1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998.
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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 MARCH 31, 1998
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 May 1, 1998, there were outstanding 103,079,802 shares of Common
Stock and 31,181,726 shares of Class B Common Stock. The aggregate market value
of the voting stock held by non-affiliates of the Registrant as of May 1, 1998
was $2,004,923,795.
Assuming the conversion, as of May 1, 1998, of all equity securities of the
Registrant and its affiliates convertible into or exchangeable for Common Stock,
the Registrant would have had outstanding 265,659,746 shares of Common Stock
with an aggregate market value of $6,674,701,118.
ALL SHARE NUMBERS SET FORTH ABOVE GIVE EFFECT TO THE TWO-FOR-ONE STOCK
SPLIT WHICH BECAME EFFECTIVE FOR HOLDERS OF RECORD AS OF THE CLOSE OF BUSINESS
ON MARCH 12, 1998.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
- ------------------------------------------------------------------------------------
(In thousands, except
per share data)
NET REVENUES
Home Shopping............................................. $249,196 $261,418
Networks and Television Production........................ 166,162 --
Ticketmaster.............................................. 93,235 --
Broadcasting and Other.................................... 14,518 18,133
-------- --------
Total net revenues................................ 523,111 279,551
-------- --------
Operating costs and expenses:
Cost of sales............................................. 164,364 158,614
Program costs............................................. 90,138 --
Other costs............................................... 186,571 76,569
Depreciation and amortization............................. 47,268 20,959
-------- --------
Total operating costs and expenses................ 488,341 256,142
-------- --------
Operating income.................................. 34,770 23,409
-------- --------
Other income (expense):
Interest income........................................... 3,604 1,340
Interest expense.......................................... (27,153) (7,021)
Gain on disposition of broadcast station.................. 74,940 --
Miscellaneous............................................. (9,220) (3,229)
-------- --------
42,171 (8,910)
-------- --------
Earnings before income taxes and minority interest.......... 76,941 14,499
Income tax expense.......................................... (38,712) (11,129)
Minority interest........................................... (4,298) 400
-------- --------
NET EARNINGS................................................ $ 33,931 $ 3,770
======== ========
Net earnings per common share
Basic..................................................... $ .28 $ .04
======== ========
Diluted................................................... $ .17 $ .04
======== ========
Weighted average shares outstanding......................... 123,062 101,246
======== ========
Weighted average diluted shares outstanding................. 212,501 101,246
======== ========
The accompanying notes are an integral part of these statements.
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3
USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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MARCH 31,
------------------------ DECEMBER 31,
ASSETS 1998 1997 1997
- ----------------------------------------------------------------------------------------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents........................... $ 162,191 $ 41,562 $ 116,036
Accounts and notes receivable, net.................. 283,392 53,291 96,867
Inventories, net.................................... 400,013 113,479 151,100
Deferred income taxes............................... 37,296 34,718 39,956
Other current assets, net........................... 27,507 6,778 16,723
---------- ---------- ----------
Total current assets...................... 910,399 249,828 420,682
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment.................... 165,913 98,556 145,701
Buildings and leasehold improvements................ 84,241 63,072 83,851
Furniture and other equipment....................... 70,347 20,889 39,498
---------- ---------- ----------
320,501 182,517 269,050
Less accumulated depreciation and amortization.... 119,501 78,143 120,793
---------- ---------- ----------
201,000 104,374 148,257
Land................................................ 16,624 14,944 16,602
Projects in progress................................ 16,823 6,519 15,262
---------- ---------- ----------
234,447 125,837 180,121
OTHER ASSETS
Intangible assets, net.............................. 6,018,127 1,529,969 1,862,128
Cable distribution fees, net ($44,833, $39,825, and
$46,459, respectively, to related parties)........ 106,771 112,854 111,292
Long-term investments and notes receivable ($7,784,
$17,368, and $8,353, respectively, in related
parties).......................................... 75,692 45,000 59,780
Inventories, net.................................... 164,825 -- --
Deferred income taxes............................... 63,190 6,086 3,541
Deferred charges and other, net..................... 139,985 29,726 33,252
---------- ---------- ----------
6,568,590 1,723,635 2,069,993
---------- ---------- ----------
$7,713,436 $2,099,300 $2,670,796
========== ========== ==========
The accompanying notes are an integral part of these statements.
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USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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MARCH 31,
------------------------ DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 1997
- ----------------------------------------------------------------------------------------------
(In thousands)
CURRENT LIABILITIES
Current maturities of long-term obligations......... $ 35,399 $ 14,734 $ 12,918
Accounts payable.................................... 212,006 109,599 185,101
Obligations for program rights and film costs....... 240,846 -- --
Cable distribution fees payable ($18,487, $8,703;
and $19,091, respectively, to related parties).... 47,554 35,472 43,553
Other accrued liabilities........................... 298,619 82,572 118,169
---------- ---------- ----------
Total current liabilities................. 834,424 242,377 359,741
LONG-TERM OBLIGATIONS (net of current maturities)... 1,862,909 269,071 448,346
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net
of current........................................ 327,114 -- --
OTHER LONG-TERM LIABILITIES......................... 60,621 58,392 43,132
MINORITY INTEREST................................... 2,736,010 365,009 372,223
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
102,222,772; 72,188,386; and 87,430,586 shares,
respectively...................................... 1,022 722 874
Class B -- convertible common stock -- $.01 par
value; authorized, 200,000,000 shares; issued and
outstanding, 32,013,616; 20,450,112; and
24,455,294 shares, respectively................... 320 204 244
Additional paid-in capital.......................... 1,968,386 1,286,208 1,558,037
Accumulated deficit................................. (69,670) (112,892) (103,601)
Unearned compensation............................... (2,702) (4,793) (3,202)
Note receivable from key executive for common stock
issuance.......................................... (4,998) (4,998) (4,998)
---------- ---------- ----------
1,892,358 1,164,451 1,447,354
---------- ---------- ----------
$7,713,436 $2,099,300 $2,670,796
========== ========== ==========
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)
- -------------------------------------------------------------------------------------------------------------------
NOTE
RECEIVABLE
FROM KEY
EXECUTIVE
CLASS B FOR
CONVERTIBLE ADDITIONAL COMMON
COMMON COMMON PAID-IN ACCUMULATED UNEARNED STOCK
STOCK STOCK CAPITAL DEFICIT COMPENSATION ISSUANCE TOTAL
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
BALANCE AT JANUARY 1,
1997................... $ 720 $204 $1,284,815 $(116,662) $(5,330) $(4,998) $1,158,749
Issuance of common stock
upon exercise of stock
options................ 2 -- 805 -- -- -- 807
Income tax benefit
related to executive
stock options
exercised.............. -- -- 588 -- -- -- 588
Amortization of unearned
compensation related to
stock options and
equity participation
plans.................. -- -- -- -- 537 -- 537
Net earnings for the
three months ended
March 31, 1997......... -- -- -- 3,770 -- -- 3,770
------ ---- ---------- --------- ------- ------- ----------
BALANCE AT MARCH 31,
1997................... $ 722 $204 $1,286,208 $(112,892) $(4,793) $(4,998) $1,164,451
====== ==== ========== ========= ======= ======= ==========
BALANCE AT JANUARY 1,
1998................... $ 874 $244 $1,558,037 $(103,601) $(3,202) $(4,998) $1,447,354
Issuance of common stock
upon exercise of stock
options................ 2 -- 1,635 -- -- -- 1,637
Income tax benefit
related to executive
stock options
exercised.............. -- -- 1,061 -- -- -- 1,061
Issuance of stock in
connection with
Universal
Transaction............ 71 76 302,007 -- -- -- 302,154
Issuance of stock in
connection with
conversion of
debentures............. 75 -- 105,646 -- -- -- 105,721
Amortization of unearned
compensation related to
stock options and
equity participation
plans.................. -- -- -- -- 500 -- 500
Net earnings for the
three months ended
March 31, 1998......... -- -- -- 33,931 -- -- 33,931
------ ---- ---------- --------- ------- ------- ----------
BALANCE AT MARCH 31,
1998................... $1,022 $320 $1,968,386 $ (69,670) $(2,702) $(4,998) $1,892,358
====== ==== ========== ========= ======= ======= ==========
The accompanying notes are an integral part of these statements.
