1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1999.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-20570
USA NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
10019
(ZIP CODE)
(212) 314-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
As of October 29, 1999, the following shares of the Registrant's capital
stock were outstanding:
Common Stock........................................... 136,505,046
Class B Common Stock................................... 31,516,726
-----------
Total outstanding Common Stock............... 168,021,772
Common Stock issuable upon exchange of outstanding
exchangeable subsidiary equity....................... 180,576,423
-----------
Total outstanding Common Stock, assuming full
exchange of exchangeable subsidiary
equity..................................... 348,598,195
===========
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of October 29, 1999 was $4,598,860,125. 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 October 29, 1999, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 348,598,195 shares of Common Stock with an
aggregate market value of $15,708,706,162.
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2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET REVENUES
Networks and television production.......... $307,360 $281,302 $ 955,725 $ 757,305
Electronic retailing........................ 281,946 258,038 842,851 766,458
Ticketing operations........................ 110,813 89,134 337,357 283,538
Hotel reservations.......................... 47,652 -- 70,670 --
Internet services........................... 15,224 5,934 40,761 14,467
Filmed entertainment........................ 27,912 500 39,687 6,814
Broadcasting................................ 2,341 579 5,691 967
Other....................................... -- 5,027 6,882 37,468
-------- -------- ---------- ----------
Total net revenues..................... 793,248 640,514 2,299,624 1,867,017
-------- -------- ---------- ----------
Operating costs and expenses:
Cost of sales............................... 243,345 192,531 664,450 533,190
Program costs............................... 147,549 153,618 466,896 412,541
Selling and marketing....................... 129,067 114,793 377,397 347,418
General and administrative.................. 127,804 47,258 331,415 183,700
Other operating costs....................... 16,783 23,707 58,525 66,210
Amortization of cable distribution fees..... 6,938 5,319 19,214 15,883
Depreciation and amortization............... 83,430 53,286 230,467 147,829
-------- -------- ---------- ----------
Total operating costs and expenses..... 754,916 590,512 2,148,364 1,706,771
-------- -------- ---------- ----------
Operating profit............................ 38,332 50,002 151,260 160,246
Other income (expense):
Interest income............................. 8,948 13,712 24,297 21,422
Interest expense............................ (21,170) (35,490) (61,233) (104,319)
Gain on disposition of broadcast stations... -- 9,247 -- 84,187
Gain on sale of securities.................. 39,451 -- 89,721 --
Other, net.................................. (509) (3,452) 1,986 (19,707)
-------- -------- ---------- ----------
26,720 (15,983) 54,771 (18,417)
-------- -------- ---------- ----------
Earnings before income taxes and minority
interest....................................... 65,052 34,019 206,031 141,829
Income tax expense............................... (24,947) (16,619) (65,302) (72,792)
Minority interest................................ (47,785) (22,249) (150,582) (42,996)
-------- -------- ---------- ----------
NET EARNINGS (LOSS).............................. $ (7,680) $ (4,849) $ (9,853) $ 26,041
======== ======== ========== ==========
Basic earnings (loss) per common share........... $ (.04) $ (.03) $ (.06) $ .19
======== ======== ========== ==========
Diluted earnings (loss) per common share......... $ (.04) $ (.03) $ (.06) $ .14
======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
1
3
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 386,032 $ 445,356
Accounts and notes receivable, net of allowance of
$42,341 and $20,610, respectively..................... 391,588 372,111
Inventories, net....................................... 488,584 421,570
Other current assets, net.............................. 40,018 28,501
---------- ----------
Total current assets.............................. 1,306,222 1,267,538
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment....................... 282,900 249,539
Buildings and leasehold improvements................... 107,274 100,339
Furniture and other equipment.......................... 60,251 40,105
---------- ----------
450,425 389,983
Less accumulated depreciation and amortization......... (209,207) (168,727)
---------- ----------
241,218 221,256
Land................................................... 16,158 16,044
Projects in progress................................... 45,858 18,130
---------- ----------
303,234 255,430
OTHER ASSETS
Intangible assets, net................................. 6,844,263 6,342,646
Cable distribution fees, net ($36,830 and $39,650,
respectively, to related parties)..................... 131,191 100,416
Long-term investments.................................. 57,860 63,365
Notes and accounts receivable, net of current portion
($2,562 and $3,356, respectively, from related
parties).............................................. 48,253 48,532
Advance to Universal................................... 183,285 --
Inventories, net....................................... 176,659 151,828
Deferred charges and other, net ($4,671 and $4,357,
respectively, from related parties)................... 107,459 97,347
---------- ----------
$9,158,426 $8,327,102
========== ==========
The accompanying notes are an integral part of these statements.
2
4
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations............ $ 16,329 $ 36,538
Accounts payable, trade................................ 151,972 186,690
Accounts payable, client accounts...................... 97,359 70,817
Obligations for program rights and film costs.......... 250,958 184,583
Deferred revenue....................................... 90,726 45,619
Amounts due under acquisition agreements............... 32,167 --
Cable distribution fees payable ($18,567 and $18,633,
respectively, to related parties)..................... 41,149 44,588
Deferred income taxes.................................. 21,410 17,269
Other accrued liabilities ($16,844 and $0, respectively, to related parties) .. 292,758 276,675
---------- ----------
Total current liabilities......................... 994,828 862,779
LONG-TERM OBLIGATIONS, net of current....................... 550,221 775,683
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 305,869 409,956
OTHER LONG-TERM LIABILITIES................................. 76,532 73,682
MINORITY INTEREST........................................... 4,445,902 3,633,597
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 800,000,000
shares; issued and outstanding 136,414,109 and 127,272,032
shares, respectively...................................... 1,364 1,273
Class B -- convertible common stock -- $.01 par value;
authorized, 200,000,000 shares; issued and outstanding,
31,516,726 shares......................................... 315 315
Additional paid-in capital.................................. 2,834,514 2,594,043
Accumulated deficit......................................... (36,580) (26,727)
Unrealized gain in available for sale securities............ -- 10,353
Foreign currency translation................................ (1,237) (1,501)
Treasury stock at cost -- 264,124 shares.................... (7,861) --
Unearned compensation....................................... (443) (1,353)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
---------- ----------
Total stockholders' equity........................ 2,785,074 2,571,405
---------- ----------
$9,158,426 $8,327,102
========== ==========
The accompanying notes are an integral part of these statements.
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USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
CLASS B
CONVERTIBLE ADDITIONAL FOREIGN
COMMON COMMON PAID-IN ACCUMULATED UNREALIZED CURRENCY
TOTAL STOCK STOCK CAPITAL DEFICIT GAINS TRANSLATION
---------- ------ ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
BALANCE AT JANUARY 1, 1999................ $2,571,405 $1,273 $315 $2,594,043 $(26,727) $ 10,353 $(1,501)
Comprehensive loss:
Net loss for the nine months ended
September 30, 1999.................. (9,853) -- -- -- (9,853) -- --
Decrease in unrealized gains in
available for sale securities....... (10,353) -- -- -- -- (10,353) --
Foreign currency translation.......... 264 -- -- -- -- -- 264
----------
Comprehensive loss (19,942)
----------
Issuance of common stock upon exercise of
stock options........................... 38,741 48 -- 38,693 -- -- --
Income tax benefit related to stock
options exercised....................... 53,731 -- -- 53,731 -- -- --
Issuance of stock in connection with
October Films/PFE Transaction........... 23,558 6 -- 23,552 -- -- --
Issuance of stock in connection with other
acquisitions............................ 4,226 1 -- 4,225 -- -- --
Issuance of stock in connection with
Liberty preemptive rights............... 120,306 36 -- 120,270 -- -- --
Purchase of treasury stock in connection
with stock repurchase program........... (7,226) -- -- -- -- -- --
Cancellation of employee equity program... (355) -- -- -- -- -- --
Amortization of unearned compensation
related to stock options and equity
participation plans..................... 630 -- -- -- -- -- --
---------- ------ ---- ---------- -------- -------- -------
BALANCE AT SEPTEMBER 30, 1999............. $2,785,074 $1,364 $315 $2,834,514 $(36,580) $ -- $(1,237)
========== ====== ==== ========== ======== ======== =======
NOTE
RECEIVABLE
FROM KEY
EXECUTIVE
FOR
COMMON
TREASURY UNEARNED STOCK
STOCK COMPENSATION ISSUANCE
-------- ------------ ----------
(IN THOUSANDS)
BALANCE AT JANUARY 1, 1999................ $ -- $(1,353) $(4,998)
Comprehensive loss:
Net loss for the nine months ended
September 30, 1999.................. -- -- --
Decrease in unrealized gains in
available for sale securities....... -- -- --
Foreign currency translation.......... -- -- --
Comprehensive loss
Issuance of common stock upon exercise of
stock options........................... -- -- --
Income tax benefit related to stock
options exercised....................... -- -- --
Issuance of stock in connection with
October Films/PFE Transaction........... -- -- --
Issuance of stock in connection with other
acquisitions............................ -- -- --
Issuance of stock in connection with
Liberty preemptive rights............... -- -- --
Purchase of treasury stock in connection
with stock repurchase program........... (7,226) -- --
Cancellation of employee equity program... (635) 280 --
Amortization of unearned compensation
related to stock options and equity
participation plans..................... -- 630 --
------- ------- -------
BALANCE AT SEPTEMBER 30, 1999............. $(7,861) $ (443) $(4,998)
======= ======= =======
The accompanying notes are an integral part of these statements.
