AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2002
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
USA NETWORKS, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NO. 0-20570
DELAWARE 59-2712887
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
152 WEST 57TH STREET, NEW YORK, NEW YORK, 10019
(Address of Registrant's principal executive offices)
(212) 314-7300
(Registrant's telephone number, including area code):
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
Warrants to acquire Common Stock
------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of February 15, 2002, the following shares of the Registrant's capital
stock were outstanding:
Common Stock................................................ 340,633,475
Class B Common Stock........................................ 63,033,452
-----------
Total....................................................... 403,666,927
Common Stock issuable upon exchange of outstanding
exchangeable subsidiary equity............................ 361,152,845
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Total outstanding Common Stock, assuming full exchange of
Class B Common Stock and exchangeable subsidiary equity... 764,819,772
===========
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 15, 2002 was $8,110,122,614. For the purpose of the
foregoing calculation only, all directors and executive officers of the
Registrant are assumed to be affiliates of the Registrant.
Assuming the exchange, as of February 15, 2002, of all equity securities of
subsidiaries of the Registrant exchangeable for Common Stock of the Registrant,
the Registrant would have outstanding 764,819,772 shares of Common Stock with an
aggregate market value of $23,135,798,101.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's proxy statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III herein.
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INDEX
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 41
Item 3. Legal Proceedings........................................... 46
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 52
Item 6. Selected Financial Data..................................... 52
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 55
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 72
Item 8. Consolidated Financial Statements and Supplementary Data.... 75
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 121
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 121
Item 11. Executive Compensation...................................... 121
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 121
Item 13. Certain Relationships and Related Party Transactions........ 121
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 121
2
PART I
ITEM 1. BUSINESS
GENERAL
On December 17, 2001, USA Networks, Inc. ("USA" or the "Company") and
Vivendi Universal, S.A. ("Vivendi") announced a transaction (the "Vivendi
Transaction") in which USA's Entertainment Group, consisting of USA Cable,
Studios USA, and USA Films, would be contributed to Vivendi Universal
Entertainment LLLP, a new joint venture to be controlled by Vivendi ("VUE").
Upon closing of the Vivendi Transaction, USA will be renamed USA Interactive
and will be focused on integrating interactive assets across multiple lines of
business. We believe USA Interactive will be a leader in integrated
interactivity, including ticketing, online travel, electronic retailing,
teleservices and other interactive commerce services. USA Interactive will
consist of the divisions and subsidiaries in USA's Interactive Group. These
divisions and subsidiaries include Home Shopping Network, including HSN
International and HSN.com; Ticketmaster (Nasdaq: TMCS), which operates
Ticketmaster, Ticketmaster.com, Citysearch and Match.com; Expedia, Inc. (Nasdaq:
EXPE); Hotel Reservations Network, Inc. (Nasdaq: ROOM); Precision Response
Corporation; Electronic Commerce Solutions; and Styleclick, Inc.
USA organizes the various businesses in its Interactive Group into
"Operating Businesses" and "Emerging Businesses" as follows:
OPERATING BUSINESSES
- HSN--U.S., consisting primarily of the HSN and America's Store television
networks and HSN.com.
- TICKETING OPERATIONS, consisting primarily of Ticketmaster and
Ticketmaster.com, which provide offline and online automated ticketing
services.
- EXPEDIA, a leading provider of travel planning services.
- HOTEL RESERVATIONS NETWORK, a leading consolidator of hotel rooms for
resale in the consumer market.
- PRECISION RESPONSE CORPORATION, a leader in outsourced consumer care for
both large corporations and high-growth Internet-focused companies.
- MATCH.COM, a leading online personals business.
EMERGING BUSINESSES
- HSN--INTERNATIONAL AND OTHER, consisting primarily of HSN's international
and Spanish-language electronic retailing operations.
- CITYSEARCH AND RELATED, which operates a network of local city guide sites
that offer primarily original local content for major cities in the U.S.
and abroad, as well as practical transactional tools to get things done.
- USA ELECTRONIC COMMERCE SOLUTIONS, the Company's electronic commerce
solutions business.
- STYLECLICK, a provider of e-commerce services and technologies.
