10-Q 1 a2048960z10-q.txt FORM 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 333-71305-03 ------------------------ USANI LLC (Exact name of registrant as specified in its charter) ~~DELAWARE 59-3490970 (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization)~~

152 WEST 57TH STREET, NEW YORK, NEW YORK, 10019 (Address of Registrant's principal executive offices) (212) 314-7300 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 USANI LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (UNAUDITED)

Accumulated other comprehensive income is comprised of unrealized gains on available for sale securities of $(9,542) and $(9,291) at March 31, 2001 and December 31, 2000, respectively and foreign currency translation adjustments of $(4,858) and $413 at March 31, 2001 and December 31, 2000, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 USANI LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION COMPANY FORMATION USANi LLC (the "Company" or "LLC"), a Delaware limited liability company, was formed on February 12, 1998 and is a subsidiary of Home Shopping Network, Inc. ("Home Shopping" or "Holdco"), which is a subsidiary of USA Networks, Inc. ("USAi"), formerly known as HSN, Inc. On July 27, 2000, the Company and Styleclick.com Inc., an enabler of e-commerce for manufacturers and retailers ("Styleclick.com"), completed the merger of Internet Shopping Network ("ISN") and Styleclick.com (the "Styleclick Transaction"). See Note 3. COMPANY BUSINESS The Company is a holding company, the subsidiaries of which are focused on the new convergence of entertainment, information and direct selling. The five principal areas of business are: - CABLE AND STUDIOS, consisting of the cable networks USA Network and Sci Fi Channel and Studios USA, which produces and distributes television programming. - ELECTRONIC RETAILING, consisting primarily of HSN and America's Store, HSN International and HSN Interactive, including HSN.com. - ELECTRONIC COMMERCE SOLUTIONS, which primarily represents the Company's electronic commerce solutions business. - STYLECLICK, a facilitator of e-commerce websites and Internet enabled applications which includes the Company's online retailing networks. - EMERGING NETWORKS, consists primarily of the recently acquired cable television properties Trio and News World International, which were acquired on May 19, 2000, and SciFi.com. an emerging Internet content and commence site. BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of the Company are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the twelve months ended December 31, 2000. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's audited Consolidated Financial Statements and Notes thereto. ACCOUNTING ESTIMATES Management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and 6 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Significant estimates underlying the accompanying consolidated financial statements include the inventory carrying adjustment, program rights and film cost amortization, sales return and other revenue allowances, allowance for doubtful accounts, recoverability of intangibles and other long-lived assets, estimates of film revenue ultimates and various other operating allowances and accruals. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted SOP 00-2, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS OF FILMS ("SOP 00-2") during the three months ended March 31, 2001. SOP 00-2 established new film accounting standards, including changes in revenue recognition and accounting for advertising, development and overhead costs. Specifically, SOP 00-2 requires advertising costs for theatrical and television product to be expensed as incurred. This compares to the Company's previous policy of first capitalizing these costs and then expensing them over the related revenue streams. In addition, SOP 00-2 requires development costs for abandoned projects and certain indirect overhead costs to be charged directly to expense, instead of those costs being capitalized to film costs, which was required under the previous accounting rules. SOP 00-2 also requires all film costs to be classified in the balance sheet as non-current assets. Provisions of SOP 00-2 in other areas, such as revenue recognition, generally are consistent with the Company's existing accounting policies. SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a one-time, non-cash benefit of $6.5 million. The benefit is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 2001 presentation, including all amounts charged to customers for shipping and handling, which are now presented as revenue. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 Form 10-K") for a summary of all significant accounting policies. NOTE 3--BUSINESS ACQUISITIONS STYLECLICK TRANSACTION On July 27, 2000, USAi and Styleclick.com Inc., an enabler of e-commerce for manufacturers and retailers, completed the merger of Internet Shopping Network and Styleclick.com. The entities were merged with a new company, Styleclick, Inc., which owns and operates the combined properties of Styleclick.com and ISN. Styleclick, Inc. Class A common stock is traded on the Nasdaq market under the symbol "IBUY". In accordance with the terms of the agreement, USAi invested $40 million in cash and agreed to contribute $10 million in dedicated media, and received warrants to purchase additional 7 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) shares of the new company. At closing, Styleclick.com repaid the $10 million of borrowing outstanding under a bridge loan made by USAi. The aggregate purchase price, including transaction costs, was $211.9 million. In conjunction with the transaction, the Company recorded a pre-tax gain of $104.6 million based upon the 25% of ISN exchanged for 75% of Styleclick.com. The Styleclick 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 $170.2 million was allocated to goodwill, and was initially being amortized over 3 years. Assets and liabilities as of the acquisition date consist of the following:

The following unaudited pro forma condensed consolidated financial information for the three months ended March 31, 2000 is presented to show the results of the Company as if the Styleclick Transaction had occurred on January 1, 2000. The pro forma results reflect certain adjustments, including increased amortization related to goodwill, and are not necessarily indicative of what the results would have been had the transactions actually occurred on January 1, 2000.