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USA NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net earnings................................................ $ 33,931 $ 3,770
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 47,268 21,499
Amortization of program rights............................ 78,238 --
Deferred income taxes..................................... 4,064 7,615
Equity in losses of unconsolidated affiliates............. 5,788 3,322
Gain on disposition of broadcast station.................. (74,940) --
Minority interest......................................... 4,298 (400)
Changes in current assets and liabilities:
Accounts receivable.................................... (28,252) 3,189
Inventories............................................ (2,129) (12,240)
Accounts payable....................................... 19,519 14,178
Accrued liabilities.................................... 63,683 (16,931)
Payment for program rights................................ (84,329) --
Other, net................................................ (7,165) 5,536
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 59,974 29,538
---------- --------
Cash flows from investing activities:
Acquisition of Universal Transaction, net of cash
acquired............................................... (1,306,473) --
Acquisitions, net of cash acquired........................ (17,520) --
Capital expenditures, net................................. (19,002) (9,169)
Capital contributions received............................ -- 9,000
Increase in long-term investments......................... (12,472) (1,159)
Proceeds from long-term notes receivable.................. 813 815
Proceeds from disposition of broadcast station............ 80,000 --
Investment of broadcast station proceeds.................. (80,000) --
Payment of merger costs................................... (10,680) (341)
---------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (1,365,334) (854)
---------- --------
Cash flows from financing activities:
Borrowings................................................ 1,499,380 --
Principal payments on long-term obligations............... (149,502) (30,534)
Proceeds from issuance of common stock.................... 1,637 806
---------- --------
NET CASH PROVIDED BY (USED) IN FINANCING
ACTIVITIES...................................... 1,351,515 (29,728)
---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 46,155 (1,044)
Cash and cash equivalents at beginning of period............ 116,036 42,606
---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 162,191 $ 41,562
========== ========
The accompanying notes are an integral part of these statements.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- COMPANY HISTORY AND BASIS OF PRESENTATION
COMPANY HISTORY
USA Networks, Inc. (the "Company" or "USAi"), formerly known as HSN, Inc.,
is a holding company, the subsidiaries of which are engaged in diversified media
and electronic commerce businesses.
In December 1996, the Company consummated mergers with each of Home
Shopping Network, Inc. ("Home Shopping") and Savoy Pictures Entertainment, Inc.
("Savoy") (the "Mergers"). In July, 1997, the Company acquired a controlling
interest in Ticketmaster Group, Inc. ("Ticketmaster"). On March 20, 1998, the
Company entered into a merger agreement with Ticketmaster regarding the
acquisition by the Company in a tax-free merger of the remaining Ticketmaster
common stock for 1.126 shares of Common Stock for each outstanding share of
Ticketmaster common stock. On February 12, 1998, the Company acquired USA
Networks, a New York general partnership, consisting of cable television
networks USA Network and Sci-Fi Channel ("Networks"), as well as the domestic
television production and distribution businesses of Universal Studios ("Studios
USA") from Universal Studios, Inc. ("Universal"), an entity controlled by The
Seagram Company Ltd. ("Seagram"), and the Company changed its name to USA
Networks, Inc. (the "Universal Transaction") -- See Note C.
Following the Universal Transaction, the Company engages in four principal
areas of business:
- HOME SHOPPING, which primarily engages in the electronic retailing
business.
- NETWORKS AND TELEVISION PRODUCTION, which includes Networks and Studios
USA. Networks operates the USA Network and Sci-Fi Channel cable networks
and Studios USA produces and distributes television programming.
- USA BROADCASTING, which owns and operates television stations.
- TICKETMASTER, which is the leading provider of automated ticketing
services in the U.S.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements 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, 1997.
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.
The Condensed Consolidated Financial Statements include the operations of
USA Networks and Studios USA from the date of acquisition on February 12, 1998.
Certain amounts in the Condensed Consolidated Financial Statements for the
quarter ended March 31, 1997 have been reclassified to conform to the 1998
presentation.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K") for a summary of significant accounting
policies.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Investments in which the Company owns a 20%, but not in excess of a 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. All other investments
are accounted for using the cost method. The Company periodically evaluates the
recoverability of investments recorded under the cost method and recognizes
losses if a decline in value is determined to be other than temporary.
REVENUE RECOGNITION
Networks and Television Production
Television production revenues are recognized as completed episodes are
delivered. Generally, television programs are first licensed for network
exhibition and foreign syndication, and subsequently for domestic syndication,
cable television and home video. Certain television programs are produced and/or
distributed directly for initial exhibition by local television stations,
advertiser-supported cable television, pay television and/or home video.
Television production advertising revenues (i.e., sales of advertising time
received by Studios USA in lieu of cash fees for the licensing of program
broadcast rights to a broadcast station ("barter syndication")) are recognized
upon both the commencement of the license period of the program and the sale of
advertising time pursuant to non-cancelable agreements, provided that the
program is available for its first broadcast. Foreign minimum guaranteed amounts
or inducement fees are recognized as revenues on the date of the license
agreement, provided the program is available for exhibition.
Networks advertising revenue is recognized in the period in which the
advertising commercials are aired on cable networks. Provisions are recorded
against advertising revenues for audience under deliveries ("makegoods").
Affiliate fees are recognized in the period during which the programming is
provided.
EARNINGS PER SHARE
Basic earnings per share ("Basic EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share ("Diluted EPS") reflects the
potential dilution that could occur if stock options and other commitments to
issue common stock were exercised resulting in the issuance of common stock that
would share in the earnings of the Company.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. The adoption of this Statement had no impact on the
Company's net earnings or shareholders' equity.
During the first quarter of 1998 and 1997, total comprehensive income
substantially equaled net income.
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
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
and other long-lived assets, management's forecast of anticipated revenues from
the distribution of television product in order to evaluate the ultimate
recoverability of film inventory and amortization of program usage.
RECENTLY ISSUED PRONOUNCEMENTS
During fiscal 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") was issued. SFAS 131 requires disclosure of financial and descriptive
information about an entity's reportable operating segments under the
"management approach" as defined in the Statement. The Company will adopt SFAS
131 as of December 31, 1998. The impact of adoption of this standard on the
Company's financial statements is not expected to be material.
FILM COSTS
Film costs consist of direct production costs and production overhead, less
accumulated amortization. Development roster (and related costs) and abandoned
story and development costs are charged to production overhead. Film costs are
stated at the lower of unamortized cost or estimated net realizable value on a
production-by-production basis.
Generally, the estimated ultimate costs of completed television productions
are amortized, and participation expenses are accrued, for each production in
the proportion that current period revenue recognized bears to the estimated
future revenue to be received from all sources. Amortization and accruals are
made under the individual film forecast method. Estimated ultimate revenues and
costs are reviewed quarterly and revisions to amortization rates or write-downs
to net realizable value are made as required.
Film costs, net of amortization, classified as current assets include the
portion of unamortized costs of television program productions allocated to
network, first run syndication and initial international distribution markets.
The allocated portion of released film costs expected to be recovered from
secondary markets or other exploitation is reported as a noncurrent asset. Other
costs relating to television productions, such as television program development
costs, in-process productions and the television program library, are classified
as noncurrent assets.
PROGRAM RIGHTS
License agreements for program material are accounted for as a purchase of
program rights. The asset related to the program rights acquired and the
liability for the obligation incurred are recorded at their net present value
when the license period begins and the program is available for its initial
broadcast. The asset is amortized primarily based on the estimated number of
airings. Amortization is computed generally on the straight-line basis as
programs air; however, when management estimates that the first airing of a
program has more value than subsequent airings, an accelerated method of
amortization is used. Other costs related to programming, which include program
assembly, commercial integration and other costs, are expensed as incurred.
Management periodically reviews the carrying value of program rights and records
write-offs, as warranted, based on changes in programming usage.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE C -- BUSINESS ACQUISITIONS
In connection with the Universal Transaction, USAi paid Universal
approximately $4.1 billion including a cash payment of approximately $1.63
billion, a portion of which ($300 million) has been deferred until no later than
June 30, 1998, and an effective 45.8% interest in the Company (assuming
completion of the Liberty transaction described below) 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 ("LLC Shares") of a newly formed limited liability company
("USANi LLC") which are exchangeable (subject to regulatory restrictions) into
shares of Common Stock and Class B Common Stock. At the closing of the Universal
Transaction, USAi contributed its Home Shopping business to USANi LLC, a
subsidiary of USAi. Simultaneously with this transaction, the remaining
1,178,322 shares of Class B Common Stock, contingently issuable to Liberty in
connection with the Mergers, were issued.
The Investment Agreement, as amended and restated as of December 18, 1997,
among the Company, Home Shopping, Universal and Liberty Media Corporation
("Liberty") (the "Investment Agreement"), relating to the Universal Transaction
also contemplates that, on or prior to June 30, 1998, the Company and Liberty, a
subsidiary of Tele-Communications, Inc. ("TCI"), will complete a transaction
that involves a $300 million cash investment by Liberty in the Company through
the purchase of LLC Shares. The Investment Agreement also provides that the
Company, Liberty and Universal may agree prior to that date on the acquisition
by the Company of as-yet unspecified assets owned or controlled by Liberty in
exchange for LLC Shares, which transaction would reduce Liberty's cash purchase
obligation by 45% of the value of the asset acquisition.
The Universal Transaction has been accounted for using the purchase method
of accounting . The purchase price of $4.1 billion including expenses, has been
preliminarily allocated to the assets acquired and liabilities assumed based on
their respective fair values at the date of purchase. The fair value of the
assets acquired and liabilities assumed are summarized below, along with the
excess of the purchase price, including expenses, over the fair value of net
assets, which has been assigned to goodwill.
============================================================================
(In thousands)
Current assets.............................................. $ 478,000
Non-current assets.......................................... 267,000
Goodwill.................................................... 4,153,000
Current liabilities......................................... 420,000
Non-current liabilities..................................... 345,000
The following unaudited pro forma condensed consolidated financial
information for the quarters ended March 31, 1998 and 1997, is presented to show
the results of the Company for the full periods, as if the Universal Transaction
occurred at the beginning of the periods presented. The pro forma results
include certain adjustments, including increased amortization related to
goodwill, the reduction of programming costs for fair value adjustments related
to purchase accounting and the elimination of intercompany revenues and
expenses, and are not necessarily indicative of what the results would have been
had the Universal Transaction actually occurred on the aforementioned dates.