3
CORPORATE STRUCTURE, EQUITY OWNERSHIP AND VOTING CONTROL
CORPORATE STRUCTURE. A number of USA's businesses are currently held by two
non-wholly owned subsidiaries, Home Shopping Network, Inc. ("Holdco") and USANi
LLC. USA maintains control and management of Holdco and USANi LLC, and manages
the businesses held by them, in substantially the same manner as they would be
if they were wholly owned subsidiaries. The other principal owners of these
subsidiaries are Liberty Media Corporation ("Liberty") and Vivendi, through
Universal Studios, Inc. ("Universal"). USA has the contractual right to require
the exchange of the Holdco shares held by Liberty for shares of USA. Following
such exchange and after giving effect to the Vivendi Transaction, Holdco and
USANi LLC will become wholly owned, thereby simplifying USA's corporate
structure.
EQUITY OWNERSHIP. As of February 15, 2002, Liberty, through companies owned
by Liberty and Mr. Diller, owned 7.3% of USA's outstanding common stock and
78.7% of USA's outstanding Class B common stock and Vivendi (through Universal)
owned approximately 5.3% of USA's outstanding common stock and 21.3% of USA's
Class B common stock. Pro forma for the Vivendi Transaction and after giving
effect to the exchange of all of Liberty's Holdco shares, Liberty, through
companies owned by Liberty and Mr. Diller, would own approximately 2.0% of USA's
outstanding common stock and 78.7% of USA's outstanding Class B common stock,
Vivendi (through subsidiaries) would own approximately 12.4% of USA's
outstanding common stock and 21.3% of USA's outstanding Class B common stock and
the public shareholders, including Mr. Diller and other USA officers and
directors, would own approximately 85.6% of USA's common stock. Following the
Vivendi Transaction, Vivendi will own 43.2 million shares of USA common stock
and 13.4 million shares of Class B common stock (for a total of 56.6 million USA
shares) and will be required to hold 56.6 million USA shares to satisfy its put
and call obligations relating to the Class B preferred interest in VUE that will
be issued to USA in the Vivendi Transaction described below. See "Corporate
History--Certain Entertainment Group Transactions--Vivendi Transaction." The
terms of the Class B preferred interest provide that it is puttable and callable
commencing on the 20th anniversary of the completion of the Vivendi Transaction
at its then accreted face value for up to 56.6 million USA common and Class B
shares held by Vivendi. If USA's share price exceeds $40.82 per share at the
time of the put or call, fewer than 56.6 million shares would be cancelled. At
the election of Vivendi, USA common shares (but not the USA Class B common
shares) to be received by USA pursuant to the put or call can be substituted
with cash equal to the market value of those shares.
VOTING CONTROL. Mr. Diller, subject to the stockholders agreement and
subject to veto rights of Universal and Liberty over fundamental changes, is
effectively able to control the outcome of nearly all matters submitted to a
vote of USA's stockholders. Upon closing of the Vivendi Transaction, Vivendi's
veto rights over fundamental changes will be eliminated and Liberty's veto
rights over fundamental matters will be significantly limited. As of
February 15, 2002, Mr. Diller, through companies owned by Liberty and
Mr. Diller, his own holdings and the stockholders agreement dated as of
October 19, 1997, among Mr. Diller, Universal, Liberty, USA and Seagram,
controls 67.8% of the outstanding total voting power of USA. Pro forma for the
Vivendi Transaction and after giving effect to the exchange of all of Liberty's
Holdco shares, and subject to an amended and restated stockholders agreement,
Mr. Diller will control 69.4% of the outstanding total voting power of USA.
CORPORATE HISTORY
USA was incorporated in July 1986 in Delaware under the name Silver King
Broadcasting Company, Inc. as a subsidiary of Home Shopping Network, Inc.
("Holdco"). On December 28, 1992, Holdco distributed the capital stock of USA to
its stockholders.
In December 1996, USA completed mergers with Savoy Pictures
Entertainment, Inc. ("Savoy") and Holdco, and Savoy and Holdco became
subsidiaries of USA. At the same time as the mergers, USA
4
changed its name from Silver King Broadcasting Company, Inc. to HSN, Inc. In
February 1998, as part of the Universal Transaction described below, the Company
changed its name to USA Networks, Inc.
