired cable television properties Trio and News World International and SciFi.com, a developing Internet content and commerce site. BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of the Company are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the three and months ended June 30, 2000. Certain amounts in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 1999 have been reclassified to conform to the 2000 presentation. 46 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K") for a summary of all significant accounting policies. NEW ACCOUNTING PRONOUNCEMENTS In June 2000, the Securities and Exchange Commission issued an amendment to Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101") which delayed the effective date for adoption of SAB 101 to the fourth quarter of 2000. SAB 101 provides guidance on revenue recognition criteria for certain types of transactions. SAB 101 also provides guidance on the disclosures that companies should make about their revenue recognition policies and the impact of events and trends on revenue. In June 2000, the Accounting Standards Executive Committee ("AcSEC") issued SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2"), which replaces FASB Statement No. 53, FINANCIAL ACCOUNTING BY PRODUCERS AND DISTRIBUTORS OF MOTION PICTURE FILMS. AcSEC concluded that film costs would be accounted for under an inventory model. In addition, the SOP considers such topics as revenue recognition (fixed fees and minimum guarantees in variable fee arrangements), fee allocation in multiple films, accounting for exploitation costs, and impairment assessment. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2000. The Company is currently evaluating the impact of SAB 101 and SOP 00-2, although the impact is not expected to be material. NOTE 3--INVESTMENTS During the quarter and six months ended June 30, 1999, the Company recognized pre-tax gains of $3.0 and $50.3 million, respectively, on the sale of securities in a publicly traded entity. NOTE 4--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000: As of January 1, 2000 the Company began to consolidate the accounts of HOT Germany, an electronic retailer operating principally in Germany, whereas its investment in HOT Germany was previously accounted for under the equity method of accounting. On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. 47 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--STATEMENTS OF CASH FLOWS (CONTINUED) During the second quarter, the company recorded $8.7 million of expense related to an agreement with an executive. Of this amount, $2.9 million is a non-cash stock compensation charge related to restricted stock. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999: During the six months ended June 30, 1999, the Company acquired post-production and other equipment through capital leases totaling $2.1 million. NOTE 5--INDUSTRY SEGMENTS For the three and six months ended June 30, 2000 and 1999, the Company operated principally in five industry segments: Networks and television production, Electronic retailing, Interactive, Electronic commerce and services and Developing networks. The Networks and television production segment consists of the cable networks USA Network and Sci-Fi Channel and Studios USA, which produces and distributes television programming. The Electronic-retailing segment consists of Home Shopping Network and America's Store, which are engaged in the sale of merchandise through electronic retailing. The Interactive segment represents the Company's on-line retailing networks business. The Electronic commerce and services segment primarily represents the Company's customer and e-care businesses. The Developing networks segment consists primarily of the recently acquired cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com, a developing Internet content and commerce site.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- (IN THOUSANDS) Revenue Networks and television production............. $390,688 $316,394 $ 769,641 $ 647,938 Electronic retailing........................... 357,722 284,322 736,780 559,832 Internet services.............................. 4,785 6,544 10,311 12,851 Electronic commerce and services............... 1,533 800 2,431 1,073 Developing networks............................ 3,709 218 4,271 427 Other.......................................... 395 2,836 395 6,882 -------- -------- ---------- ---------- $758,832 $611,114 $1,523,829 $1,229,003 ======== ======== ========== ========== Operating profit (loss) Networks and television production............. $111,190 $ 77,697 $ 221,977 $ 158,967 Electronic retailing........................... 21,808 18,964 51,820 33,650 Internet services.............................. (11,355) (11,220) (21,412) (19,021) Electronic commerce and services............... (4,022) (500) (7,945) (926) Developing networks............................ (2,528) (543) (3,762) (543) Other.......................................... (15,324) (7,948) (22,925) (13,834) -------- -------- ---------- ---------- $ 99,769 $ 76,450 $ 217,753 $ 158,293 ======== ======== ========== ==========
48 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION On November 23, 1998, USAi and the Company completed an offering of $500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In May 1999, the Old Notes were exchanged in full for $500.0 million of new 6 3/4% Senior Notes due 2005 (the "Notes") that have terms that are substantially identical to the Old Notes. Interest is payable on the Notes on May 15 and November 15 of each year, commencing May 15, 1999. The Notes are jointly, severally, fully and unconditionally guaranteed by certain subsidiaries of USAi, including Holdco, a non-wholly owned, direct subsidiary of USAi, and all of the subsidiaries of the Company (other than subsidiaries that are, individually and in the aggregate, inconsequential to the Company on a consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Holdco) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or indirectly, by USAi or the Company, as the case may be. Separate financial statements for each of the Wholly Owned Subsidiary Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not filing separate reports under the Securities Exchange Act of 1934 because USAi's and the Company's management has determined that the information contained in such documents would not be material to investors. USANi LLC and its subsidiaries have no material restrictions on their ability to transfer amounts to fund USAi's operations. NOTE 7--SUBSEQUENT EVENTS MERGER OF INTERNET SHOPPING NETWORK AND STYLECLICK.COM On July 27, 2000 USAi and Styleclick.com Inc., a leading enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com Inc. and ISN. Styleclick, Inc. is traded on the Nasdaq market under the symbol "IBUY". In accordance with the terms of the agreement, USAi invested $40 million in cash and will contribute $10 million in dedicated media, and will receive warrants to purchase additional shares of the new company. On a fully diluted basis, USAi owns approximately 75% of the new company and Styleclick.com stockholders own approximately 25%. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under the bridge loan. 49 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION --------------------- ----------- 3.1 Restated Certificate of Incorporation 10.1 USA Networks, Inc. 2000 Stock and Annual Incentive Plan 10.2 USA Networks, Inc. Deferred Compensation Plan For Non-Employee Directors 10.3* Consulting Agreement, dated June 21, 2000, between USA Networks,Inc. and Barry Baker 10.5* Employment Agreement, dated August 9, 2000, between USA Networks, Inc. and Julius Genachowski 27.1 Financial Data Schedule (for SEC use only) 27.2 Financial Data Schedule (for SEC use only) 27.3 Financial Data Schedule (for SEC use only) 27.4 Financial Data Schedule (for SEC use only)
------------------------ * Reflects management contracts and compensatory plans.