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
- --------------------------------------------------------------------------------------------
(In thousands, except per
share data)
Net revenues................................................ $680,475 $623,282
Net earnings (loss)......................................... 34,018 (9,999)
Basic earnings (loss) per common share...................... $ .26 $ (.09)
======== ========
Diluted earnings (loss) per common share.................... $ .15 (.09)
======== ========
9
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE D -- CREDIT FACILITIES AND CONVERTIBLE SUBORDINATED DEBENTURES
On February 12, 1998, the Company, and certain of its subsidiaries,
including USANi LLC as borrower, entered into a new $1.6 billion credit facility
(the "New Facility") with a $40.0 million sub-limit for letters of credit. The
New Facility was used to finance the Universal Transaction and to refinance the
Company's existing facility. The New Facility consists of a $600.0 million
revolving credit facility, a $750.0 million "Tranche A Term Loan" and a $250.0
million "Tranche B Term Loan". The revolving credit facility and Tranche A Term
Loan mature on December 31, 2002 and the Tranche B Term Loan matures on December
31, 2003. The New Facility is guaranteed by, and secured by stock in,
substantially all of the Company's material subsidiaries. The interest rate on
borrowings under the New Facility is tied to an alternate base rate or the
London InterBank Rate, in each case, plus an applicable margin. The interest
rate under the New Facility was 7.2% at March 31, 1998. As of March 31, 1998,
there was $1.445 billion in outstanding borrowings under the New Facility and
$151.7 million was available for borrowing after taking into account outstanding
letters of credit.
As of March 1, 1998, the 5 7/8% Convertible Subordinated Debentures were
converted into 7,499,022 shares of Common Stock.
NOTE E -- INCOME TAXES
The Company's effective tax rate of 50% for the quarter ended March 31,
1998 is higher than the statutory rate due primarily to non-deductible goodwill
and other acquired intangibles and state income taxes. During the remainder of
1998, the Company's effective tax rate is expected to be higher than the
statutory rate as a result of the items mentioned above and higher than the
first quarter rate because the gain on the sale of the Baltimore television
station in the first quarter had the effect of lowering the Company's effective
tax rate.
NOTE F -- CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE QUARTER ENDED
MARCH 31, 1998:
- ----------------------------------------------------------------------------
(In thousands)
ACQUISITION OF USA NETWORKS AND STUDIOS USA
Acquisition price.................................... $ 4,124,771
Less: Amount paid in cash............................ (1,310,223)
-----------
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.............................. $ 122,711
===========
As of March 1, 1998 the 5 7/8% Convertible Subordinated Debentures were
converted to 7,499,022 shares of Common Stock.
In addition, during the quarter ended March 31, 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 represents the remaining contingently
issuable shares in connection with the Merger.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE G -- INVENTORIES
- ------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1998 1997
--------------------- ---------------------
INVENTORIES CONSIST OF CURRENT NONCURRENT CURRENT NONCURRENT
- ------------------------------------------------------------------------------------------------
(In thousands)
Film costs:
Released, less amortization............... $ 94,945 $ 64,322
In process and unreleased................. 18,613 --
Programming costs, net of amortization...... 133,226 100,503
Merchandise held for sale................... 148,416 -- $151,100 $ --
Other....................................... 4,813
-------- -------- -------- --------
Total............................. $400,013 $164,825 $151,100 $ --
======== ======== ======== ========
The Company estimates that approximately 70% of unamortized film costs
(including amounts allocated under purchase accounting) at March 31, 1998 will
be amortized within the next three years.
NOTE H -- SAVOY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)
The Company has not presented separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy Debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
SUMMARIZED OPERATING INFORMATION 1998 1997
- ------------------------------------------------------------------------------------
(In thousands)
Net revenue............................................ $14,286 $ 17,659
Operating expenses..................................... 15,028 19,757
Operating loss......................................... (742) (2,098)
Net loss............................................... (1,590) (3,652)
- -----------------------------------------------------------------------------------------------
MARCH 31,
------------------- DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION 1998 1997 1997
- -----------------------------------------------------------------------------------------------
(In thousands)
Current assets........................................ $ 30,596 $ 42,789 $ 31,898
Non-current assets.................................... 284,983 288,099 289,381
Current liabilities................................... 30,821 24,299 32,836
Non-current liabilities............................... 106,521 123,449 110,470
Minority interest..................................... 118,302 120,233 119,427
Amounts include the operations of SF Broadcasting, which the Company has
agreed to sell -- See Note J.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE I -- PROGRAM RIGHTS AND FILM COSTS
As of March 31, 1998, the liability for program rights, representing future
payments to be made under program contract agreements amounted to $486.7
million. Annual payments required are $120.9 million in 1998, $106.2 million in
1999, $40.8 million in 2000, $12.4 million in 2001, $3.8 million in 2002 and
$202.6 million in 2003 and thereafter. Amounts representing interest are $57.5
million and the present value of future payments is $429.2 million.
As of March 31, 1998, the liability for film costs amounted to $138.7.
Annual payments are $103.1 in 1998 and $35.6 in 1999.
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 March 31, 1998, the unrecorded commitments amounted to $855.6 million. Annual
commitments are $123.7 million for the remainder of 1998, $119.7 million in
1999, $128.9 million in 2000, $137.0 million in 2001, $116.5 million in 2002 and
$229.8 million in 2003 and thereafter.
NOTE J -- 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 March 30, 1998, the Company announced that it had signed an agreement to
sell its interest in SF Broadcasting ("SF"), which owns and operates four
television stations. The total consideration to be received for SF is $307
million, of which the Company's share is $120 million, net of repayment of bank
debt outstanding. No significant gain or loss is expected to be realized on the
disposition of these assets.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
USA Networks, Inc. (the "Company" or "USAi"), formerly known as HSN, Inc.,
is a holding company, the subsidiaries of which are engaged in diversified media
and electronic commerce businesses. At December 31, 1997, the Company owned a
controlling interest in Ticketmaster Group, Inc. ("Ticketmaster"). On March 20,
1998, the Company and Ticketmaster entered into a merger agreement regarding the
acquisition by the Company in a tax-free merger of the remaining Ticketmaster
common stock for 1.126 shares of Common Stock for each outstanding share of
Ticketmaster common stock. On February 12, 1998, the Company acquired cable
television networks USA Network and Sci-Fi Channel ("Networks") as well as the
domestic television production and distribution business of Universal Studio
("Studios USA") from Universal (the "Universal Transaction") and changed the
Company's name to USA Networks, Inc. Following the Universal Transaction, the
Company's principal areas of business are electronic retailing (through its Home
Shopping business), the operation of cable networks and the production and
distribution of television programming (through its Networks and television
production business), the ownership and operation of television stations
(through USA Broadcasting) and automated ticketing services (through
Ticketmaster). During 1996, the Company merged with Home Shopping Network, Inc.
("Home Shopping") and Savoy Pictures Entertainment, Inc. ("Savoy"),
(collectively, the "Mergers"). The acquisition of the controlling interest in
Ticketmaster (the "Ticketmaster Transaction"), the Universal Transaction and the
Mergers were accounted for using the purchase method of accounting.
Prior to the Universal Transaction, the Company's principal areas of
business were electronic retailing, ticketing operations and television
broadcasting. The electronic retailing business operates two services, The Home
Shopping Network and America's Store, (together "HSN"). The ticketing operations
business sells over 70 million tickets a year through 2,900 retail center
outlets, 25 telephone call centers and an Internet site and is the leading
provider of automated ticketing services in the U.S. The television broadcasting
business owns and operates eleven full-power UHF television stations (the "USA
Stations") and four full-power VHF television stations ("SF Broadcasting").
Share numbers, earnings per share and conversion ratios reflect the Company's
two-for-one stock split to holders of record at the close of business on March
12, 1998.
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.
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW DEVELOPMENTS, NEW
MERCHANDISING STRATEGIES AND SIMILAR MATTERS. A VARIETY OF FACTORS COULD CAUSE
THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE
ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE COMPANY'S
FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE
OPERATIONS, PERFORMANCE, DEVELOPMENT AND RESULTS OF THE COMPANY'S BUSINESS
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: MATERIAL ADVERSE CHANGES IN
ECONOMIC CONDITIONS IN THE MARKETS SERVED BY THE COMPANY; FUTURE REGULATORY
ACTIONS AND CONDITIONS IN THE COMPANY'S OPERATING AREAS; COMPETITION FROM
OTHERS; SUCCESSFUL INTEGRATION OF THE COMPANY'S DIVISIONS' MANAGEMENT
STRUCTURES; PRODUCT DEMAND AND MARKET ACCEPTANCE; THE ABILITY TO PROTECT
PROPRIETARY INFORMATION AND TECHNOLOGY OR TO OBTAIN NECESSARY LICENSES ON
COMMERCIALLY REASONABLE TERMS; AND OBTAINING AND RETAINING KEY EXECUTIVES AND
EMPLOYEES.