CERTAIN INTERACTIVE GROUP TRANSACTIONS
TICKETMASTER TRANSACTIONS
On July 17, 1997, USA acquired a controlling interest in Ticketmaster
Group, Inc. ("Ticketmaster Group") from Mr. Paul G. Allen in exchange for shares
of USA's common stock. On June 24, 1998, USA acquired the remaining Ticketmaster
Group common equity in a tax-free stock-for-stock merger.
On September 28, 1998, Citysearch, Inc. merged with Ticketmaster Online (now
known as Ticketmaster.com), then a wholly owned subsidiary of Ticketmaster
Corporation, to form Ticketmaster Online-Citysearch, Inc. ("Ticketmaster
Online-Citysearch"). Following the merger, Ticketmaster Online-Citysearch was a
majority-owned subsidiary of Ticketmaster Corporation. Shares of Ticketmaster
Online-Citysearch's Class B common stock were sold to the public in an initial
public offering that was completed on December 8, 1998.
On November 21, 2000, USA announced it had entered into an agreement with
Ticketmaster Online-Citysearch to combine Ticketmaster Corporation, a
wholly-owned subsidiary of USA, with Ticketmaster Online-Citysearch. The
transaction closed January 31, 2001. The combined company was renamed
"Ticketmaster." Under the terms of the transaction, USA contributed Ticketmaster
Corporation to Ticketmaster Online-Citysearch and received 52 million shares of
Ticketmaster Online-Citysearch Class B common stock. The Ticketmaster Class B
common stock is quoted on the Nasdaq Stock Market under the symbol "TMCS." As of
December 31, 2001, USA beneficially owned 67.6% of the outstanding Ticketmaster
common stock, representing 91.7% of the total voting power of Ticketmaster's
outstanding common stock.
EXPEDIA TRANSACTION
On February 4, 2002, USA completed its acquisition of a controlling interest
in Expedia, Inc. ("Expedia") through a merger of one of its subsidiaries with
and into Expedia. Immediately following the merger, USA owned all of the
outstanding shares of Expedia Class B common stock, representing approximately
64.2% of Expedia's then outstanding shares, and 94.9% of the voting interest in
Expedia. On February 20, 2002, USA acquired 936,815 shares of Expedia Class A
common stock, increasing USA's ownership to approximately 64.6% of Expedia's
then outstanding shares, with USA's voting percentage remaining at 94.9%. In the
merger, USA issued to former holders of Expedia common stock who elected to
receive USA securities an aggregate of 20.6 million shares of USA common stock,
13.1 million shares of $50 face value 1.99% cumulative convertible preferred
stock of USA and warrants to acquire 14.6 million shares of USA common stock at
an exercise price of $35.10 per share. Expedia continues to be traded on Nasdaq
under the symbol "EXPE," the USA cumulative preferred stock trades over the
counter under the symbol "USAIP" and the USA warrants trade on Nasdaq under the
symbol "USAIW."
Pursuant to the terms of the USA/Expedia transaction documents, Microsoft
Corporation elected to exchange all of its Expedia common stock (representing
approximately 63% of Expedia's common stock) for USA securities in the merger.
Expedia shareholders who did not receive USA securities in the transaction
retained their Expedia shares and received for each Expedia share held 0.1920 of
a new Expedia warrant.
HOTEL RESERVATIONS NETWORK TRANSACTION
On May 10, 1999, the Company completed the acquisition of substantially all
of the assets and the assumption of substantially all of the liabilities of two
entities which operate Hotel Reservations
5
Network, a leading consolidator of hotel rooms and other lodging accommodations
for resale in the consumer market. On March 1, 2000, Hotel Reservations Network
completed an initial public offering. As of December 31, 2001, USA beneficially
owned approximately 68.3% of the outstanding Hotel Reservations Network common
stock, representing 97.0% of the total voting power of Hotel Reservations
Network's outstanding common stock. Hotel Reservations Network's Class A common
stock is quoted on the Nasdaq Stock Market under the symbol "ROOM."
With the recent closing of USA's acquisition of a controlling interest in
Expedia, HRN and Expedia are now under the common control of USA.
PRECISION RESPONSE CORPORATION TRANSACTION
On April 5, 2000, USA completed its acquisition of Precision Response
Corporation ("PRC"), a leading provider of third-party consumer care services,
in a tax-free merger transaction. In accordance with the terms of the merger
agreement, USA issued 24.3 million shares of USA common stock in exchange for
all outstanding equity of PRC.