NOTE 4--STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000: On January 20, 2000, the Company completed its acquisition of Ingenious Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USAi common stock for all the outstanding stock of IDI, for a total value of approximately $5.0 million. NOTE 5--INDUSTRY SEGMENTS The Company operates principally in five industry segments: Cable and studios, Electronic retailing, Electronic commerce solutions, Styleclick, and Emerging networks. The Cable and studios segment consists of the cable networks USA Network and Sci Fi Channel and Studios USA, which produces and distributes television programming. The Electronic retailing segment consists of Home Shopping Network, America's Store, HSN International and HSN Interactive, including HSN.com, which are engaged in the sale of merchandise through electronic retailing. The Electronic commerce 8 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--INDUSTRY SEGMENTS (CONTINUED) solutions segment primarily represents the Company's customer and e-care businesses. The Styleclick segment represents Styleclick, Inc., a facilitator of e-commerce websites and Internet enabled applications which includes the Company's online retailing networks. The Emerging networks segment consists primarily of the recently acquired cable television properties Trio and NewsWorld International, which were acquired on May 19, 2000, and SciFi.com, an emerging Internet content and commerce site.

NOTE 6-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION On November 23, 1998, USAi and the USANi LLC completed an offering of $500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In May 1999, the Old Notes were exchanged in full for $500.0 million of new 6 3/4% Senior Notes due 2005 (the "Notes") that have terms that are substantially identical to the Old Notes. Interest is payable on the Notes on May 15 and November 15 of each year, commencing May 15, 1999. The Notes are jointly, severally, fully and unconditionally guaranteed by certain subsidiaries of USAi, including Holdco, and all of the subsidiaries of the Company (other than subsidiaries that are, individually and in the aggregate, inconsequential to the Company on a consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Holdco) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or indirectly, by USAi or the Company, as the case may be. Separate financial statements for each of the Wholly Owned Subsidiary Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not filing separate reports under the Securities Exchange Act of 1934 because USAi's and the Company's management has determined that the information contained in such documents would not be material to investors. USANi LLC and its subsidiaries have no material restrictions on their ability to transfer amounts to fund USAi's operations. 9 USANI LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED) During 2000, in conjunction with the Styleclick Transaction, Styleclick became a non-guarantor. The following information is presented as of and for the three months ended March 31, 2001:

10 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL USANi LLC (the "Company" or "LLC"), a Delaware limited liability company, was formed on February 12, 1998 and is a subsidiary of Home Shopping Network, Inc. ("Home Shopping" or "Holdco"), which is a subsidiary of USA Networks, Inc. ("USAi"). On July 27, 2000, the Company and Styleclick.com Inc., an enabler of e-commerce for manaufacturers and retailers, completed the merger of Internet Shopping Network ("ISN") and Styleclick.com (the "Styleclick Transaction"). The Styleclick Class A common stock is quoted on the Nasdaq Stock Market under the symbol "IBUY". The Company is a holding company, the subsidiaries of which are focused on the new convergence of entertainment, information and direct selling. The five principal areas of business are: - CABLE AND STUDIOS, consisting of the cable networks USA Network and Sci Fi Channel and Studios USA, which produces and distributes television programming. - ELECTRONIC RETAILING, consisting primarily of HSN and America's Store, HSN International and HSN Interactive, including HSN.com. - ELECTRONIC COMMERCE SOLUTIONS, which primarily represents the Company's electronic commerce solutions business. - STYLECLICK, a facilitator of e-commerce websites and Internet enabled applications which includes the Company's online retailing networks. - EMERGING NETWORKS, consists primarily of the recently acquired cable television properties Trio and NewsWorld International, which were acquired on May 19, 2000, and SciFi.com. an emerging Internet content and commence site. This report includes forward-looking statements relating to such matters as anticipated financial performance. Business propsects, 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 of other expectations expressed in the company's forward-looking statements. The risks and uncertainities 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 if 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 executive's and employees. CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2000 NET REVENUES For the three months ended March 31, 2001 revenues increased by $100.3 million, or 12.4%, to $907.7 million from $807.3 million in 2000 primarily due to increases of $58.7 million, $34.9 million and $5.6 million from the Cable and studios, Electronic retailing and Emerging networks businesses, respectively, partially offset by a decrease in the Styleclick business of $2.6 million. 11 Cable and studios increased by $58.7 million, or 15.5%, to $437.7 million from $379.0 in 2000. The increase resulted from an increase in advertising revenues at USA Network and Sci Fi Channel, including the satisfaction of makegood liabilities at a higher level in Q1 2001. Affiliate revenues increased at both networks due to a higher number of subscribers as compared to the prior year. Net revenues at Studios USA increased significantly due to increased drama productions for the broadcast networks and increased productions for USA Network and Sci Fi Channel. Note that Studios USA defers revenue recognition for internally produced series for USA Network and Sci Fi Channel until the product is aired on the networks. Electronic retailing increased by $34.9 million, or 8.3%, to $455.1 million from $420.2 million in 2000. The increase primarily resulted from Home Shopping Network's domestic business, which generated increased sales of $26.9 million, including increased sales of $14.2 million from HSN.com. Electronic retailing operations in Germany generated increased sales of $7.3 million, although sales were hindered by the conversion to a new order management system, which delayed certain shipments. Total units shipped increased to 8.4 million units compared to 8.3 million units in 2000, while the average price point increased as a result of product mix. Furthermore, the return rate decreased to 20.0% from 20.9% in 2000. Emerging networks increased primarily due to the acquisition of Trio and NewsWorld International, which were acquired on May 19, 2000, which accounted for $5.0 million of the increase. Styleclick net revenues for the three months ended March 31, 2001 decreased by $2.6 million to $4.0 million compared to $6.6 million in 2000. Revenue from the auction sites decreased due to the shut-down of the First Jewelry site. In connection with its increased focus on its e-commerce service provider business, Styleclick has significantly reduced its online retailing networks business. OPERATING COSTS AND EXPENSES For the three months ended March 31, 2001, total operating costs and expenses increased $103.4 million, or 15.0%, to $792.7 million from $689.4 million compared to 2000, primarily due to increased operating costs of $46.7 million, $34.0 million, $6.3 million and $5.0 million from the Electronic retailing, Cable and studios, Electronic commerce solutions and Emerging networks businesses, respectively, increased depreciation and amortization of $8.6 million, and increased amortization of cable distribution fees of $.5 million. The increased costs are related to the higher revenue of all of the businesses and increased start-up costs for electronic commerce solutions and emerging businesses. Depreciation and amortization increased as a result of capital expenditures and acquisitions, including Styleclick, NWI and Trio. Amortization of cable distribution fees increased due to higher cost distribution arrangements. OTHER INCOME (EXPENSE) For the three months ended March 31, 2001, net interest expense increased by $1.8 million, compared to 2000 primarily due to lower short-term investment levels. Other expense increased $4.6 million due primarily to higher equity losses in unconsolidated subsidiaries. MINORITY INTEREST Minority interest primarily represents the public's ownership interest in Styleclick since July 27, 2000 and partners interest in HOT Germany, which the Company began to consolidate as of January 1, 2000. 12 INCOME TAXES As a limited liability company, the Company is not subject to federal or state income taxes in the United States, but rather the LLC partners are responsible for taxes related to the earnings attributable to each partner. The Company is subject to unincorporated business tax in New York City and income tax in Germany. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The operating results and capital resources and liquidity requirements of USAi, Holdco and USANi LLC are dependent on each other. The investment agreement, among Universal Studios, Inc. ("Universal"), Liberty Media Corporation ("Liberty"), USAi and Holdco, requires that no less frequently than monthly, (1) all cash generated by entities not owned by USANi LLC be transferred to USANi LLC and (2) any cash needs by entities not owned by USANi LLC be funded by USANi LLC. In addition, USAi and USANi LLC are jointly and severally obligated under the $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi LLC and its subsidiaries have no material restrictions on their ability to transfer amounts to fund USAi's operations. Net cash provided by operating activities was $70.8 million for the three months ended March 31, 2001 compared to $171.9 million for the three months ended March 31, 2000. The decrease relates primarily to increased payments for program rights and film costs and accounts payable related to inventory purchases made in late 2000. The 2001 cash proceeds were used to pay for capital expenditures of $19.0 million, to make principal payments on long-term obligations of $2.4 million, to make mandatory tax distribution payments to LLC partners of $30.7 million, including $17.3 million to USAi, and to provide funding to USAi. Under the investment agreement, transfers of cash between USAi and USANi LLC are evidenced by a demand note and accrue interest at USANi LLC's borrowing rate under the existing credit agreement. Certain transfers of funds between Holdco, USANi LLC and USAi are not evidenced by a demand note and do not accrue interest, primarily relating to the establishment of the operations of USANi LLC and capital contributions from USAi into USANi LLC. During the three months ended March 31, 2001, net transfers from USANi LLC to USAi totaling approximately $57.6 million, including $14.6 million to fund the operations of USAi's television broadcast operations, $14.5 million to fund the operations of Ticketmaster for January, and $4.9 million to fund the operations of Precision Response Corporation, offset partially by net cash receipts from USA Films of $6.8 million. On February 12, 1998, USAi and USANi LLC, as borrower, entered into a credit agreement that provided for a $1.6 billion credit facility. Of that amount, $1.0 billion was permanently repaid in prior years. The $600.0 million revolving credit facility expires on December 31, 2002. The existing credit facility is guaranteed by substantially all of USAi's material wholly owned subsidiaries. The interest rate on borrowings under the existing credit facility is tied to an alternate base rate or the London InterBank Rate, in each case, plus an applicable margin. As of March 31, 2001, there was $561.3 million available for borrowing after taking into account outstanding letters of credit. 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 the Internet business, future capital expenditures are projected to be higher than current amounts. On February 28, 2001, the Company made a mandatory tax distribution payment to Universal and Liberty in the amount of $30.7 million, including $13.3 million to USAi. In management's opinion, available cash, internally generated funds and available borrowings will provide sufficient capital resources to meet the Company's foreseeable needs. 13 SEASONALITY USANi LLC's businesses are subject to the effects of seasonality. Cable and Studios revenues are influenced by advertiser demand and the seasonal nature of programming, and generally peak in the spring and fall. USANi LLC believes seasonality impacts its Electronic Retailing segment but not to the same extent it impacts the retail industry in general. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's short-term investment portfolio and issuance of debt. The Company does not use derivative financial instruments in its investment portfolio. The Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers. To further mitigate risk, the vast majority of the securities have a maturity date within 60 days. The portfolio is reviewed on a periodic basis and adjusted in the event that the credit rating of a security held in the portfolio has deteriorated. At March 31, 2001, the Company's outstanding debt approximated $561.8 million, substantially all of which is fixed rate obligations. If market rates decline, the Company runs the risk that the related required payments on the fixed rate debt will exceed those based on the current market rate. FOREIGN CURRENCY EXCHANGE RISK The Company conducts business in certain foreign markets. However, the level of operations in foreign markets is insignificant to the consolidated results. EQUITY PRICE RISK The Company has no investments in equity securities of a publicly-traded companies. It is not customary for the Company to make investments in equity securities as part of its investment strategy. 14 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the Urban litigation, previously reported in the Company's Form 10-K for the year ended December 31, 2000, on April 6, 2001, the U.S. Bankruptcy Court for the Eastern District of Virginia approved a sale of Urban Broadcasting Corporation's ("Urban") assets for the sum of $60,000,000. If the sale closes, the proceeds therefrom will be sufficient to pay all of Urban's creditors in full, including USA Station Group of Virginia, Inc.'s ("USA-SGV") judgment claim, and leave substantial funds for distribution to Urban's equity holders. At this time, it is not possible to predict when USA-SGV's claim will be paid or the timing and amount of any distribution USA-SGV will receive as a shareholder in Urban. In the Marketingworks litigation, previously reported in the Company's Form 10-K for the year ended December 31, 2000, the parties have reached a settlement. Formal drafts are being exchanged and the parties expect to conclude the matter by the end of the month. The Company does not believe that the outcome of this litigation will have a material impact on its financial results. In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving property, personal injury, contract and other claims. The amounts that may be recovered in these matters may be subject to insurance coverage. Although amounts recovered in litigation are not expected to be material to the financial position or operations of the Company, this litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits

(b) Reports on Form 8-K filed during the quarter ended March 31, 2001. None. 15 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. USANi LLC May 15, 2001 By: /s/ BARRY DILLER ----------------------------------------- Barry Diller Chairman and Chief Executive Officer

USANI LLC 10-Q