TRANSACTIONS AFFECTING THE COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
During the past two years, the Company has pursued several strategic
initiatives that have resulted in the acquisition and development of several new
businesses. As a result, the following changes should be considered
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when comparing the Company's results of operations and financial position. These
include the Universal Transaction in February 1998 and the acquisition of a
controlling interest in Ticketmaster in July 1997. 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 cost of revenues that would
have actually been reported had the Universal Transaction and the Ticketmaster
Transaction occurred at the beginning of the respective periods, nor is it
necessarily indicative of future results.
A. CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter ended March 31, 1998,
compared with the quarter ended March 31, 1997. The operations of the quarter
ended March 31, 1997, consist of the operations of Home Shopping, Savoy and USA
Broadcasting while the operations of the quarter ended March 31, 1998 reflect
Home Shopping, Savoy, USA Broadcasting, Ticketmaster and, since February 12,
1998, the results of USA Networks and Studios USA. Reference should also be made
to the unaudited Condensed Consolidated Financial Statements included herein.
QUARTER ENDED MARCH 31, 1998 VS. QUARTER ENDED MARCH 31, 1997
The Universal Transaction and the Ticketmaster 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 for the remainder of 1998 when compared to 1997, and
accordingly, no significant discussion of these fluctuations is presented.
NET REVENUES
For the quarter ended March 31, 1998, revenues increased $244 million
compared to 1997 primarily due to increases of $166 million and $93 million from
the Networks and television production business and Ticketmaster, respectively,
offset by a $12 million decrease at Home Shopping.
OPERATING COSTS AND EXPENSES
For the quarter ended March 31, 1998, total operating costs and expenses
increased $232 million compared to 1997 primarily due to increases of $138
million and $88 million from the Networks and television production business and
Ticketmaster, respectively.
OTHER INCOME (EXPENSE), NET
For the quarter ended March 31, 1998, interest income increased $2.3
million compared to 1997 due to higher cash balances of the combined entities,
specifically from Ticketmaster.
For the quarter ended March 31, 1998, interest expense increased $20.1
million compared to 1997 primarily due to interest incurred on the new credit
facility to finance the Universal Transaction and non-cash interest expense on
long-term program liabilities at the Networks and television production
business.
For the quarter ended March 31, 1998, other expense increased $6.0 million
compared to 1997 primarily due to equity losses relating to foreign investments
at Home Shopping and losses from an international joint venture at the Networks
and television production business.
INCOME TAXES
The Company's effective tax rate of 50% for the quarter ended March 31,
1998 is higher than the statutory rate due primarily to non-deductible goodwill
and other acquired intangible and state income taxes. During the remainder of
1998, the Company's effective tax rate is expected to be higher than the
statutory rate as a result of
14
16
the items mentioned above and higher than the first quarter rate because the
gain on the sale of the Baltimore television station in the first quarter had
the effect of lowering the Company's effective tax rate.
MINORITY INTEREST
For the quarter ended March 31, 1998, minority interest represents
Universal's ownership interest in USANi LLC for the period February 12 through
March 31, 1998, Liberty's ownership interest in Home Shopping, Fox Broadcasting
Company's 50% ownership interest in SF Broadcasting and the public's ownership
interest in Ticketmaster.
PRO FORMA QUARTER ENDED MARCH 31, 1998 VS. PRO FORMA QUARTER
ENDED MARCH 31, 1997
The following unaudited pro forma operating results of the Company presents
combined results of operations as if the Universal Transaction and Ticketmaster
Transaction had occurred on January 1, 1998 and 1997, respectively.
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, 1998 and 1997, nor are they necessarily
indicative of future results of operations.
USA NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
- ------------------------------------------------------------------------------------
(In thousands, except
per share data)
NET REVENUES:
Home Shopping............................................. $249,196 $261,418
Ticketing operations...................................... 93,235 80,655
Networks and television production........................ 323,526 263,076
Other..................................................... 14,518 18,133
-------- --------
Total net revenues................................ 680,475 623,282
Operating costs and expenses:
Cost of sales............................................. 342,186 322,395
Program and other costs................................... 215,343 205,862
Depreciation and amortization............................. 60,492 55,579
-------- --------
Total operating costs and expenses................ 618,021 583,836
-------- --------
Operating profit.................................. $ 62,454 $ 39,446
======== ========
For the quarter ended March 31, 1998, pro forma revenues for the Company
increased $57 million, or 9.2%, to $680 million from $623 million compared to
1997. For the quarter ended March 31, 1998, cost of revenues and other costs
increased $29 million, or 5.5%, to $557 million from $528 million compared to
1997.
For the quarter ended March 31, 1998, pro forma EBITDA increased $28
million, or 29.4%, to $123 million from $95 million compared to 1997.
The following discussion provides an analysis of the aforementioned
increases in pro forma revenues and costs of revenues and other costs by
significant business segment.
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Electronic Retailing
Net revenue for the quarter ended March 31, 1998 decreased by $12.2
million, or 4.7%, to $249.2 million from $261.4 million compared to 1997. The
decrease primarily results from an unanticipated shift in consumer demand away
from jewelry to hardgoods, which includes consumer electronics, collectibles and
housewares. The shift resulted in not having the necessary mix of inventory to
satisfy consumer demand and resulted in the sale of certain inventory at lower
prices.
Net sales of HSN decreased $12.2 million, or 4.7%, for the quarter ended
March 31, 1998, reflecting a 4.0% decrease in the average price per unit sold on
a comparable number of packages shipped compared to the quarter ended March 31,
1997.
Cost of revenues and other costs increased by $3.7 million, or 1.8%, to
$219.1 million from $215.4 million. This increase resulted primarily from the
sale of merchandise at lower gross margins (38.9% in 1998 compared to 41.7% in
1997) and from disengagement costs for certain affiliates, severance costs for
the call center and higher merchandising personnel costs.
EBITDA for the quarter ended March 31, 1998 decreased $16.0 million, or
34.7%, to $30.0 million from $46.0 million compared to 1997.
Ticketing Operations
Net revenue for the quarter ended March 31, 1998 increased by $12.6
million, or 15.6%, to $93.2 million from $80.6 million compared to 1997. The
increase primarily resulted from an increase in the number of tickets sold,
including a significant increase in the number of tickets (400,000) sold
on-line.
Cost of revenues and other costs increased by $10.3 million, or 14.9%, to
$79.3 million from $69.0 million. This increase resulted primarily from higher
ticketing operation costs as a result of higher ticketing revenue.
EBITDA for the quarter ended March 31, 1998 increased $2.3 million, or
19.8%, to $13.9 million from $11.6 million compared to 1997.
Networks and Television Production
Net revenue for the quarter ended March 31, 1998 increased by $60.4
million, or 23.0%, to $323.5 million from $263.1 million compared to 1997. The
increase primarily resulted from an increase in advertising revenues at USA
Network and Sci-Fi channels, an increase in affiliate revenues at both networks
and increased deliveries of both network product and first run product at the
television production business. Also contributing to higher revenues was the
increase in ratings of USA Network in the first quarter 1998 compared to 1997.
Cost of revenues and other costs increased by $15.6 million, or 7.0%, to
$239.6 million from $224.0 million. This increase results primarily from the
cost of increased deliveries of network and first run product, partially offset
by the lower cost of programming on USA Network.
EBITDA for the quarter ended March 31, 1998 increased $44.9 million, or
115.1%, to $83.9 million from $39.0 million compared to 1997.
Broadcasting and Other
Other revenue includes revenue generated from the distribution of films
from the Savoy library acquired as a result of the Mergers and broadcasting
revenue from the SF stations.
Other costs of revenues and other costs include the costs to generate the
Savoy revenues, the SF Broadcasting station costs, corporate expenses and $2.3
million of cost in the quarter ended March 31, 1998 to launch the Miami station.
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B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $60.0 million for the quarter
ended March 31, 1998. These cash proceeds were used to pay for capital
expenditures of $19.0 million, and pay for long-term investments of $12.5
million.
Consolidated capital expenditures for the quarter ended March 31, 1998
relate in part to the build-out of the Miami station. Consolidated capital
expenditures are expected to range from $70.0 million to $95.0 million in 1998.
On February 12, 1998, the Company, and certain of its subsidiaries,
including USANi LLC as borrower, entered into a new $1.6 billion credit facility
(the "New Facility") with a $40.0 million sub-limit for letters of credit. The
New Facility was used to finance the Universal Transaction and to refinance the
Company's existing $275.0 million revolving credit facility. The New Facility
consists of a $600.0 million revolving credit facility, a $750.0 million
"Tranche A Term Loan" and a $250.0 million "Tranche B Term Loan". The revolving
credit facility and Tranche A Term Loan mature on December 31, 2002 and the
Tranche B Term Loan matures on December 31, 2003. The New Facility is guaranteed
by, and secured by stock in, substantially all of the Company's material
subsidiaries. The interest rate on borrowings under the New Facility is tied to
an Alternate Base Rate or the London InterBank Offered Rate, in each case, plus
an applicable margin. As of May 6, 1998, there was $1.410 billion in outstanding
borrowings under the New Facility and $188.8 million was available for
borrowings after taking into account outstanding letters of credit.