STYLECLICK TRANSACTION
On July 27, 2000, USA and Styleclick.com Inc., an enabler of e-commerce for
manufacturers and retailers, completed the combination of USA's Internet
Shopping Network ("ISN") and Styleclick.com Inc. The new company, which is named
Styleclick, Inc. ("Styleclick"), owns and operates the combined properties of
Styleclick.com Inc. and ISN. As of December 31, 2001, USA beneficially owned
100% of the outstanding Styleclick Class B common stock, representing 72% of the
total common stock of Styleclick and 96% of the total voting power of Styleclick
outstanding common stock. On January 25, 2002, Styleclick was delisted from
NASDAQ and currently trades over the counter. It continues to incur significant
losses that raise substantial doubts about its ability to continue as a going
concern.
UNIVISION TRANSACTION
On December 7, 2000, USA and Univision Communications Inc. ("Univision")
announced that Univision would acquire, for $1.1 billion in cash, all of the
capital stock of certain USA Broadcasting subsidiaries that own thirteen
full-power television stations and minority interests in four additional
full-power stations. The acquisition closed in August 2001. $510.4 million of
the proceeds were collected in fiscal year 2001 and $589.6 million in
January 2002. Most of these stations aired HSN; as of January 2002, HSN has
cable carriage in these markets, including the carriage of two of the minority
interest stations through the must-carry rules of the Federal Communications
Commission.
CERTAIN ENTERTAINMENT GROUP TRANSACTIONS
UNIVERSAL TRANSACTION
On February 12, 1998, USA completed the Universal transaction, in which USA
acquired USA Networks, a New York partnership (which consisted of USA Network
and Sci Fi Channel cable television networks), and the domestic television
production and distribution business ("Studios USA") of Universal from
Universal. USA paid Universal approximately $1.6 billion in cash ($300 million
of which was deferred with interest) and an effective 45.8% interest in USA
through shares of USA common stock, USA Class B common stock and shares of USANi
LLC, a Delaware limited liability company. The USANi LLC shares, exchangeable
for shares of USA's common stock and Class B common stock on a one-for-one
basis, are among the shares being cancelled in connection with the Vivendi
Transaction described below. Universal is controlled by Vivendi as a result of
the combination of Vivendi S.A., The Seagram Company Ltd. ("Seagram") and Canal
Plus completed in December 2000. As part of the Universal transaction, USA
changed its name to USA Networks, Inc.
6
OCTOBER FILMS/PFE TRANSACTION
On May 28, 1999, the Company acquired October Films, Inc., which was 50%
owned by Universal, and the domestic film distribution and development business
previously operated by Polygram Filmed Entertainment, Inc. ("PFE") and PFE's
domestic video and specialty video businesses from Universal.
VIVENDI TRANSACTION
On December 17, 2001, USA announced the Vivendi Transaction, pursuant to
which USA would contribute USA's Entertainment Group to VUE, a joint venture
with Vivendi, which joint venture would also hold the film, television and theme
park businesses of Universal, a subsidiary of Vivendi. Upon consummation of the
Vivendi Transaction, the joint venture will be controlled by Vivendi and its
subsidiaries, with the common interests owned 93.06% by Vivendi and its
subsidiaries, 5.44% by USA and its subsidiaries and 1.5% by Mr. Diller.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by the joint venture, subject to
tax-deferred treatment for a 15-year period; (ii) a $750 million face value
Class A preferred interest in the joint venture, with a 5% annual paid-in-kind
dividend and a 20-year term, to be settled in cash at its then face value at
maturity; (iii) a $1.75 billion face value Class B preferred interest in the
joint venture, with a 1.4% annual paid-in-kind dividend, a 3.6% annual cash
dividend, callable and puttable after 20 years, to be settled by Vivendi at its
then face value with a maximum of approximately 43.2 million shares of USA
common stock and 13.4 million shares of USA Class B common stock (for a total of
56.6 million USA common shares), provided that Vivendi may substitute cash in
lieu of shares of USA common stock (but not USA Class B common stock), at its
election (as described above under "Corporate Structure, Equity Ownership and
Voting Control--Equity Ownership"); (iv) a 5.44% common interest in VUE,
generally callable by Universal after five years and puttable by USA after eight
years, which may be settled in either Vivendi stock or cash, at Universal's
election; and (v) cancellation of all of Vivendi's USANi LLC interests currently
exchangeable into USA common shares, including USANi LLC interests obtained from
Liberty in a related transaction (see immediately below).