4
6
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
--------- -----------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)......................................... $ (9,853) $ 26,041
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 230,467 147,829
Amortization of cable distribution fees................ 19,214 15,883
Amortization of program rights and film costs.......... 420,285 358,688
Gain on disposition of broadcast station............... -- (84,187)
Gain on sale of securities............................. (89,721) --
Minority interest...................................... 150,582 42,996
Non-cash stock compensation............................ 3,754 3,892
Changes in current assets and liabilities:
Accounts receivable............................... 2,607 (112,685)
Inventories....................................... (18,343) (86,067)
Accounts payable.................................. (25,488) 67,191
Accrued liabilities............................... 48,453 57,712
Payment for program rights and film costs.............. (448,975) (335,001)
Increase in cable distribution fees.................... (35,624) (2,365)
Other, net............................................. 2,074 46,804
--------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.... 249,432 146,731
--------- -----------
Cash flows from investing activities:
Acquisition of Universal Transaction, net of cash
acquired.............................................. -- (1,297,233)
Acquisitions, net of cash acquired..................... (179,906) (85,555)
Capital expenditures, net.............................. (87,795) (64,240)
Advance to Universal................................... (200,000) --
Recoupment of advance to Universal..................... 20,741 --
Increase in long-term investments...................... (17,746) (25,631)
Proceeds from disposition of broadcast stations........ -- 356,769
Proceeds from sale of securities....................... 107,231 --
Payment of merger and financing costs.................. (4,765) (29,972)
Other, net............................................. 5,845 (2,997)
--------- -----------
NET CASH USED IN INVESTING ACTIVITIES........ (356,395) (1,148,859)
--------- -----------
Cash flows from financing activities:
Borrowings............................................. -- 1,641,380
Principal payments on long-term obligations............ (337,636) (1,198,565)
Purchase of treasury stock............................. (7,226) --
Payment of mandatory tax distribution to LLC
partners.............................................. (28,830) --
Proceeds from issuance of common stock and LLC
shares................................................ 413,318 811,018
Proceeds from sale of subsidiary stock................. 2,490 --
Proceeds from minority interest shareholders........... 4,050 --
Cash acquired in merger transactions................... 1,209 7,877
Redemption of minority interest in SF Broadcasting..... -- (81,664)
--------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 47,375 1,180,046
--------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 264 (1,723)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (59,324) 176,195
Cash and cash equivalents at beginning of period............ 445,356 116,036
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 386,032 $ 292,231
========= ===========
The accompanying notes are an integral part of these statements.
5
7
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- COMPANY HISTORY AND BASIS OF PRESENTATION
COMPANY HISTORY
USA Networks, Inc., formerly HSN, Inc. (the "Company" or "USAi") is a
holding company, the subsidiaries of which are engaged in diversified media and
electronic commerce businesses.
In July 1997, the Company acquired a controlling interest in Ticketmaster
Group, Inc. ("Ticketmaster"). On June 24, 1998, the Company completed its
acquisition of Ticketmaster in a tax-free merger, pursuant to which each
outstanding share of Ticketmaster common stock not owned by the Company was
exchanged for 1.126 shares of USAi common stock -- See Note 3.
On February 12, 1998, the Company acquired USA Networks, a New York general
partnership, consisting of cable television networks USA Network and The Sci-Fi
Channel ("Networks"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram"), and the Company changed its name to USA Networks, Inc. (the
"Universal 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.
As of September 30, 1999, the Company engages in seven principal areas of
business:
- NETWORKS AND TELEVISION PRODUCTION, which includes Networks and Studios
USA. Networks operates the USA Network and The Sci-Fi Channel cable
networks and Studios USA produces and distributes television programming.
- ELECTRONIC RETAILING, consisting primarily of the Home Shopping Network
and America's Store, which are engaged in the electronic retailing
business.
- TICKETING OPERATIONS, which primarily represents Ticketmaster, the
leading provider of automated ticketing services in the United States,
and Ticketmaster Online, 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.
- INTERNET SERVICES, which represents the Company's on-line retailing
networks business and local city guide business.
- FILMED ENTERTAINMENT, which primarily represents the Company's domestic
theatrical film distribution and production businesses.
- BROADCASTING, which owns and operates television stations.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements and Notes thereto
of the Company are unaudited and should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto for the year ended December
31, 1998. Certain amounts in the Condensed Consolidated Financial
6
8
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 1 -- COMPANY HISTORY AND BASIS OF PRESENTATION -- (CONTINUED)
Statements for the quarter and nine months ended September 30, 1998 have been
reclassified to conform to the 1999 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, 1998 (the "1998 Form 10-K") for a summary of all significant
accounting policies.
HOTEL RESERVATIONS REVENUE RECOGNITION
Revenue related to the sale of hotel rooms is recognized at the conclusion
of the customer's stay at the hotel.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements and notes include the inventory carrying adjustment, sales return
accrual, allowance for doubtful accounts, recoverability of intangibles and
other long-lived assets, management's forecast of anticipated revenues from the
distribution of television and film product in order to evaluate the ultimate
recoverability of film inventory and amortization of program usage.
NOTE 3 -- BUSINESS ACQUISITIONS
UNIVERSAL TRANSACTION
In connection with the Universal Transaction, USAi paid Universal
approximately $4.1 billion in the form of a cash payment of approximately $1.6
billion, a portion of which ($300 million plus interest) was deferred until no
later than June 30, 1998, and an effective 45.8% interest in the Company through
shares of common stock, par value $.01 per share, of the Company (the "Common
Stock") and Class B common stock, par value $.01 per share, of the Company (the
"Class B Common Stock"), and shares of a newly formed limited liability company
("LLC Shares") ("USANi LLC") which are exchangeable (subject to regulatory
restrictions) into shares of Common Stock and Class B Common Stock. At the
closing of the Universal Transaction, USAi contributed its Electronic retailing
business to USANi LLC, a subsidiary of USAi. Simultaneously with this
transaction, the remaining 1,178,322 shares of Class B Common Stock were issued
in accordance with Liberty Media Corporation's, a subsidiary of AT&T
Corporation, ("Liberty") contingent right to receive such shares as part of
USAi's merger with Home Shopping Network, Inc. ("Holdco") in 1996.
The Investment Agreement, as amended and restated as of December 18, 1997,
among the Company, Holdco, Universal and Liberty (the "Investment Agreement"),
relating to the Universal Transaction also
7
9
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3 -- BUSINESS ACQUISITIONS -- (CONTINUED)
contemplated that, on or prior to June 30, 1998, the Company and Liberty would
complete a transaction involving a $300 million cash investment, plus an
interest factor, by Liberty in the Company through the purchase of Common Stock
or LLC Shares. The transaction closed on June 30, 1998 with Liberty making a
cash payment of $308.5 million in exchange for 15,000,000 LLC shares.
TICKETMASTER TRANSACTION
In connection with the Ticketmaster tax-free merger, as of June 24, 1998,
the Company issued 15,967,200 shares of Common Stock to the public shareholders
of Ticketmaster and converted 3.6 million options to acquire Ticketmaster common
stock into options to acquire Common Stock for a total consideration of $467.7
million. The acquisition of the controlling interest in Ticketmaster in 1997 and
the tax-free merger are collectively referred to as the "Ticketmaster
Transaction."
CITYSEARCH TRANSACTION
On September 28, 1998, pursuant to an Amended and Restated Agreement and
Plan of Reorganization among CitySearch, Inc.("CitySearch"), the Company,
Ticketmaster and certain of its subsidiaries, the Company merged the online
ticketing operations of Ticketmaster ("Ticketmaster Online") into a subsidiary
of CitySearch, a publisher of local city guides on the Web (the "CitySearch
Merger"), to create Ticketmaster Online-CitySearch, Inc. ("TMCS"). The Company
had acquired Ticketmaster Online as part of the Ticketmaster Transaction and
allocated to Ticketmaster Online a total of $154.8 million of the goodwill
resulting from the Ticketmaster Transaction. The CitySearch Merger was accounted
for using the "reverse purchase" method of accounting, pursuant to which
Ticketmaster Online was treated as the acquiring entity for accounting purposes,
and the portion of the assets and liabilities of CitySearch acquired were
recorded at their respective fair values under the purchase method of
accounting.