On February 12, 1998, the Company completed the Universal Transaction. The
consideration paid to Universal included a cash payment of $1.63 billion a
portion of which ($300.0 million) was deferred until no later than June 30,
1998. The Investment Agreement relating to the Universal Transaction also
contemplates that, on or prior to June 30, 1998, the Company and Liberty, will
complete a transaction that involves a $300.0 million cash investment by Liberty
in the Company through the purchase of USANi LLC Shares or, if agreed upon among
the Company, Liberty and Universal, the acquisition by the Company of assets
owned or controlled by Liberty in exchange for USANi LLC Shares. An asset
transaction with Liberty would reduce Liberty's cash purchase obligation by 45%
of the value of the assets acquired.
Pursuant to the Investment Agreement, the Company has granted to Universal
and Liberty preemptive rights with respect to future issuances of USAi Common
Stock and USAi Class B Common Stock, which generally allow Universal and Liberty
the right to maintain an ownership percentage equal to the ownership percentage
such entity held immediately prior to such issuance. In addition, Universal has
certain mandatory purchase obligations with respect to USAi Common Stock (or
USANi LLC shares), and with respect to the pending Ticketmaster Transaction.
In connection with the Universal Transaction, the Company entered into a
joint venture agreement relating to the development of international general
entertainment television channels including international versions of USA
Network, Sci-Fi Channel and Universal's action/adventure channel 13th Street.
Unless the Company elects to have Universal buy out its interest in the venture,
the Company and Universal will be 50-50 partners in the venture, which will be
managed by Universal. USANi LLC and Universal have each committed to contribute
$100 million in capital in the venture over a number of years.
The Company is implementing its plans to disaffiliate its station in the
Miami, Florida market in 1998. The Company will incur expenditures to develop
programming and promotion of this station, which during the development and
transitional stage, may not be offset by sufficient advertising revenues. The
Company may also transition additional broadcasting stations to the new format
later in 1998. The Company believes that the process of disaffiliation can be
successfully managed so as not to have a material adverse effect on the Company
and so as to maximize the value of the broadcasting stations.
In connection with the Universal Transaction and other strategic
initiatives, the Company anticipates that it will need to invest working capital
in connection with the development and expansion of its overall operations.
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The maximum amount available under Ticketmaster's credit agreement was
$165.0 at March 31, 1998 and will decrease to $150.0 million at December 31,
1998. At May 6, 1998, Ticketmaster had $142.0 million in outstanding borrowings
under its credit agreement and $23.0 million was available for borrowing.
During 1998, management expects to pay cable distribution fees of
approximately $25.0 million to $40.0 million, relating to new and current
contracts with cable systems operators to carry Home Shopping's programming.
During the quarter ended March 31, 1998, the Company received cash proceeds
of $1.6 million from the exercise of 173,100 options to purchase the Company's
common stock. At May 6, 1998, 10.6 million options to purchase the Company's
common stock were outstanding and exercisable at prices ranging between $1.00
and $24.75. The exercise of such options would result in a cash inflow to the
Company of $109.4 million.
On January 20, 1998, the Company consummated the sale of its Baltimore,
Maryland television station for $80.0 million. The Company has also entered into
an agreement to acquire a television station serving the Atlanta, Georgia,
market and an agreement to acquire the remaining interest in an entity partially
owned by the Company, which owns television stations serving the Orlando,
Florida and Rapid City, South Dakota markets. The aggregate purchase prices for
these transactions is approximately $67.0 million. The proceeds from the sale of
the Baltimore station are temporarily invested and will be used to complete the
purchase of the Atlanta station.
On January 28, 1998, Blackstar, an equity affiliate, consummated the sale
of one of its television broadcast stations. This resulted in termination of the
Company's affiliation agreement, and changed the Company's ownership to 45%. The
Company also received $1.0 million in cash and $3.0 million in preferred stock
in connection with the disaffiliation. The company also will receive $15.0
million in connection with disaffiliations of two other stations.
As of March 1, 1998, the Company redeemed, at a redemption price of 104.7%
of the principal amount, all of Home Shopping's outstanding 5.875% Convertible
Subordinated Debentures (the "Home Shopping Debentures"). The Home Shopping
Debentures were all converted by the holders into 7,499,022 shares of USAi
Common Stock on or prior to the Redemption Date. In connection with its
preemptive and mandatory rights with respect to issuances of shares by the
Company, Universal exercised its right in connection with the redemption of the
Home Shopping Debentures which resulted in the issuance of 6,135,563 USANi LLC
shares, generating an increase in minority interest in USANi LLC of $122.7
million. This amount reduced the Company's deferred purchase price liability by
that amount. In addition to the Universal purchase described in this paragraph,
Universal and Liberty have both exercised certain optional preemptive rights
(related to the redemption of the Home Shopping Debentures) for the maximum
number of either USAi shares or USANi LLC shares, as the case may be, for which
the rights are exercisable. These purchases are conditioned upon the transaction
receiving the required clearances under the Hart-Scott-Rodino Antitrust
Improvements Act, which are pending. Upon consummation of the transaction, USAi
and/or USANi LLC will, as the case may be, issue an additional 8,540,594 shares,
generating proceeds and reducing the deferred purchase price liability by
approximately $170.8 million in the aggregate.
On February 20, 1998, the Company's Board of Directors approved the
declaration of a dividend to its stockholders in the form of a distribution of
one share of USAi common stock for each share of common stock outstanding to
holders of record as of the close of business on March 12, 1998. The payment
date for the dividend was March 26, 1998. The two-for-one stock split also
included an identical stock dividend with respect to the Company's Class B
Common Stock, paid in the form of one share of USAi Class B Common Stock for
each share of Class B Stock outstanding as of the close of business on March 12,
1998.
In Management's opinion, available cash, internally generated funds and
available borrowings will provide sufficient capital resources to meet the
Company's foreseeable needs.
During the quarter ended March 31, 1998, the Company did not pay any cash
dividends, and none are permitted under the Company's existing credit facility.
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OTHER MATTERS
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner.
SEASONALITY
The Company's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter ended March 31, 1998 for
each line of business, and for the Company as a whole, are not necessarily
indicative of results for the full year.
The Company believes seasonality impacts its electronic retailing segment
but not to the same extent it impacts the retail industry in general.
Networks and television revenues are influenced by advertiser demand and
the seasonal nature of programming, and generally peak in the spring and fall.
Ticketing operations revenues are occasionally impacted by fluctuation in
the availability of events for sale to the public.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Jovon litigation, previously reported in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"),
Jovon Broadcasting Corporation's petition for reconsideration by the Federal
Communications Commission of its 1996 ruling regarding USA Capital Corporation's
option to acquire a 45 percent interest in Jovon remains pending. On January 9,
1998, the Circuit Court of Pinellas County, Florida denied Jovon's motion to
dismiss litigation brought by certain entities controlled by the Company against
Jovon. However, the court stayed the action for a period of six months. A status
conference is expected to be held in July 1998, at which time the court will
decide whether an extension of the stay is warranted.
The following is based on information available to the Company, as
previously disclosed by Ticketmaster in its Annual Report on Form 10-K for the
fiscal year ended January 31, 1998:
During 1994, Ticketmaster was named as a defendant in 16 federal class
action lawsuits filed in United States District Courts purportedly on behalf of
consumers who were alleged to have purchased tickets to various events through
Ticketmaster. These lawsuits alleged that Ticketmaster's activities violated
antitrust laws. On December 7, 1994, the Judicial Panel on Multidistrict
Litigation transferred all of the lawsuits to the United States District Court
for the Eastern District of Missouri (the "District Court") for coordinated and
consolidated pretrial proceedings. After an amended and consolidated complaint
was filed by the plaintiffs, Ticketmaster filed a motion to dismiss and, on May
31, 1996, the District Court granted that motion ruling that the plaintiffs had
failed to state a claim upon which relief could be granted. On April 10, 1998,
the Court of Appeals issued an opinion affirming the district court's ruling
that the plaintiffs in the consolidated consumer class action lawsuit lack
standing to pursue their claims for damages under the antitrust laws. However,
the Appellate Court held that the plaintiffs' status as indirect purchasers of
Ticketmaster's services did not bar them from seeking injunctive relief against
Ticketmaster.
Ticketmaster has stated that the Court's affirmance of the decision
prohibiting plaintiffs from obtaining monetary damages against Ticketmaster
eliminates the substantial portion of plaintiffs' claims. With respect to
injunctive relief, the Antitrust Division of the United States Department of
Justice had previously investigated Ticketmaster for in excess of 15 months and
closed its investigation with no suggestion of any form of injunctive relief or
modification of the manner in which Ticketmaster does business.
The Company is engaged in various other lawsuits either as plaintiff or
defendant. In the opinion of management, the ultimate outcome of these various
lawsuits should not have a material impact on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As previously reported in the Company's 1997 Form 10-K, on February 11,
1998, the Company's stockholders approved certain amendments to the Certificate
of Incorporation of the Company. These amendments and their effect upon the
holders of Common Stock and Class B Common Stock were previously reported in the
Company's Proxy Statement, dated January 12, 1998, relating to its 1998 Annual
Meeting of Stockholders under the headings "The Annual Meeting -- Description of
Proposals and HSNi Board Recommendations -- Authorized Capital Stock Proposal;
Ownership Proposal; Name Change Proposal; Director Number Proposal; and Removal
Proposal".