In the aforementioned related transaction, Liberty will exchange 7,079,726
shares of USANi LLC for shares of USA common stock, and subsequently transfer to
Universal 25,000,000 shares of USA common stock, entities holding its remaining
38,694,982 shares of USANi LLC, as well as the assets and liabilities of Liberty
Programming France (which consist primarily of 4,921,250 shares of
multiThematiques S.A., a French entity), in exchange for 37,386,436 Vivendi
ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share. Barry Diller, USA's chairman and chief executive officer, will receive a
common interest in VUE with a 1.5% profit sharing percentage in return for his
agreeing to specified non-competition provisions and agreeing to serve as
chairman and chief executive officer of the joint venture. USA and Mr. Diller
have agreed that they will not compete with Vivendi's television and filmed
entertainment businesses (including the joint venture) for a minimum of
18 months. In February 2002, Mr. Diller assigned to three executive officers of
USA the right to receive ecomonic interests in a portion of the common interests
in VUE that Mr. Diller will receive upon closing of the Vivendi Transaction.
7
FORWARD LOOKING STATEMENTS
THIS REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
SECURITIES LAWS. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, BASED ON THE INFORMATION
CURRENTLY AVAILABLE TO US. SUCH FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY
CONTAINED IN THE SECTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." THE FORWARD-LOOKING
STATEMENTS INCLUDE, AMONG OTHER THINGS, STATEMENTS RELATING TO OUR ANTICIPATED
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW DEVELOPMENTS, NEW MERCHANDISING
STRATEGIES AND SIMILAR MATTERS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND
ASSUMPTIONS, THAT MAY AFFECT THE OPERATIONS, PERFORMANCE, DEVELOPMENT AND
RESULTS OF OUR BUSINESS AND INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
- MATERIAL ADVERSE CHANGES IN ECONOMIC CONDITIONS GENERALLY OR IN OUR
MARKETS;
- FUTURE REGULATORY AND LEGISLATIVE ACTIONS AND CONDITIONS IN OUR OPERATING
AREAS;
- COMPETITION FROM OTHERS;
- SUCCESSFUL INTEGRATION OF OUR 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;
- THE ABILITY TO EXPAND INTO AND SUCCESSFULLY OPERATE IN FOREIGN MARKETS;
- OBTAINING AND RETAINING KEY EXECUTIVES AND EMPLOYEES; AND
- OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN OUR
PUBLIC
ANNOUNCEMENTS AND FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR ANY OTHER
REASON. IN LIGHT OF THESE RISKS, UNCERTAINTIES AND ASSUMPTIONS, THE
FORWARD-LOOKING EVENTS DISCUSSED IN THIS REPORT MAY NOT OCCUR.
DESCRIPTION OF BUSINESSES
USA INTERACTIVE GROUP
HOME SHOPPING NETWORK
Home Shopping Network sells a variety of consumer goods and services by
means of live, customer-interactive electronic retail sales programs that are
transmitted via satellite to cable television systems, affiliated broadcast
television stations and satellite dish receivers. Home Shopping Network operates
three retail sales programs in the United States, each 24 hours a day, seven
days a week: HSN and America's Store, in English; and HSE (Home Shopping en
Espanol), in Spanish.
Home Shopping Network's retail sales and programming are intended to promote
sales and customer loyalty through a combination of product quality, price and
value, coupled with product information and entertainment. HSN and America's
Store programs are carried primarily by cable television systems and also by
broadcast television stations throughout the country. HSE is carried primarily
in markets with significant Spanish speaking populations. All three programs are
divided into segments that are televised with a host who presents the
merchandise, sometimes with the assistance of a guest representing the product
vendor, and conveys information relating to the product. Viewers purchase
products by calling a toll-free telephone number. According to Nielsen Media
Research, as of December 31, 2001, HSN was available in approximately
82.7 million unduplicated households, including approximately 73.1 million cable
households. These numbers were reduced, as shown in the
8
table below, as of January 14, 2002, as a result of the last of the USA stations
sold to Univision converting from HSN programming to Univision programming. See
"Broadcast Television Distribution" below.