Prior to the CitySearch Merger, the Company owned approximately 11.8% of
CitySearch, which it had purchased for total consideration of $23.0 million.
Pursuant to the CitySearch Merger, the Company acquired 50.7% of CitySearch in
exchange for an effective 35.2% interest in Ticketmaster Online. The total
purchase price for the acquisition of the additional CitySearch interest was
approximately $120.8 million, substantially all of which was allocated to
goodwill.
In connection with the CitySearch Merger, the Company purchased 1,997,502
TMCS shares pursuant to a Tender Offer, which was completed on November 3, 1998,
representing an additional 3.1% interest in CitySearch, for total consideration
of $17.3 million.
On December 8, 1998, TMCS completed an initial public offering of 8,050,000
shares of its common stock (the "CitySearch IPO"), which generated proceeds of
$105.0 million. In connection with the CitySearch IPO, the Company recognized a
gain of $41.1 million. The CitySearch Merger, the Tender Offer and the
CitySearch IPO are referred to as the "CitySearch Transaction".
HOTEL RESERVATIONS NETWORK TRANSACTION
On May 10, 1999, the Company completed the 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 purchase
price was $150.0 million, reduced by 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. Through November 4, 1999, the Company paid $37.5 million pursuant
to these contingent payment arrangements. The transaction has been accounted for
under the purchase method
8
10
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3 -- BUSINESS ACQUISITIONS -- (CONTINUED)
of accounting. The purchase price, including the remaining initial contingent
payment of $12.5 million which management has determined is probable of
occurrence, 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 $200.2 million has been preliminarily allocated to goodwill, which is being
amortized over 10 years.
OCTOBER FILMS/PFE TRANSACTION
In connection with the acquisition of October Films, Inc., as of May 28,
1999, the Company issued 300,000 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
300,000 additional shares of Common Stock at $40.00 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 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 September 30, 1999, approximately $20.7 million had been
offset against the advance.
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 $98.2 million has been preliminarily allocated to goodwill,
which is being amortized over 40 years.
The following unaudited pro forma condensed combined financial information
for the three and nine month periods ended September 30, 1999 and 1998, is
presented to show the results of the Company as if the Universal Transaction,
the Ticketmaster Transaction, the CitySearch Transaction, the sale of SF
Broadcasting (see Note 8), the Hotel Reservations Network Transaction and the
October Films/PFE Transaction all occurred at the beginning of the periods
presented. The pro forma results include certain adjustments, including
increased amortization related to goodwill and other intangibles, changes in
programming and film costs amortization and an increase in interest expense, and
are not necessarily indicative of what the results would have been had the
transactions actually occurred on the aforementioned dates.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............................. $793,248 $673,232 $2,354,612 $2,078,824
Net loss................................. (7,680) (30,748) (14,130) (13,729)
Basic and diluted loss per common
share.................................. $ (.04) $ (.22) $ (.09) $ (.13)
9
11
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- LONG-TERM OBLIGATIONS
On February 12, 1998, the Company entered into an Unsecured Senior Credit
Facility, which included a $750.0 million Tranche A Term Loan maturing on
December 31, 2002. In November 1998, in conjunction with the offering of $500.0
million 6 3/4% Senior Notes, the Company permanently repaid $500.0 million of
the Tranche A Term Loan. In September 1999, the Company permanently repaid the
remaining balance. In conjunction with the September 1999 repayment, the Company
wrote off deferred financing costs of $0.6 million.
NOTE 5 -- CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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 common stock for all the outstanding stock
of City Auction, for a total value of $27.2 million.
On May 28, 1999, in connection with the October Films/PFE Transaction, the
Company issued 300,000 shares of Common Stock, with a value of approximately
$12.0 million.
On June 14, 1999, TMCS completed the acquisition of Match.com, Inc
("Match.com"), an Internet personals company. In connection with the
acquisition, TMCS issued approximately 1.9 million shares of TMCS Class B Common
Stock to the former owners of Match.com representing a total purchase price of
approximately $43.3 million.
On September 13, 1999, TMCS purchased all the outstanding limited liability
company units ("Units") of Web Media Ventures, L.L.C., an Internet personals
company distributing its services through a network of affiliated Internet
sites. In connection with the acquisition, TMCS issued 1.2 million shares of
TMCS Class B Common Stock in exchange for all of the Web Media Units. In
addition, TMCS is obligated to issue additional contingent shares related to
certain revenue targets. The total purchase price recorded at September 13,
1999, without considering the contingent shares, was $36.6 million.
On September 18, 1999, TMCS acquired certain assets associated with the
entertainment city guide (A&E) portion of the Sidewalk.com web site ("Sidewalk")
from Microsoft Corporation ("Microsoft"). The Company also entered into a four
year distribution agreement with Microsoft pursuant to which the Company will
become the exclusive provider of local city guide content on the Microsoft
Network ("MSN") and the Company's internet personals Web sites will become the
premier provider of personals content to MSN. In addition, the Company and
Microsoft entered into additional cross-promotional arrangements. TMCS issued
Microsoft 7.0 million shares of TMCS Class B Common Stock. The fair value of the
consideration provided in exchange for the Sidewalk assets and distribution
agreement amounted to $338.0 million.
During the nine months ended September 30, 1999, the Company acquired
post-production and other equipment through capital leases totaling $2.5
million.
10
12
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 5 -- CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
(IN THOUSANDS)
ACQUISITION OF USA NETWORKS AND STUDIOS USA
Acquisition price...................................... $ 4,115,531
Less: Amount paid in cash.............................. (1,300,983)
-----------
Total Non-Cash Consideration........................... $ 2,814,548
===========
Components of Non-Cash Consideration:
Deferred purchase price liability...................... $ 300,000
Issuance of Common Shares and Class B Shares........... 277,898
Issuance of USANi LLC Shares........................... 2,236,650
-----------
$ 2,814,548
===========
Exchange of Minority Interest in USANi LLC for Deferred
Purchase Price Liability.................................. $ 304,636
===========
As of March 1, 1998, the 5 7/8% Convertible Subordinated Debentures were
converted to 7,499,022 shares of Common Stock.
During the nine months ended September 30, 1998, the Company acquired
computer equipment through a capital lease totaling $15.5 million.
In connection with the Universal Transaction, the Company issued 1,178,322
Class B Common Stock to Liberty, which represented the remaining contingently
issuable shares in connection with the 1996 merger of the Company with Home
Shopping Network, Inc.
In connection with the acquisition of the remaining interest in
Ticketmaster, the Company issued 15,967,200 shares of Common Stock.
In connection with the sale of the SF Broadcasting television stations on
July 16, 1998, as part of the total consideration, the Company received a note
in the amount of $25.0 million. This note was transferred to the minority
interest shareholder of SF Broadcasting as part of the redemption of their
interest.
In connection with the CitySearch Transaction, the Company exchanged an
effective 35.2% interest in Ticketmaster Online for a 50.7% interest in
CitySearch.
NOTE 6 -- INVENTORIES
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------- ---------------------
INVENTORIES CONSIST OF: CURRENT NONCURRENT CURRENT NONCURRENT
----------------------- -------- ---------- -------- ----------
(IN THOUSANDS)
Film costs:
Released, less amortization............ $ 86,531 $ 50,068 $ 98,082 $ 61,310
Completed or in process and
unreleased........................... 62,144 22,790 138 --
Programming costs, net of amortization...... 175,790 102,558 156,789 90,518
Inventories held for sale................... 164,119 -- 165,212 --
Other....................................... -- 1,243 1,349 --
-------- -------- -------- --------
Inventories, net.................. $488,584 $176,659 $421,570 $151,828
======== ======== ======== ========
11
13
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 6 -- INVENTORIES -- (CONTINUED)
The Company estimates that approximately 90% of unamortized film costs at
September 30, 1999 will be amortized within the next three years.
NOTE 7 -- SAVOY SUMMARIZED FINANCIAL INFORMATION
The Company has not presented separate financial statements and other
disclosures concerning Savoy Pictures Entertainment, Inc. ("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.