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.2 -- Investment Agreement among Universal Studios, Inc., HSN,
Inc., Home Shopping Network, Inc. and Liberty Media
Corporation dated as of October 19, 1997, as amended and
restated as of December 18, 1997, filed as Appendix A to the
Company's Definitive Proxy Statement, January 12, 1998, is
incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of the Registrant,
filed as Exhibit 3.1 to the Company's Form 8-K, February 23,
1998, is incorporated herein by reference.
3.2 -- Amended and Restated By-Laws of the Registrant, filed as
Exhibit 3.1 to the Company's Form 8-K, January 9, 1998, is
incorporated herein by reference.
4.1 -- Form of Common Stock Certificate filed as Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 10-K") is incorporated
herein by reference.
10.1 -- $1,600,000,000 Credit Agreement dated February 12, 1998
among USA Networks, Inc., USANi LLC, as Borrower, Various
Lenders, The Chase Manhattan Bank as Administrative Agent,
Syndication Agent and Collateral Agent, and Bank of America
National Trust & Savings Association and The Bank of New
York as Co-Documentation Agents, filed as Exhibit 10.50 to
the 1997 10-K is incorporated herein by reference.
10.2 -- Form of Governance Agreement among HSN, Inc., Universal
Studios, Inc., Liberty Media Corporation and Barry Diller,
dated as of October 19, 1997, filed as Appendix B to the
Company's Definitive Proxy Statement, January 12, 1998, is
incorporated herein by reference.
10.3 -- Form of Stockholders Agreement among Universal Studios,
Inc., Liberty Media Corporation, Barry Diller, HSN, Inc. and
The Seagram Company Ltd. dated as of October 19, 1997, filed
as Appendix C to the Company's Definitive Proxy Statement,
January 12, 1998, is incorporated herein by reference.
10.4 -- Form of Spinoff Agreement between Liberty Media Corporation
and Universal Studios, Inc., dated as of October 19, 1997,
filed as Appendix D to the Company's Definitive Proxy
Statement, January 12, 1998, is incorporated herein by
reference.
*10.5 -- HSN, Inc. 1997 Stock and Annual Incentive Plan filed as
Appendix F to the Company's Definitive Proxy Statement,
January 12, 1998, is incorporated herein by reference.
*10.6 -- Employment Agreement between Jed B. Trosper and Home
Shopping Network, Inc. dated January 13, 1997, filed as
Exhibit 10.55 to the 1997 10-K is incorporated herein by
reference.
*10.7 -- Employment Agreement between Thomas J. Kuhn and HSN, Inc.
dated February 9, 1998, filed as Exhibit 10.56 to the 1997
10-K is incorporated herein by reference.
*10.8 -- Employment Agreement between Dara Khosrowshahi and USA
Networks, Inc., dated March 2, 1998, filed as Exhibit 10.57
to the 1997 10-K is incorporated herein by reference.
*10.9 -- Employment Agreement between Michael P. Durney and USA
Networks, Inc. dated March 30, 1998.
*10.10 -- HSN, Inc. Retirement Savings Plan filed as Exhibit 10.58 to
the 1997 10-K is incorporated herein by reference.
10.11 -- Amended and Restated Limited Liability Company Agreement of
USANi LLC, dated as of February 12, 1998, filed as Exhibit
10.59 to the 1997 10-K, is incorporated herein by reference.
10.12 -- Exchange Agreement dated as of October 19, 1997 by and among
HSN, Inc. (renamed USA Networks, Inc.), Universal Studios,
Inc. (and certain of its subsidiaries) and Liberty Media
Corporation (and certain of its subsidiaries), filed as
Exhibit 10.60 to the 1997 10-K, is incorporated herein by
reference.
21
23
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13 -- Agreement and Plan of Merger by and among USA Networks,
Inc., Brick Acquisition Corp. and Ticketmaster Group, Inc.
dated as of March 20, 1998, filed as Exhibit 10.61 to the
1997 10-K, is incorporated herein by reference.
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Restated Financial Data Schedule
- ---------------
* Reflects management contracts and compensatory plans.
(b) Reports on Form 8-K
A current report on Form 8-K/A dated February 13, 1996 was filed by the
Company on January 9, 1998 announcing a change in the Company's certified public
accountant.
A current report on Form 8-K dated January 9, 1998 was filed by the Company
on January 16, 1998 containing amended and restated by-laws adopted on January
9, 1998.
A current report on Form 8-K dated January 23, 1998 was filed by the
Company on January 23, 1998 announcing Home Shopping Network, Inc.'s election to
redeem all of the outstanding Home Shopping Network 5.875% Convertible
Subordinated Debentures due March 1, 2006.
A current report on Form 8-K dated February 12, 1998 was filed by the
Company on February 13, 1998 announcing the closing of the transaction between
HSN, Inc. and Universal Studios, Inc.
A current report on Form 8-K dated February 23, 1998 was filed by the
Company on February 23, 1998 announcing a two-for-one stock split and the filing
of the Company's Restated Certificate of Incorporation.
A current report on Form 8-K dated March 26, 1998 was filed by the Company
on April 1, 1998 announcing the completion of the two-for-one stock split.
22
24
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)
Dated May 15, 1998 /s/ BARRY DILLER
---------------------------------------- --------------------------------------------------------
Barry Diller
Chairman of the Board and
Chief Executive Officer
Dated May 15, 1998 /s/ VICTOR A. KAUFMAN
---------------------------------------- --------------------------------------------------------
Victor A. Kaufman
Office of the Chairman,
Chief Financial Officer
(Principal Financial Officer)
Dated May 15, 1998 /s/ MICHAEL P. DURNEY
---------------------------------------- --------------------------------------------------------
Michael P. Durney
Vice President, Controller
(Chief Accounting Officer)
23
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
2.2 -- Investment Agreement among Universal Studios, Inc., HSN,
Inc., Home Shopping Network, Inc. and Liberty Media
Corporation dated as of October 19, 1997, as amended and
restated as of December 18, 1997, filed as Appendix A to the
Company's Definitive Proxy Statement, January 12, 1998, is
incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of the Registrant,
filed as Exhibit 3.1 to the Company's Form 8-K, February 23,
1998, is incorporated herein by reference.
3.2 -- Amended and Restated By-Laws of the Registrant, filed as
Exhibit 3.1 to the Company's Form 8-K, January 9, 1998, is
incorporated herein by reference.
4.1 -- Form of Common Stock Certificate filed as Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 10-K") is incorporated
herein by reference.
10.1 -- $1,600,000,000 Credit Agreement dated February 12, 1998
among USA Networks, Inc., USANi LLC, as Borrower, Various
Lenders, The Chase Manhattan Bank as Administrative Agent,
Syndication Agent and Collateral Agent, and Bank of America
National Trust & Savings Association and The Bank of New
York as Co-Documentation Agents, filed as Exhibit 10.50 to
the 1997 10-K is incorporated herein by reference.
10.2 -- Form of Governance Agreement among HSN, Inc., Universal
Studios, Inc., Liberty Media Corporation and Barry Diller,
dated as of October 19, 1997, filed as Appendix B to the
Company's Definitive Proxy Statement, January 12, 1998, is
incorporated herein by reference.
10.3 -- Form of Stockholders Agreement among Universal Studios,
Inc., Liberty Media Corporation, Barry Diller, HSN, Inc. and
The Seagram Company Ltd. dated as of October 19, 1997, filed
as Appendix C to the Company's Definitive Proxy Statement,
January 12, 1998, is incorporated herein by reference.
10.4 -- Form of Spinoff Agreement between Liberty Media Corporation
and Universal Studios, Inc., dated as of October 19, 1997,
filed as Appendix D to the Company's Definitive Proxy
Statement, January 12, 1998, is incorporated herein by
reference.
*10.5 -- HSN, Inc. 1997 Stock and Annual Incentive Plan filed as
Appendix F to the Company's Definitive Proxy Statement,
January 12, 1998, is incorporated herein by reference.
*10.6 -- Employment Agreement between Jed B. Trosper and Home
Shopping Network, Inc. dated January 13, 1997, filed as
Exhibit 10.55 to the 1997 10-K is incorporated herein by
reference.
*10.7 -- Employment Agreement between Thomas J. Kuhn and HSN, Inc.
dated February 9, 1998, filed as Exhibit 10.56 to the 1997
10-K is incorporated herein by reference.
*10.8 -- Employment Agreement between Dara Khosrowshahi and USA
Networks, Inc., dated March 2, 1998, filed as Exhibit 10.57
to the 1997 10-K is incorporated herein by reference.
*10.9 -- Employment Agreement between Michael P. Durney and USA
Networks, Inc. dated March 30, 1998.
*10.10 -- HSN, Inc. Retirement Savings Plan filed as Exhibit 10.58 to
the 1997 10-K, is incorporated herein by reference.
10.11 -- Amended and Restated Limited Liability Company Agreement of
USANi LLC, dated as of February 12, 1998, filed as Exhibit
10.59 to the 1997 10-K is incorporated herein by reference.