The following table highlights the changes in the estimated unduplicated
television household reach of HSN, by category of access for the year ended
December 31, 2001 and through January 14, 2002:
CABLE(1)(2) BROADCAST(1)(3) OTHER TOTAL
----------- --------------- -------- --------
(IN THOUSANDS OF HOUSEHOLDS)
Households--December 31, 2000............................... 65,580 9,860 1,296 76,736
Net additions/(deletions)................................... 7,554 (1,208) (425) 5,921
------ ------ ----- ------
Households--December 31, 2001............................... 73,134 8,652 871 82,657
(Deletions) after year end due to Disengagement(4).......... (1,880) (7,253) 0 (9,133)
------ ------ ----- ------
Households January 14, 2002................................. 71,254 1,399 871 73,524
====== ====== ===== ======
- --------------------------
(1) Households capable of receiving both broadcast and cable transmissions are
included under cable and therefore are excluded from broadcast to present
unduplicated household reach.
(2) Cable households included 14.7 million and 11.6 million direct broadcast
satellite households at December 31, 2001 and 2000, respectively, and
therefore are excluded from other.
(3) See "Broadcast Television Distribution" below for a discussion of the
disaffiliation of certain stations from HSN in 2001 and 2002.
(4) Households lost as a result of the conversion of the majority owned stations
sold to Univision by USA, from HSN programming to Univision programming. HSN
believes that the majority of the lost cable households will be recaptured
over the next 12 to 18 months. See "Broadcast Television Distribution"
below.
According to industry sources, as of December 31, 2001, there were
105.4 million homes in the United States with a television set, 73.2 million
basic cable television subscribers and 871,000 homes with satellite dish
receivers, excluding direct broadcast satellite.
As of December 31, 2001, America's Store reached approximately 8.5 million
cable television households, of which 1.2 million were on a part time basis. Of
the total cable television households receiving America's Store, 8.2 million
also receive HSN.
As of December 31, 2001, HSE reached approximately 5.8 million Hispanic
broadcast television households. This total includes 2.9 million Hispanic
households that receive HSE pursuant to an agreement with Mun2 (a national
network) that became effective April 1, 2001. For more information, see
"-International Home Shopping Network Ventures-SPANISH LANGUAGE NETWORKS."
CUSTOMER SERVICE AND RETURN POLICY
Home Shopping Network believes that satisfied customers will be loyal and
will purchase merchandise on a regular basis. Accordingly, Home Shopping Network
has customer service personnel and/or computerized voice response units
available to handle calls relating to customer inquiries 24 hours a day, seven
days a week. Generally, any item purchased from Home Shopping Network may be
returned within 30 days for a full refund of the purchase price, including the
original shipping and handling charges.
DISTRIBUTION, DATA PROCESSING AND TELECOMMUNICATIONS
Home Shopping Network's fulfillment subsidiaries store, service and ship
merchandise from warehouses located in Salem, Virginia, Waterloo, Iowa and in a
fulfillment facility in Fontana, California that was opened in 2001.
Home Shopping Network currently operates multiple main frame and distributed
computing platforms and has extensive computer systems which track purchase
orders, inventory, sales, payments, credit authorization, and delivery of
merchandise to customers. During 2001, Home Shopping Network
9
continued to make significant progress upgrading many of its computer systems.
These upgrades will continue in 2002 through enhancements to existing systems
and roll out of additional key operational systems.
Home Shopping Network has digital telephone and switching systems and
utilizes voice response units, which allow callers to place their orders by
means of touch-tone input or to be transferred to an operator.
PRODUCT PURCHASING AND LIQUIDATION
Home Shopping Network purchases merchandise made to its specifications,
merchandise from manufacturers' lines, merchandise offered under certain
exclusive rights and overstock inventories of wholesalers. The mix of products
and source of such merchandise depends upon a variety of factors including price
and availability. Home Shopping Network generally does not have long-term
commitments with its vendors, and there are various sources of supply available
for each category of merchandise sold.