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
SUMMARIZED OPERATING INFORMATION 1999 1998
- -------------------------------- ------- --------
(IN THOUSANDS)
Net revenue................................................. $4,687 $33,938
Operating expenses.......................................... 4,882 36,432
Operating loss.............................................. (195) (2,494)
Net income.................................................. 3,258 35,118
SEPTEMBER 30, DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION 1999 1998
--------------------------------- ------------- ------------
(IN THOUSANDS)
Current assets.............................................. $ 11,018 $ 24,115
Non-current assets.......................................... 138,849 132,937
Current liabilities......................................... 12,173 12,596
Non-current liabilities..................................... 42,507 52,532
The September 30, 1998 summarized operating information includes the
operations of SF Broadcasting until its assets were sold on July 16, 1998.
NOTE 8 -- PROGRAM RIGHTS AND FILM COSTS
As of September 30, 1999, the liability for program rights, representing
future payments to be made under program contract agreements amounted to $489.6
million. Annual payments required are approximately $55.2 million in the
remainder of 1999, $209.3 million in 2000, $109.4 million in 2001, $67.5 million
in 2002, $28.2 million in 2003 and $20.0 million in 2004 and thereafter. Amounts
representing interest are $59.1 million and the present value of future payments
is $430.5 million.
As of September 30, 1999, the liability for film costs amounted to $126.3
million. Annual payments are approximately $20.1 million in the remainder of
1999, $63.2 million in 2000, $25.0 million in 2001, $13.0 million in 2002, and
$5.0 million in 2003.
Unrecorded commitments for program rights consist of programs for which the
license period has not yet begun or the program is not yet available to air. As
of September 30, 1999, the unrecorded commitments amounted to $766.8 million.
Annual commitments are $15.8 million for the remainder of 1999, $111.5 million
in 2000, $157.3 million in 2001, $151.8 million in 2002, $120.9 million in 2003
and $209.5 million in 2004 and thereafter.
12
14
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- BROADCAST STATION TRANSACTIONS
On January 20, 1998, the Company consummated the sale of its Baltimore
television station for $80.0 million resulting in a gain of $74.9 million during
the first quarter of 1998. On July 16, 1998, the Company sold the assets of SF
Broadcasting, which owned and operated four television stations.
NOTE 10 -- INVESTMENTS
During the quarter and nine months ended September 30, 1999, the Company
recognized gains of $39.5 million and $89.7 million, respectively, from the sale
of securities in a publicly traded entity.
NOTE 11 -- INDUSTRY SEGMENTS
For the quarter and nine months ended September 30, 1999, the Company
operated principally in seven industry segments: Networks and television
production, Electronic retailing, Ticketing operations, Hotel reservations,
Internet services, Filmed entertainment and Broadcasting. The Networks and
television production segment consists of the cable networks USA Network and The
Sci-Fi Channel and Studios USA, which produces and distributes television
programming. 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 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
United States. The Internet services 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 Broadcasting segment includes the operations of
broadcast television stations in twelve markets that principally transmit Home
Shopping Network programming. Through July 16, 1998, Other included the
operations of SF Broadcasting, the owner of network-affiliated television
stations.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------------
1999 1998 1999 1998
-------- -------- ------------- ----------
(IN THOUSANDS)
Net revenues
Networks and television production.............. $307,360 $281,302 $ 955,725 $ 757,305
Electronic retailing....................... 281,946 258,038 842,851 766,458
Ticketing operations....................... 110,813 89,134 337,357 283,538
Hotel reservations......................... 47,652 -- 70,670 --
Internet services.......................... 15,224 5,934 40,761 14,467
Filmed entertainment....................... 27,912 500 39,687 6,814
Broadcasting............................... 2,341 579 5,691 967
Other...................................... -- 5,027 6,882 37,468
-------- -------- ---------- ----------
$793,248 $640,514 $2,299,624 $1,867,017
======== ======== ========== ==========
13
15
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 11 -- INDUSTRY SEGMENTS -- (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------------
1999 1998 1999 1998
-------- -------- ------------- ----------
(IN THOUSANDS)
Operating profit (loss)
Networks and television production......... $ 65,028 $ 43,187 $ 222,897 $ 128,376
Electronic retailing....................... 26,431 24,586 73,320 64,036
Ticketing operations....................... 7,510 3,203 23,868 15,005
Hotel reservations......................... 1,500 -- 2,159 --
Internet services.......................... (43,938) (4,317) (105,280) (10,705)
Filmed entertainment....................... 798 1,680 158 2,748
Broadcasting............................... (11,525) (9,591) (36,612) (19,825)
Other...................................... (7,472) (8,746) (29,250) (19,389)
-------- -------- ---------- ----------
$ 38,332 $ 50,002 $ 151,260 $ 160,246
======== ======== ========== ==========
NOTE 12 -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL
INFORMATION
On November 23, 1998, the Company completed an offering of $500.0 million
6 3/4% Senior Notes due 2005 (the "Notes" and "Notes Offering"). Interest is
payable on the Notes on May 15 and November 15 of each year, commencing May 15,
1999.
The Company is a holding company that has no operating assets or
operations. Certain of the Company's indirectly owned subsidiaries are held by
Home Shopping Network, Inc. ("Holdco") through USANi LLC. USANi LLC is a
co-obligor of the Notes and Holdco is a guarantor. Substantially all of the
significant subsidiaries of Holdco and USANi LLC and substantially all of the
significant wholly owned subsidiaries of the Company (principally subsidiaries
engaged in the hotel reservations, filmed entertainment, broadcasting and
ticketing operations) have jointly and severally guaranteed the Company's and
USANi LLC's indebtedness (the "Guarantors") under the Notes. Certain
subsidiaries of the Company, Holdco and USANi LLC (the "Non-Guarantor
Subsidiaries") do not guarantee such indebtedness.
Full financial statements of the Guarantors and Non-Guarantor Subsidiaries
have not been included because, pursuant to their respective guarantees, the
Guarantors are jointly and severally liable with respect to the Notes.
Management does not believe that the information contained in separate full
financial statements of the wholly owned Guarantors or Non-Guarantor
Subsidiaries would be material to investors. Full financial statements of
Holdco, a non-wholly owned Guarantor, are presented in a separate filing. The
following are summarized unaudited statements setting forth certain financial
information concerning the Guarantors and Non-Guarantor Subsidiaries as of and
for the three and nine months ended September 30, 1999 (in thousands).
14
16
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 12 -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR
FINANCIAL INFORMATION -- (CONTINUED)
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ------------ ------------
BALANCE SHEET DATA AS OF
SEPTEMBER 30, 1999
Current assets.................. $ 2,097 $ 947,705 $ 356,420 $ -- $ 1,306,222
Property and equipment, net..... -- 229,813 73,421 -- 303,234
Goodwill and other intangible
assets, net................... 76,312 5,154,916 1,613,035 -- 6,844,263
Investments in subsidiaries..... 2,603,778 720,135 -- (3,323,913) --
Other assets.................... 138,260 481,974 84,473 -- 704,707
---------- ----------- ---------- ----------- -----------
Total assets.......... $2,820,447 $ 7,534,543 $2,127,349 $(3,323,913) $ 9,158,426
========== =========== ========== =========== ===========
Current liabilities............. $ 169 $ 653,297 $ 341,362 $ -- $ 994,828
Long-term debt, less current
portion....................... -- 506,755 43,466 -- 550,221
Other liabilities............... 35,204 146,428 200,769 -- 382,401
Minority interest............... -- 3,911,329 534,573 -- 4,445,902
Interdivisional equity.......... -- 2,316,734 1,007,179 (3,323,913) --
Stockholders' equity............ 2,785,074 -- -- -- 2,785,074
---------- ----------- ---------- ----------- -----------
Total liabilities and
shareholders'
equity.............. $2,820,447 $ 7,534,543 $2,127,349 $(3,323,913) $ 9,158,426
========== =========== ========== =========== ===========
OPERATING RESULTS FOR THE
QUARTER ENDED SEPTEMBER 30,
1999
Revenue......................... $ -- $ 594,253 $ 198,995 $ -- $ 793,248
Operating expenses.............. (1,035) (530,440) (223,441) -- (754,916)
Interest expense, net........... (3,213) (8,623) (386) -- (12,222)
Gain on sale of securities...... -- 39,451 -- -- 39,451
Other income (expense), net..... 13,271 (18,722) 18,213 (13,271) (509)
Income tax expense.............. (16,703) (2,394) (5,850) -- (24,947)
Minority interest............... -- (61,922) 14,137 -- (47,785)
---------- ----------- ---------- ----------- -----------
Net earnings (loss)............. $ (7,680) $ 11,603 $ 1,668 $ (13,271) $ (7,680)
========== =========== ========== =========== ===========
OPERATING RESULTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
1999
Revenue......................... $ -- $ 1,815,030 $ 484,594 $ -- $ 2,299,624
Operating expenses.............. (8,333) (1,600,881) (539,150) -- (2,148,364)
Interest income (expense),
net........................... (7,974) (29,001) 39 -- (36,936)
Gain on sale of securities...... -- 89,721 -- -- 89,721
Other income (expense), net..... 49,618 (26,716) 28,702 (49,618) 1,986
Income tax expense.............. (43,164) (5,532) (16,606) -- (65,302)
Minority interest............... -- (182,552) 31,970 -- (150,582)
---------- ----------- ---------- ----------- -----------
Net earnings (loss)............. $ (9,853) $ 60,069 $ (10,451) $ (49,618) $ (9,853)
========== =========== ========== =========== ===========
15
17
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 12 -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR
FINANCIAL INFORMATION -- (CONTINUED)
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
CASH FLOW DATA FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
Cash flows from operating
activities......................... $ (34,548) $ 269,576 $ 14,404 $ -- $ 249,432
Cash flows from investing
activities......................... (370,727) 26,095 (11,763) -- (356,395)
Cash flows from financing
activities......................... 405,275 (328,136) (29,764) -- 47,375
Effect of exchange rate changes on
cash and cash equivalents.......... -- -- 264 -- 264
Cash at the beginning of the
period............................. -- 253,468 191,888 -- 445,356
--------- --------- -------- ------- ---------
Cash at the end of the period........ $ -- $ 221,003 $165,029 $ -- $ 386,032
========= ========= ======== ======= =========
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
for the three and nine months ended September 30, 1998 (in thousands).