26
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
10.12 -- Exchange Agreement dated as of October 19, 1997 by and among
HSN, Inc. (renamed USA Networks, Inc.), Universal Studios,
Inc. (and certain of its subsidiaries) and Liberty Media
Corporation (and certain of its subsidiaries), filed as
Exhibit 10.60 to the 1997 10-K, is incorporated herein by
reference.
10.13 -- Agreement and Plan of Merger by and among USA Networks,
Inc., Brick Acquisition Corp. and Ticketmaster Group, Inc.
dated as of March 20, 1998, filed as Exhibit 10.61 to the
1997 10-K, is incorporated herein by reference.
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Restated Financial Data Schedule
- ---------------
* Reflects management contracts and compensatory plans.
1
Exhibit 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between
Michael Durney ("Employee") and USA Networks, Inc., a Delaware corporation (the
"Company"), and is effective March 30, 1998 (the "Effective Date").
WHEREAS, the Company desires to establish its right to the services of
Employee, in the capacity described below, on the terms and conditions
hereinafter set forth, and Employee is willing to accept such employment on such
terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, Employee and the Company have agreed and do hereby agree as follows:
1A. EMPLOYMENT. The Company agrees to employ Employee as Vice President -
Controller of the Company, and Employee accepts and agrees to such employment.
During Employee's employment with the Company, Employee shall do and perform all
services and acts necessary or advisable to fulfill the duties and
responsibilities as are commensurate and consistent with Employee's position and
shall render such services on the terms set forth herein. During Employee's
employment with the Company, Employee shall report directly to the Chief
Financial Officer and/or the senior executive officer who has responsibility for
corporate staff functions (such person(s) as from time to time may be designated
by the Company, hereinafter referred to as the "Reporting Officer"). Employee
shall have such powers and duties with respect to the Company as may reasonably
be assigned to Employee by the Reporting Officer, to the extent consistent with
Employee's position and status. Employee agrees to devote all of Employee's
working time, attention and efforts to the Company and to perform the duties of
Employee's position in accordance with the Company's policies as in effect from
time to time. Employee's principal place of employment shall be the Company's
offices located in New York City; however, Employee's position shall require
long-distance travel on Company business.
2A. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the
Effective Date and shall continue for a period of three years, unless sooner
terminated in accordance with the provisions of Section 1 of the Standard Terms
and Conditions attached hereto.
3A. COMPENSATION.
(a) BASE SALARY. During the Term, the Company shall pay Employee an
annual base salary of $250,000 (the "Base Salary"), payable in equal biweekly
installments or in accordance with the Company's payroll practice as in effect
from time to time. For all purposes under this Agreement, the term "Base Salary"
shall refer to Base Salary, including adjustments thereto, if any, as made from
time to time.
2
(b) DISCRETIONARY BONUS. During the Term, Employee shall be eligible to
receive discretionary annual bonuses on the same basis as peer employees of the
Company.
(c) STOCK OPTION. In consideration of Employee's entering into this
Agreement and as an inducement to join the Company, Employee shall be granted
under USA Networks, Inc.'s 1997 Stock and Annual Incentive Plan (the "Plan") a
non-qualified stock option (the "Option") to purchase 50,000 shares of USA
Networks, Inc. ("USAi") common stock, par value $.0l per share (the "Common
Stock"), after giving effect to the two-for-one stock split paid to holders of
record of the Common Stock on March 12, 1998. The date of grant of the Option
shall be the Effective Date. The exercise price of the Option shall equal the
last reported sales price of the Common Stock in the over-the-counter market on
the date preceding the Effective Date. Such Option shall vest and become
exercisable in four equal installments on each of the first, second, third and
fourth anniversaries of the Effective Date, provided that the Option shall
become 100% vested and exercisable upon a Change in Control (as such term is
defined in the Plan). The Option shall expire upon the earlier to occur of (i)
ten years from the date of grant (the "Option Term") or (ii) except as otherwise
provided in the Option award agreement, 90 days following the termination of
Employee's employment with the Company for any reason.
(d) BENEFITS. During the Term, Employee shall be entitled to
participate in any welfare, health and life insurance and pension benefit and
incentive programs as may be adopted from time to time by the Company on the
same basis as that provided to other senior executives of the Company. Without
limiting the generality of the foregoing, Employee shall be entitled to the
following benefits:
(i) Reimbursement for Business Expenses. During the Term, the
Company shall reimburse Employee for all reasonable and necessary
expenses incurred by Employee in performing Employee's duties for the
Company, on the same basis as similarly situated employees and in
accordance with the Company's policies as in effect from time to time.
(ii) Vacation. During the Term, Employee shall be entitled to
four weeks of paid vacation per year, in accordance with the plans,
policies, programs and practices of the Company applicable to similarly
situated employees of the Company generally.
4A. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be given by first-class mail, certified or registered with
return receipt requested or hand delivery acknowledged in writing by the
recipient personally, and shall be deemed to have been duly given three days
after mailing or immediately upon duly acknowledged hand delivery to the
respective persons named below:
If to the Company: USA Networks, Inc.
152 West 57 Street
New York, NY 10019
Attention: General Counsel
2
3
If to Employee: Michael Durney
44 Dorchester Road
Rockville Centre, NY 11570
Either party may change such party's address for notices by notice duly given
pursuant hereto.
5A. GOVERNING LAW. This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the internal laws of the State of New York without reference to the
principles of conflicts of laws.
6A. COUNTERPARTS. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument. Employee expressly understands and
acknowledges that the Standard Terms and Conditions attached hereto are
incorporated herein by reference, deemed a part of this Agreement and are
binding and enforceable provisions of this Agreement. References to "this
Agreement" or the use of the term "hereof" shall refer to this Agreement and the
Standard Terms and Conditions attached hereto, taken as a whole.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed and delivered by its duly authorized officer and Employee has
executed and delivered this Agreement on March 31, 1998.
USA NETWORKS, INC.
-----------------------------------------------
By: Thomas J. Kuhn
Title: Senior Vice President & General Counsel
-----------------------------------------------
MICHAEL DURNEY
3
4
STANDARD TERMS AND CONDITIONS
1. TERMINATION OF EMPLOYEE'S EMPLOYMENT.
(a) DEATH. In the event Employee's employment hereunder is terminated
by reason of Employee's death, the Company shall pay Employee's designated
beneficiary or beneficiaries, within 30 days of Employee's death in a lump sum
in cash, Employee's Base Salary through the end of the month in which death
occurs and any Accrued Obligations (as defined in paragraph 1(f) below).
(b) DISABILITY. If, as a result of Employee's incapacity due to
physical or mental illness ("Disability"), Employee shall have been absent from
the full-time performance of Employee's duties with the Company for a period of
four consecutive months and, within 30 days after written notice is provided to
Employee by the Company (in accordance with Section 6 hereof), he shall not have
returned to the full-time performance of Employee's duties, Employee's
employment under this Agreement may be terminated by the Company for Disability.
During any period prior to such termination during which Employee is absent from
the full-time performance of Employee's duties with the Company due to
Disability, the Company shall continue to pay Employee's Base Salary at the rate
in effect at the commencement of such period of Disability, offset by any
amounts payable to Employee under any disability insurance plan or policy
provided by the Company. Upon termination of Employee's employment due to
Disability, the Company shall pay Employee within 30 days of such termination
(i) Employee's Base Salary through the end of the month in which termination
occurs in a lump sum in cash, offset by any amounts payable to Employee under
any disability insurance plan or policy provided by the Company; and (ii) any
Accrued Obligations (as defined in paragraph 1(f) below).
(c) TERMINATION FOR CAUSE. The Company may terminate Employee's
employment under this Agreement for Cause at any time prior to the expiration of
the Term. As used herein, "Cause" shall mean: (i) the plea of guilty or nolo
contendere to, or conviction for, the commission of a felony offense by
Employee; provided, however, that after indictment, the Company may suspend
Employee from the rendition of services, but without limiting or modifying in
any other way the Company's obligations under this Agreement; (ii) a material
breach by Employee of a fiduciary duty owed to the Company; (iii) a material
breach by Employee of any of the covenants made by Employee in Section 2 hereof;
or (iv) the willful and gross neglect by Employee of the material duties
required by this Agreement. In the event of Employee's termination for Cause,
this Agreement shall terminate without further obligation by the Company, except
for the payment of any Accrued Obligations (as defined in paragraph 1(f) below).
(d) TERMINATION BY THE COMPANY OTHER THAN FOR DEATH, DISABILITY OR
CAUSE. If Employee's employment is terminated by the Company for any reason
other than Employee's death or Disability or for Cause, then (i) the Company
shall pay Employee the Base Salary through the end of the Term over the course
of the then remaining
5
Term; and (ii) the Company shall pay Employee within 30 days of the date of such
termination in a lump sum in cash any Accrued Obligations (as defined in
paragraph 1(f) below).