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------ ------------
OPERATING RESULTS FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
Revenue................................ $ -- $ 544,443 $ 96,071 $ -- $ 640,514
Operating expenses..................... (1,232) (494,510) (94,770) -- (590,512)
Interest expense, net.................. (4,811) (14,831) (2,136) -- (21,778)
Gain on disposition of broadcast
stations............................. -- -- 9,247 -- 9,247
Other income (expense), net............ 7,515 (4,608) 1,156 (7,515) (3,452)
Income tax expense..................... (6,321) (738) (9,560) -- (16,619)
Minority interest...................... -- (23,797) 1,548 -- (22,249)
------- --------- -------- ------- ---------
Net earnings (loss).................... $(4,849) $ 5,959 $ 1,556 $(7,515) $ (4,849)
======= ========= ======== ======= =========
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ----------- ------------ ------------ ------------
OPERATING RESULTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998
Revenue............................ $ -- $ 1,537,145 $ 329,872 $ -- $ 1,867,017
Operating expenses................. (4,634) (1,383,697) (318,440) -- (1,706,771)
Interest expense, net.............. (5,113) (65,935) (11,849) -- (82,897)
Gain on disposition of broadcast
stations......................... -- 74,940 9,247 -- 84,187
Other income (expense), net........ 88,223 (24,284) 8,008 (91,654) (19,707)
Income tax expense................. (52,435) (4,645) (15,712) -- (72,792)
Minority interest.................. -- (45,507) 2,511 -- (42,996)
-------- ----------- --------- -------- -----------
Net earnings (loss)................ $ 26,041 $ 88,017 $ 3,637 $(91,654) $ 26,041
======== =========== ========= ======== ===========
16
18
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 12 -- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR
FINANCIAL INFORMATION -- (CONTINUED)
NON-
GUARANTOR USAI
USAI GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ----------- ------------ ------------ ------------
CASH FLOW DATA FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
Cash flows from operating
activities....................... $ 46,418 $ 51,298 $ 49,015 $ -- $ 146,731
Cash flows from investing
activities....................... (59,413) (1,311,302) 221,856 -- (1,148,859)
Cash flows from financing
activities....................... 12,953 1,464,695 (297,602) -- 1,180,046
Effect of exchange rate changes on
cash and cash equivalents........ -- -- (1,723) -- (1,723)
Cash at the beginning of the
period........................... 42 14,093 101,901 -- 116,036
-------- ----------- --------- -------- -----------
Cash at the end of the period...... $ -- $ 218,784 $ 73,447 $ -- $ 292,231
======== =========== ========= ======== ===========
NOTE 13 -- SUBSEQUENT EVENT
On November 9, 1999, Hotel Reservations Network filed a registration
statement with the Securities and Exchange Commission regarding an initial
public offering of its common stock.
17
19
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
USAi is a holding company, with subsidiaries engaged in diversified media
and electronic commerce businesses. USAi adopted its present corporate structure
as part of the Universal Transaction. USAi maintains control and management of
Home Shopping Network, Inc. ("Holdco") and USANi LLC, which are non-wholly owned
subsidiaries of USAi, 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 July 1997, USAi acquired a controlling interest in Ticketmaster. On June
24, 1998, USAi completed its acquisition of Ticketmaster in a tax-free merger.
The acquisition of the controlling interest and the tax-free merger are referred
to as the "Ticketmaster Transaction."
On February 12, 1998, the Company acquired USA Networks, a New York general
partnership, consisting of cable television networks USA Network and The Sci-Fi
Channel ("Networks"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram"), and the Company changed its name to USA Networks, Inc. (the
"Universal Transaction").
In September 1998, USAi merged Ticketmaster Online into a subsidiary of
CitySearch, Inc., a publisher of local city guides on the Web, to create
Ticketmaster Online-CitySearch ("TMCS") (the "CitySearch 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 (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 Hotel reservations and Filmed entertainment business segments.
On November 9, 1999, Hotel Reservations Network filed a registration statement
with the Securities and Exchange Commission regarding an initial public offering
of its common stock.
EBITDA
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is defined as operating profit plus depreciation and amortization.
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. EBITDA may
not be comparable to calculations of similarly titled measures by other
companies.
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.
18
20
TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
During the past three years, the Company augmented its media and electronic
commerce businesses by acquiring and developing several new businesses. As a
result, the following changes should be considered when comparing the results of
operations and financial position. These include the Universal Transaction, the
Ticketmaster Transaction, the CitySearch Transaction, the Hotel Reservations
Network Transaction and the October Films/PFE Transaction. The acquisitions
caused a significant increase in net revenues, operating costs and expenses and
operating profit. 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
operating costs and expenses and operating profit which would have actually been
reported had the Universal Transaction, the Ticketmaster Transaction, the
CitySearch Transaction, the Hotel Reservations Network Transaction and the
October Films/PFE Transaction occurred at the beginning of the respective
periods, nor is it necessarily indicative of future results.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter and nine months ended
September 30, 1999, compared with the quarter and nine months ended September
30, 1998. The operations for the quarter and nine months ended September 30,
1999 consist of the operations of Home Shopping, Savoy, USA Broadcasting,
Ticketmaster, USA Networks and Studios USA and since May 11, 1999 and May 28,
1999, respectively, the results of Hotel Reservations Network and USA Films. The
operations for the quarter and nine months ended September 30, 1998 consist of
the operations of Home Shopping, Savoy, SF Broadcasting and USA Broadcasting
and, since February 12, 1998, the operations of USA Networks and Studios USA.
Reference should also be made to the unaudited Condensed Consolidated Financial
Statements included herein.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1998
The Universal Transaction, the Ticketmaster Transaction, the CitySearch
Transaction, the Hotel Reservations Network Transaction and the October Films/
PFE Transaction resulted in significant increases in net revenues, operating
costs and expenses, other income (expense) and income taxes and will continue to
materially impact the Company's operations when comparing year to date
information for 1999 to 1998, and accordingly, no significant discussion of
these fluctuations is presented.
NET REVENUES
For the quarter ended September 30, 1999, revenues increased $152.7 million
compared to 1998 primarily due to increases of $47.7 million, $27.4 million,
$26.1 million, $23.9 million and $21.7 million from the Hotel reservations,
Filmed entertainment, Networks and television production, Electronic retailing
and Ticketing operations businesses, respectively.
For the nine months ended September 30, 1999, revenues increased $432.6
million compared to 1998 primarily due to increases of $198.4 million, $76.4
million, $70.7 million, $53.8 million, $32.9 million and $26.3 million from the
Networks and television production, Electronic retailing, Hotel reservations,
Ticketing operations, Filmed entertainment and Internet services businesses,
respectively, partially offset by a decrease of $27.1 million due to the sale of
SF Broadcasting in July 1998.
OPERATING COSTS AND EXPENSES
For the quarter ended September 30, 1999, total operating costs and
expenses, including depreciation and amortization expense, increased $164.4
million compared to 1998 primarily due to increases of $48.9 million,
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$46.2 million, $28.3 million, $22.1 million and $17.4 million from the Internet
services, Hotel reservations, Filmed entertainment, Electronic retailing and
Ticketing operations businesses, respectively. A significant portion of the
increase in Internet services is due to amortization expense as a result of the
CitySearch Transaction. Increases in Electronic retailing and Ticketing
operations are related to increased revenues.
For the nine months ended September 30, 1999, total operating costs and
expenses, including depreciation and amortization expense, increased $441.6
million compared to 1998 primarily due to increases of $120.9 million, $103.9
million, $68.5 million, $67.1 million, $45.0 million and $35.4 million from the
Internet services, Networks and television production, Hotel reservations,
Electronic retailing, Ticketing operations and Filmed entertainment businesses,
respectively. The increase was offset by a decrease of $24.0 million due to the
sale of SF Broadcasting in July 1998.
OTHER INCOME (EXPENSE), NET
For the quarter and nine months ended September 30, 1999, interest expense,
net decreased $9.6 million and $46.0 million, respectively, compared to 1998
primarily due to lower borrowing levels as a result of the repayment of bank
debt in the fourth quarter of 1998 and in 1999 from the proceeds of equity
transactions involving Universal and Liberty Media Corporation, a subsidiary of
AT&T Corporation ("Liberty"). In addition, the conversion of the Convertible
Subordinated Debentures to equity as of March 1, 1998 and lower interest rates
resulted in decreased interest expense.
For the nine months ended September 30, 1999, other, net totaled $2.0
million of income compared to an expense of $19.7 million in 1998 primarily due
to the reversal of equity losses in the quarter ended March 31, 1999 which were
recorded in 1998 as a result of the Universal Transaction. Other expense in 1999
relates primarily to losses on investments accounted for under the equity
method.
In the quarter and nine months ended September 30, 1999, the Company
realized gains of $39.5 million and $89.7 million, respectively, related to the
sale of securities.
INCOME TAXES
The Company pays income taxes based on the earnings of its consolidated
subsidiaries and its allocation of earnings from its ownership in USANi LLC. The
Company's effective tax rate for the quarter and nine months ended September 30,
1999 is higher than the statutory rate as a result of non-deductible goodwill
and other acquired intangible assets and state income taxes.
MINORITY INTEREST
For the quarter and nine months ended September 30, 1999, minority interest
primarily represents Universal's and Liberty's ownership interest in USANi LLC,
Liberty's ownership interest in Holdco and the public's ownership interest in
TMCS.
For the quarter and nine months ended September 30, 1998, minority interest
primarily represents Universal's and Liberty's ownership interest in USANi LLC,
Liberty's ownership interest in Holdco, Fox Broadcasting Company's 50% ownership
interest in SF Broadcasting through July 16, 1998 and the public's ownership
interest in Ticketmaster to June 24, 1998.
PRO FORMA QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. PRO FORMA QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The following unaudited pro forma operating results of the Company for the
quarter and nine months ended September 30, 1999 and 1998 presents combined
results of operations as if the Universal Transaction, Ticketmaster Transaction,
sale of the assets of SF Broadcasting, the CitySearch Transaction, the Hotel
Reservations Network Transaction and the October Films/PFE Transaction all
occurred at the beginning of the periods presented.
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The Unaudited Combined Condensed Pro Forma Statements of Operations are
presented 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 and 1998, nor are they necessarily
indicative of future results of operations.
USA NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
PROFORMA PROFORMA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
NET REVENUES:
Networks and television production.......... $307,360 $281,302 $ 955,725 $ 914,669
Electronic retailing........................ 281,946 258,038 842,851 766,458
Ticketing operations........................ 110,813 89,134 337,357 283,538
Hotel reservations.......................... 47,652 17,461 108,371 40,794
Filmed entertainment........................ 27,912 13,023 56,974 36,274
Internet services........................... 15,224 10,453 40,761 25,784
Broadcasting................................ 2,341 579 5,691 967
Other....................................... -- 3,242 6,882 10,340
-------- -------- ---------- ----------
Total net revenues..................... 793,248 673,232 2,354,612 2,078,824
Operating costs and expenses:
Cost of sales............................... 243,345 218,319 706,092 592,960
Program costs............................... 147,549 153,618 466,896 500,224
Selling and marketing....................... 129,067 93,141 377,397 290,473
General and administrative.................. 127,804 40,822 339,574 171,997
Other operating costs....................... 16,783 61,263 58,525 176,223
Amortization of cable distribution fees..... 6,938 5,319 19,214 15,883
Depreciation and amortization............... 83,430 70,389 238,603 214,383
-------- -------- ---------- ----------
Total operating costs and expenses..... 754,916 642,871 2,206,301 1,962,143
-------- -------- ---------- ----------
Operating profit....................... $ 38,332 $ 30,361 $ 148,311 $ 116,681
======== ======== ========== ==========
EBITDA................................. $128,700 $106,069 $ 406,128 $ 346,947
======== ======== ========== ==========
For the quarter ended September 30, 1999, pro forma revenues for the
Company increased $120.0 million, or 17.8%, to $793.2 million from $673.2
million compared to pro forma 1998. For the quarter ended September 30, 1999,
pro forma cost of revenues and other costs, excluding depreciation and
amortization, increased $97.3 million, or 17.2%, to $664.5 million from $567.2
million compared to pro forma 1998.
For the nine months ended September 30, 1999, pro forma revenues for the
Company increased $275.8 million, or 13.3%, to $2.35 billion from $2.08 billion
compared to pro forma 1998. For the nine months ended September 30, 1999, pro
forma cost of revenues and other costs, excluding depreciation and amortization,
increased $216.6 million, or 12.5%, to $1.95 billion from $1.73 billion compared
to pro forma 1998.
For the quarter ended September 30, 1999, pro forma EBITDA increased $22.6
million, or 21.3%, to $128.7 million from $106.1 million compared to pro forma
1998. For the nine months ended September 30, 1999, pro forma EBITDA increased
$59.2 million, or 17.1%, to $406.1 million from $346.9 million compared to pro
forma 1998.
The following discussion provides an analysis of the aforementioned
increases in pro forma revenues and costs of revenues and other costs, excluding
depreciation and amortization, by significant business segment.
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Networks and television production
Net revenues for the quarter ended September 30, 1999 increased by $26.1
million, or 9.3%, to $307.4 million from $281.3 million compared to 1998. The
increase primarily resulted from an increase in advertising revenues due to
higher ratings at USA Network and a significant increase in advertising revenues
and affiliate revenues due to higher ratings and an increase in subscribers at
The Sci-Fi Channel. The increases were partially offset by lower revenues at
Studios USA due to fewer deliveries of network product, fewer pilots produced
and increased usage of internally produced series for which revenue recognition
is deferred until aired on USA Network and The Sci-Fi Channel.
Net revenues for the nine months ended September 30, 1999 increased by
$41.0 million, or 4.5%, to $955.7 million from $914.7 million compared to 1998.
The increase primarily resulted from an increase in advertising revenues at USA
Network and increased advertising and affiliate revenue at The Sci-Fi Channel
due to higher ratings and subscribers. The networks increase was offset by lower
revenues at Studios USA due to fewer deliveries of network product, fewer pilots
produced and significantly increased usage of internally produced series for
which revenue recognition is deferred until aired on USA Network and The Sci-Fi
Channel.
Cost of revenues and other costs for the quarter ended September 30, 1999
increased by $4.2 million, or 2.0%, to $214.1 million from $209.9 million
compared to 1998. The increase resulted primarily from higher programming costs
at The Sci-Fi Channel.
Cost of revenues and other costs for the nine months ended September 30,
1999 decreased by $26.9 million, or 4.0%, to $648.0 million from $674.9 million
compared to 1998. The decrease resulted primarily from lower overhead and
marketing costs, lower television production and increased usage of internally
produced product.
EBITDA for the quarter ended September 30, 1999 increased $21.9 million, or
30.7%, to $93.3 million from $71.4 million compared to pro forma 1998. EBITDA
for the nine months ended September 30, 1999 increased $68.0 million, or 28.4%,
to $307.8 million from $239.8 million compared to pro forma 1998.
Electronic retailing
Net revenues for the quarter ended September 30, 1999 increased by $23.9
million, or 9.3%, to $281.9 million from $258.0 million compared to 1998 due to
increased sales volume and higher continuity (or off-air) sales.
Net revenues for the nine months ended September 30, 1999 increased by
$76.4 million, or 10.0%, to $842.9 million from $766.5 million compared to 1998.
The increase resulted from higher revenues on both the Home Shopping Network and
America's Store services, higher continuity (or off-air) sales, and higher
revenues on Home Shopping en Espanol which was launched in March 1998. The
increases were partially offset by a planned decrease in the mail order
business.