(e) MITIGATION; OFFSET. In the event of termination of Employee's
employment prior to the end of the Term, Employee shall use reasonable best
efforts to seek other employment and to take other reasonable actions to
mitigate the amounts payable under Section 1 hereof. If Employee obtains other
employment during the Term, the amount of any payment or benefit provided for
under Section 1 hereof which has been paid to Employee shall be refunded to the
Company by Employee in an amount equal to any compensation earned by Employee as
a result of employment with or services provided to another employer after the
date of Employee's termination of employment and prior to the otherwise
applicable expiration of the Term, and all future amounts payable by the Company
to Employee during the remainder of the Term shall be offset by the amount
earned by Employee from another employer. For purposes of this Section 1(e),
Employee shall have an obligation to inform the Company regarding Employee's
employment status following termination and during the period encompassing the
Term.
(f) ACCRUED OBLIGATIONS. As used in this Agreement, "Accrued
Obligations" shall mean the sum of (i) any portion of Employee's Base Salary
through the date of death or termination of employment for any reason, as the
case may be, which has not yet been paid; and (ii) any compensation previously
earned but deferred by Employee (together with any interest or earnings thereon)
that has not yet been paid.
2. CONFIDENTIAL INFORMATION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.
(a) CONFIDENTIALITY. Employee acknowledges that while employed by the
Company he will occupy a position of trust and confidence. Employee shall not,
except as may be required to perform Employee's duties hereunder or as required
by applicable law, without limitation in time or until such information shall
have become public other than by Employee's unauthorized disclosure, disclose to
others or use, whether directly or indirectly, any Confidential Information
regarding the Company or any of its subsidiaries or affiliates. "Confidential
Information" shall mean information about the Company or any of its subsidiaries
or affiliates, and their clients and customers that is not disclosed by the
Company or any of its subsidiaries or affiliates for financial reporting
purposes and that was learned by Employee in the course of employment by the
Company or any of its subsidiaries or affiliates, including (without limitation)
any proprietary knowledge, trade secrets, data, formulae, information and client
and customer lists and all papers, resumes, and records (including computer
records) of the documents containing such Confidential Information. Employee
acknowledges that such Confidential Information is specialized, unique in nature
and of great value to the Company and its subsidiaries or affiliates, and that
such information gives the Company and its subsidiaries or affiliates a
competitive advantage. Employee agrees to deliver or return to the Company, at
the Company's request at any time or upon termination or expiration of
Employee's employment or as soon thereafter as possible, all documents, computer
tapes and disks, records, lists, data, drawings, prints, notes and written
information (and all copies thereof) furnished by the
2
6
Company and its subsidiaries or affiliates or prepared by Employee in the course
of Employee's employment by the Company and its subsidiaries or affiliates. As
used in this Agreement, "subsidiaries" and "affiliates" shall mean any company
controlled by, controlling or under common control with the Company.
(b) NON-SOLICITATION OF EMPLOYEES. Employee recognizes that he will
possess confidential information about other employees of the Company and its
subsidiaries or affiliates relating to their education, experience, skills,
abilities, compensation and benefits, and inter-personal relationships with
suppliers to and customers of the Company and its subsidiaries or affiliates.
Employee recognizes that the information he will possess about these other
employees is not generally known, is of substantial value to the Company and its
subsidiaries or affiliates in developing their respective businesses and in
securing and retaining customers, and will be acquired by Employee because of
Employee's business position with the Company. Employee agrees that, during the
Term (and for a period of 12 months beyond the expiration of the Term), he will
not, directly or indirectly, solicit or recruit any employee of the Company or
any of its subsidiaries or affiliates for the purpose of being employed by
Employee or by any business, individual, partnership, firm, corporation or other
entity on whose behalf he is acting as an agent, representative or employee and
that he will not convey any such confidential information or trade secrets about
other employees of the Company or any of its subsidiaries or affiliates to any
other person except within the scope of Employee's duties hereunder.
(c) PROPRIETARY RIGHTS; ASSIGNMENT. All Employee Developments shall be
made for hire by the Employee for the Company or any of its subsidiaries or
affiliates. "Employee Developments" means any idea, discovery, invention,
design, method, technique, improvement, enhancement, development, computer
program, machine, algorithm or other work or authorship that (i) relates to the
business or operations of the Company or any of its subsidiaries or affiliates,
or (ii) results from or is suggested by any undertaking assigned to the Employee
or work performed by the Employee for or on behalf of the Company or any of its
subsidiaries or affiliates, whether created alone or with others, during or
after working hours. All Confidential Information and all Employee Developments
shall remain the sole property of the Company or any of its subsidiaries or
affiliates. The Employee shall acquire no proprietary interest in any
Confidential information or Employee Developments developed or acquired during
the Term. To the extent the Employee may, by operation of law or otherwise,
acquire any right, title or interest in or to any Confidential Information or
Employee Development, the Employee hereby assigns to the Company all such
proprietary rights. The Employee shall, both during and after the Term, upon the
Company's request, promptly execute and deliver to the Company all such
assignments, certificates and instruments, and shall promptly perform such other
acts, as the Company may from time to time in its discretion deem necessary or
desirable to evidence, establish, maintain, perfect, enforce or defend the
Company's rights in Confidential Information and Employee Developments.
(d) COMPLIANCE WITH CODE OF CONDUCT. During the Term, Employee shall
adhere to the policies and standards of professionalism set forth in the
Company's Code of Conduct as it may exist from time to time.
3
7
(e) REMEDIES FOR BREACH. Employee expressly agrees and understands that
the remedy at law for any breach by Employee of this Section 2 will be
inadequate and that damages flowing from such breach are not usually susceptible
to being measured in monetary terms. Accordingly, it is acknowledged that upon
Employee's violation of any provision of this Section 2 the Company shall be
entitled to obtain from any court of competent jurisdiction immediate injunctive
relief and obtain a temporary order restraining any threatened or further breach
as well as an equitable accounting of all profits or benefits arising out of
such violation. Nothing in this Section 2 shall be deemed to limit the Company's
remedies at law or in equity for any breach by Employee of any of the provisions
of this Section 2, which may be pursued by or available to the Company.
(f) SURVIVAL OF PROVISIONS. The obligations contained in this Section 2
shall, to the extent provided in this Section 2, survive the termination or
expiration of Employee's employment with the Company and, as applicable, shall
be fully enforceable thereafter in accordance with the terms of this Agreement.
If it is determined by a court of competent jurisdiction in any state that any
restriction in this Section 2 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the intention
of the parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that state.
3. TERMINATION OF PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties and terminates and supersedes any and all prior
agreements and understandings (whether written or oral) among the parties with
respect to the subject matter of this Agreement. Employee acknowledges and
agrees that neither the Company nor anyone acting on its behalf has made, and is
not making, and in executing this Agreement, the Employee has not relied upon,
any representations, promises or inducements except to the extent the same is
expressly set forth in this Agreement. Employee hereby represents and warrants
that by entering into this Agreement, he will not rescind or otherwise breach an
employment agreement with Employee's current employer prior to the natural
expiration date of such agreement
4. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and none of
the parties hereto shall, without the consent of the others, assign or transfer
this Agreement or any rights or obligations hereunder, provided that, in the
event of the merger, consolidation, transfer, or sale of all or substantially
all of the assets of the Company with or to any other individual or entity, this
Agreement shall, subject to the provisions hereof, be binding upon and inure to
the benefit of such successor and such successor shall discharge and perform all
the promises, covenants, duties, and obligations of the Company hereunder, and
all references herein to the "Company" shall refer to such successor.
5. WITHHOLDING. The Company shall make such deductions and withhold such amounts
from each payment and benefit made or provided to Employee hereunder, as may be
required from time to time by applicable law, governmental regulation or order.
6. HEADING REFERENCES. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other
4
8
purpose. References to "this Agreement" or the use of the term "hereof" shall
refer to these Standard Terms and Conditions and the Employment Agreement
attached hereto, taken as a whole.
7. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of
the terms, covenants, or conditions hereof shall not be deemed a waiver of such
term, covenant, or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto.
8. SEVERABILITY. In the event that a court of competent jurisdiction determines
that any portion of this Agreement is in violation of any law or public policy,
only the portions of this Agreement that violate such law or public policy shall
be stricken. All portions of this Agreement that do not violate any statute or
public policy shall continue in full force and effect. Further, any court order
striking any portion of this Agreement shall modify the stricken terms as
narrowly as possible to give as much effect as possible to the intentions of the
parties under this Agreement.
9. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless for
acts and omissions in Employee's capacity as an officer, director or employee of
the Company to the maximum extent permitted under applicable law; provided,
however, that neither the Company, nor any of its subsidiaries or affiliates
shall indemnify Employee for any losses incurred by Employee as a result of acts
described in Section 1(c) of this Agreement.
ACKNOWLEDGED AND AGREED:
Date: March 31, 1998
THE COMPANY
By:
----------------------------------
EMPLOYEE
-------------------------------------
5
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
162,191
0
283,392
0
400,013
910,399
353,948
119,501
7,713,436
834,424
1,862,909
0
0
1,342
1,891,016
7,713,436
523,111
523,111
254,502
254,502
233,839
0
27,153
76,941
38,712
33,931
0
0
0
33,931
.28
.17
5
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
41,562
0
53,291
0
113,479
249,828
203,980
78,143
2,099,300
242,377
269,071
0
0
926
1,163,525
2,099,300
279,551
279,551
158,614
158,614
97,528
0
7,021
14,499
11,129
3,770
0
0
0
3,770
.04
.04