Cost of revenues and other costs for the quarter ended September 30, 1999
increased by $18.7 million, or 8.7%, to $234.2 million from $215.5 million
compared to 1998. This increase resulted primarily from higher sales volume and
higher merchandising personnel costs.
Cost of revenues and other costs for the nine months ended September 30,
1999 increased by $58.8 million, or 9.1%, to $708.0 million from $649.2 million.
This increase resulted primarily from higher sales volume and higher
merchandising personnel costs. Also contributing to the increase in costs was
cost of sales of Home Shopping en Espanol and costs associated with developing
the Company's Short Shopping concept.
EBITDA for the quarter ended September 30, 1999 increased $5.3 million, or
12.4%, to $47.8 million from $42.5 million compared to 1998 due to increased
domestic gross margins (38.7% versus 38.3%) and lower return rates. EBITDA for
the nine months ended September 30, 1999 increased $17.6 million, or 15.0%, to
$134.9 million from $117.3 million compared to 1998 due to increased domestic
gross margins (39.8% versus 38.5%) and lower return rates.
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Ticketing operations
Net revenues for the quarter ended September 30, 1999 increased by $21.7
million, or 24.3%, to $110.8 million from $89.1 million compared to 1998. The
increase resulted from a 7.3% increase in the number of tickets sold, higher
revenue per ticket and higher revenue related to TM Direct, which provides
telemarketing and other services to third parties. Also, revenues from tickets
sold on-line increased significantly in the quarter (15.0% of total tickets sold
in the quarter ended September 30, 1999 from 5.2% compared to 1998).
Net revenues for the nine months ended September 30, 1999 increased by
$53.9 million, or 19.0%, to $337.4 million from $283.5 million compared to 1998.
The increase resulted from a 9.8% increase in the number of tickets sold and
higher revenue per ticket and increased revenues from TM Direct. Revenues were
also impacted by a significant increase in the number of tickets sold on-line.
Cost of revenues and other costs for the quarter ended September 30, 1999
increased by $14.1 million, or 19.0%, to $88.4 million from $74.3 million
compared to 1998. This increase resulted primarily from higher ticketing
operation costs as a result of higher ticketing volume and higher costs related
to TM Direct, partially offset by a reduction in overhead costs and start-up
costs which were incurred in the quarter ended September 30, 1998 related to the
launch of ticketing operations in Northern California and South America.
Cost of revenues and other costs for the nine months ended September 30,
1999 increased by $27.5 million, or 11.4%, to $267.1 million from $239.6 million
compared to 1998. This increase resulted primarily from higher ticketing
operation costs as a result of higher ticketing revenue, partially offset by a
reduction in overhead costs.
EBITDA for the quarter ended September 30, 1999 increased $7.6 million, or
51.0%, to $22.4 million from $14.8 million compared to 1998. EBITDA for the nine
months ended September 30, 1999 increased $26.4 million, or 60.1%, to $70.3
million from $43.9 million compared to 1998.
Hotel reservations
Net revenues for the quarter ended September 30, 1999 increased by $30.2
million, or 172.9%, to $47.7 million from $17.5 million compared to 1998. Net
revenues for the nine months ended September 30, 1999 increased by $67.6
million, or 165.7%, to $108.4 million from $40.8 million compared to 1998. The
increases resulted from a substantial increase in the number of rooms sold due
to the expansion of affiliate marketing programs, expansion into new cities and
an increase in the number of rooms allotted by hotels in existing cities.
Cost of revenues and other costs for the quarter ended September 30, 1999
increased by $26.6 million, or 185.3%, to $41.0 million from $14.4 million. Cost
of revenues and other costs for the nine months ended September 30, 1999
increased by $58.4 million, or 169.0%, to $92.9 million from $34.5 million. The
increases were due to higher sales volume and increased commissions related to
affiliates and travel agents.
EBITDA for the quarter ended September 30, 1999 increased $3.6 million, or
115.3%, to $6.7 million from $3.1 million compared to 1998. EBITDA for the nine
months ended September 30, 1999 increased $9.2 million, or 147.0%, to $15.5
million from $6.3 million compared to 1998.
Filmed entertainment
Net revenues for the quarter ended September 30, 1999 increased by $14.9
million, or 114.3%, to $27.9 million from $13.0 million in 1998 related to
theatrical releases, including The Muse which generated revenue of $10.2
million; foreign revenue of $4.8 million; video releases; and distribution fees.
Net revenues for the nine months ended September 30, 1999 increased by $20.7
million, or 57.1%, to $57.0 million from $36.3 million in 1998.
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Internet services
Net revenues for the quarter ended September 30, 1999 increased by $4.7
million, or 45.6%, to $15.2 million from $10.5 million in 1998. The increase
resulted from an increase in online city guide revenue from expansion into new
cities and expansion into the online personals business.
Net revenues for the nine months ended September 30, 1999 increased by
$15.0 million, or 58.1%, to $40.8 million from $25.8 million in 1998. The
increase resulted from an increase in sales of First Auction which was partially
offset by the shut down of another service during 1998, and an increase in
online city guide revenue from expansion into new cities and expansion into the
online personals business.
Cost of revenues and other costs for the quarter ended September 30, 1999
increased by $21.1 million, or 97.9%, to $42.6 million from $21.5 million in
1998. Cost of revenues and other costs for the nine months ended September 30,
1999 increased by $51.5 million, or 89.7%, to $108.9 million from $57.4 million
in 1998. The increases resulted primarily from increased costs to maintain and
enhance the Internet services; the costs incurred to develop a new electronic
commerce site, FirstJewelry.com, which launched in the third quarter of 1999;
increased costs of shipping product as First Auction expanded its product mix;
the expansion of local city guides into new markets (three in the quarter ended
September 30, 1999 and thirteen year-to-date); and increased advertising and
promotion costs.
EBITDA loss for the quarter ended September 30, 1999 increased by $16.2
million, or 147.2% to $27.3 million from $11.1 million in 1998. EBITDA loss for
the nine months ended September 30, 1999 increased by $36.6 million, or 115.4%
to $68.2 million from $31.6 million in 1998. An increased loss is expected for
the remainder of 1999 as new local city guide sites are rolled out.
Broadcasting
Net revenues represent amounts generated at the television station in the
Miami/Ft. Lauderdale market.
A significant increase in losses is expected in the broadcasting segment
for the remainder of 1999 as costs are incurred to launch more local television
stations. In November 1999, the Company launched stations in the Dallas and
Atlanta markets.
OTHER
Other includes the actual results from a business sold in the second
quarter of 1999, costs related to these revenues and corporate expenses.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $249.4 million for the nine
months ended September 30, 1999 compared to $146.7 million for the nine months
ended September 30, 1998. These cash proceeds and available cash and borrowings
were used to pay for acquisitions of $179.9 million, to make capital
expenditures of $87.8 million, to make principal payments on long-term
obligations of $337.6 million and mandatory tax distribution payments to LLC
partners of $28.8 million. Furthermore, USAi transferred $200.0 million to
Universal under an interest bearing note related to the October Films/PFE
Transaction, of which $183.3 is outstanding at September 30, 1999. The Company
generated cash proceeds of $107.2 million from the sale of securities in a
publicly traded entity during the nine months ended September 30, 1999.
On February 12, 1998, USAi and USANi LLC, as borrower, entered into a
credit agreement which provides for a $1.6 billion credit facility. The credit
facility was used to finance the Universal Transaction and to refinance USAi's
then-existing $275.0 million revolving credit facility. The credit facility
consists of (1) a $600.0 million revolving credit facility with a $40.0 million
sub-limit for letters of credit, (2) a $750.0 million Tranche A Term Loan and,
(3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and the
Tranche B Term Loan have been permanently repaid as of September 30, 1999, as
described below. The revolving credit facility expires on December 31, 2002.
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In 1999 the Company permanently repaid the Tranche A Term Loan in the
amount of $250.0 million from cash on hand, including payments of $237.5 million
in September 1999. On November 23, 1998, USAi completed an offering of $500.0
million 6 3/4% Senior Notes due 2005 (the "Notes"). Proceeds received from the
sale of the Notes together with available cash were used to repay and
permanently reduce $500.0 million of the Tranche A Term Loan. On August 5, 1998,
USANi LLC permanently repaid the Tranche B Term Loan in the amount of $250.0
million from cash on hand.
The existing credit facility is guaranteed by substantially all of USAi's
material subsidiaries. The interest rate on borrowings under the existing credit
facility is tied to an alternate base rate or the London InterBank Rate, in each
case, plus an applicable margin, and $599.4 million was available for borrowing
as of September 30, 1999 after taking into account outstanding letters of
credit.
Under the investment agreement relating to the Universal Transaction, USAi
has granted to Universal and Liberty preemptive rights with respect to future
issuances of USAi's common stock and Class B common stock. These preemptive
rights generally allow Universal and Liberty the right to maintain an ownership
percentage in USAi equal to the ownership percentage that entity held, on a
fully converted basis, immediately prior to the issuance. In July 1999,
Universal and Liberty exercised their preemptive rights, resulting in total cash
proceeds to the Company of $362.6 million. Universal purchased 7.4 million of
USANi LLC shares and Liberty purchased 3.6 million shares of USAi common stock.
As part of the Universal transaction, USAi entered into a joint venture
agreement relating to the development of international general entertainment
television channels, including international versions of USA Network, The Sci-Fi
Channel and Universal's action/adventure channel, 13th Street. USAi has elected
to have Universal buy out its 50% interest in the venture. Accordingly, during
the nine months ended September 30, 1999, USANi LLC reversed amounts previously
recorded for its share of losses of the joint venture.
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 are projected to be higher than current
amounts.
USAi implemented its plan to disaffiliate its television station in the
Miami/Ft. Lauderdale market in September 1998. USAi has incurred and will
continue to incur expenditures to develop programming for this station, which
during the development and transitional stage, may not be offset by sufficient
advertising revenues. USAi transitioned the stations serving the Dallas and
Atlanta markets in November 1999. 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. In
connection with the launch of the local television stations, the Company built a
production center in California to serve the stations. The total capital cost
was $25.0 million.
On March 1, 1999, the Company made a mandatory tax distribution payment to
Universal and Liberty in the amount of $28.8 million.
On May 10, 1999, the Company completed the 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 purchase
price was $150.0 million, reduced by a working capital adjustment of $0.8
million, plus contingent payments based on operating performance during the year
ended December 31, 1999 and during the twelve month periods ended March 31,
2000, 2001 and 2002. Actual operating performance is measured against targeted
performance for the defined periods to arrive at the contingent payments.
Through November 4, 1999, the Company paid $37.5 million pursuant to these
contingent payment arrangements and expects to pay an additional $12.5 million
by January 30, 2000.
On May 28, 1999, the Company completed its acquisition of October Films,
Inc. The Company issued 300,000 shares of USAi common stock to Universal and
paid cash consideration of $12.0 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 300,000
additional shares of USAi
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common stock at $40.00 per share. As part of the transaction, the Company
assumed the outstanding balance under October Films' credit agreement, which
totaled $83.2 million as of the acquisition date 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. The
acquisition of the above assets is referred to as the "PFE Transaction". 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, 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 September 30,
1999, approximately $20.7 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 10 million shares of USAi's common stock over the next 12 months, 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 nine
months ended September 30, 1999, the Company purchased 150,000 shares of its
common stock for aggregate consideration $4.9 million. In September 1999, the
Company purchased 56,946 shares of its common stock for aggregate consideration
of $2.3 million from the Company's ESOP, representing shares forfeited by former
participants at the time the ESOP was merged with another USAi plan. In October
1999, the Company purchased 30,000 shares of its common stock for aggregate
consideration of $1.2 million.
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 nine months ended September 30, 1999, USAi did not pay any cash
dividends, and none are permitted under USAi's existing credit facility.
OTHER MATTERS
USAi is currently working to resolve the potential impact of the year 2000
on the processing of date-sensitive information by USAi's computerized
information systems.
Although assessment of non-critical systems is an ongoing process, USAi has
substantially completed its detailed assessment of all of its information
technology and non-information technology hardware and software to assess the
scope of its year 2000 issue. USAi has potential exposure in technological
operations within the sole control of USAi and in technological operations which
are dependent in some way on one or more third parties. USAi believes that it
has identified all significant technological areas within its control. USAi has
ongoing communications with significant vendors and customers to confirm their
plans to become Year 2000 compliant and is assessing any possible risk to or
effects on USAi's operations.
USAi believes that, with respect to technological operations which are
dependent on third parties, the significant areas of potential risk are the
ability of satellite and cable operators to receive the signal transmission of
USA Network, The Sci-Fi Channel and the Home Shopping Network and America's
Store services and the ability of banks and credit card processors to process
credit card transactions. Remediation and testing of critical systems that were
not Year 2000 compliant is substantially complete as of the end of October 1999.
USAi believes that the total costs associated with the Year 2000
assessment, remediation, implementation and testing will not exceed $10 million
of which approximately $9 million has been spent through
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October 31, 1999. This amount is exclusive of capital expenditures that have
either been made or are currently planned to be made to replace existing
hardware and software systems, all as part of USAi's ongoing efforts to upgrade
its infrastructure and systems.
Accordingly, based on existing information, USAi believes that the costs of
addressing potential problems will not have a material adverse effect on USAi's
financial position, results of operations or cash flows. However, if USAi, its
customers or vendors were unable to resolve the issues in a timely manner, it
could result in a material adverse effect on USAi's financial position, results
of operations or cash flows. USAi has devoted and plans to continue to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner.
During the second quarter of 1999, USAi developed contingency plans in the
event it does not successfully complete all phases of its Year 2000 program for
each of its significant operating divisions.
SEASONALITY
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 fluctuations in
the availability of events for sale to the public.
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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Jovon litigation, previously reported in the Company's 1998 Form
10-K and the Company's Quarterly Reports on Form 10-Q for the fiscal quarter
ended March 31, 1999 (the "Company's 1st Quarter Form 10-Q") and the fiscal
quarter ended June 30, 1999 (the "Company's 2nd Quarter Form 10-Q"), the
entities controlled by USAi filed a Notice of Appeal with the Florida Circuit
Court, on July 12, 1999, to appeal the Order of Summary Final Judgment to the
Court of Appeal for the Second District of Florida. On November 8, 1999, the FCC
released a Memorandum Opinion and Order dismissing USAi's Request for
Clarification as moot based on the Florida Circuit Court's determination that
Jovon had validly terminated the Option Agreement. The Company is evaluating its
options to redress the FCC Memorandum Opinion and Order.
In the Ticketmaster shareholder litigation, previously reported in the
Company's 1998 Form 10-K and the Company's 1st Quarter Form 10-Q, on July 21,
1999 the court in the California cases entered an order of dismissal with
prejudice as to the named class members and an order of dismissal without
prejudice as to unnamed class members.
In the MovieFone litigation, previously reported in the Company's 1998 Form
10-K and the Company's 2nd Quarter Form 10-Q, the court hearing regarding
alleged violations of the injunction by the Ticketmaster affiliate, which was
originally set for September 13, 1999, was adjourned without date on August 20,
1999, pending resolution of the appeal.
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 adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 30, 1999, the annual meeting of stockholders was held.
Stockholders present in person or by proxy, representing 127,158,890 shares of
Common Stock and 31,516,726 shares of Class B Common Stock, voted on the
following matters:
The stockholders elected the following twelve 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 AGAINST OR
NUMBER OF SHARES FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ------------------
Donald R. Keough................................... 124,841,891 2,316,999
William D. Savoy................................... 124,844,972 2,313,918
Gen. H. Norman Schwarzkopf......................... 124,840,360 2,318,530
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Elected by holders of Common Stock and Class B Common Stock voting as a single
class:
NUMBER OF SHARES
CAST AGAINST OR
NUMBER OF SHARES FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ------------------
Paul G. Allen...................................... 440,012,938 2,313,212
Barry Baker........................................ 440,012,540 2,313,610
Edgar Bronfman, Jr. ............................... 439,260,334 3,065,816
Anne M. Busquet.................................... 439,260,368 3,065,782
Barry Diller....................................... 440,012,731 2,313,419
Victor A. Kaufman.................................. 440,011,360 2,314,790
Robert W. Matschullat.............................. 439,261,338 3,064,812
Samuel Minzberg.................................... 439,259,277 3,066,873
Diane Von Furstenberg.............................. 439,255,228 3,070,922
The stockholders of both the 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 1999 as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
---------------- ---------------- ----------------
442,243,057 20,722 62,371
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
(b) Forms 8-K
On July 13, 1999, USAi filed a report on Form 8-K announcing the date of
its 1999 annual meeting and the deadline for submitting stockholders proposals
for the 1999 annual meeting.
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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)
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BARRY DILLER Chairman of the Board and November 15, 1999
- --------------------------------------------------- Chief Executive Officer
Barry Diller
/s/ VICTOR A. KAUFMAN Office of the Chairman, Chief November 15, 1999
- --------------------------------------------------- Financial Officer
Victor A. Kaufman (Principal Financial Officer)
/s/ MICHAEL P. DURNEY Vice President, Controller November 15, 1999
- --------------------------------------------------- (Chief Accounting Officer)
Michael P. Durney
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