Home Shopping Network's product offerings include: homegoods, which include
consumer electronics, collectibles, housewares, consumables, entertainment,
sports and fitness; jewelry; apparel, which includes fashion and accessories;
and cosmetics, which consists primarily of cosmetics, skin care and nutritional
supplements. For 2001, homegoods, jewelry, apparel and cosmetics accounted for
approximately 51%, 25%, 13% and 11%, respectively, of Home Shopping Network's
net sales.
Home Shopping Network liquidates excess inventory through its four outlet
stores located in the Tampa Bay and Orlando areas. Damaged merchandise is
liquidated by Home Shopping Network through traditional channels.
TRANSMISSION AND PROGRAMMING
Home Shopping Network produces its programming in its studios located in St.
Petersburg, Florida. HSN, America's Store and HSE programs are distributed to
cable television systems, broadcast television stations, direct broadcast
satellite, and/or satellite antenna owners by means of Home Shopping Network's
satellite uplink facilities to satellite transponders leased by Home Shopping
Network. Any cable television system, broadcast television station or individual
satellite dish owner in the United States and the Caribbean Islands equipped
with standard satellite receiving facilities and the appropriate equipment is
capable of receiving HSN, America's Store and HSE.
Home Shopping Network has lease agreements securing full-time use of two
transponders on two domestic communications satellites. Each of the transponder
lease agreements grants Home Shopping Network "protected" rights. When the
carrier provides services to a customer on a "protected" basis, replacement
transponders (I.E., spare or unassigned transponders) on the satellite may be
used in the event the "protected" transponder fails. Should there be no
replacement transponders available, the "protected" customer will displace a
"preemptible" transponder customer on the same satellite. The carrier also
maintains a protection satellite and should a satellite fail completely, all
"protected" transponders would be moved to the protection satellite that is
available on a "first fail, first served" basis.
A transponder failure that would necessitate a move to another transponder
on the same satellite would not result in any significant interruption of
service to the cable systems and/or television stations which receive HSN,
America's Store or HSE. However, a failure that would necessitate a move to
another satellite may temporarily affect the number of cable systems and/or
television stations that receive HSN, America's Store or HSE, as well as all
other programming carried on the failed satellite, because of the need to
install equipment or to reorient earth stations.
The terms of two of the satellite transponder leases utilized by Home
Shopping Network are for the life of the satellites, which are projected through
November of 2004 for the satellite presently carrying HSN and through May of
2005 for the satellite carrying America's Store and HSE.
10
Home Shopping Network's access to two transponders pursuant to long-term
agreements would enable it to continue transmission of Home Shopping Network
programming should either one of the satellites fail. Although Home Shopping
Network believes it is taking every reasonable measure to ensure its continued
satellite transmission capability, there can be no assurance that termination or
interruption of satellite transmissions will not occur. Such a termination or
interruption of service by one or both of these satellites could have a material
adverse effect on the operations and financial condition of USA.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which Home Shopping
Network has no control, including competition among prospective users for
available transponders and the availability of satellite launching facilities
for replacement satellites.
The FCC grants licenses to construct and operate satellite uplink facilities
that transmit signals to satellites. These licenses are generally issued without
a hearing if suitable frequencies are available. Home Shopping Network has been
granted one license for operation of C-band satellite transmission facilities
and one license for operation of KU-band satellite transmission facilities on a
permanent basis in Clearwater and St. Petersburg, Florida.
CABLE TELEVISION DISTRIBUTION
Home Shopping Network has entered into affiliation agreements with cable
system operators to carry HSN, America's Store, HSE, and/or a combination of the
services. These agreements are multi-year arrangements, and obligate the cable
operator to assist with the promotional efforts of Home Shopping Network by
carrying commercials promoting HSN, America's Store and HSE and by distributing
Home Shopping Network's marketing materials to the cable operator's subscribers.
All cable operators receive significant compensation for carriage, including a
commission based on a percentage of the net merchandise sales within the cable
operator's franchise area and, generally, additional compensation consisting of
the purchase of advertising availabilities from cable operators on other
programming networks, commission guarantees for the operator, or upfront
payments to the operator in return for commitments to deliver a minimum number
of Home Shopping Network subscribers for a certain number of years. From time to
time, a cable network operated by HSN will be distributed on one or more cable
systems without a distribution agreement in effect while the parties negotiate a
new agreement, a process that may be protracted. While the cessation of carriage
by a major cable operator would have a negative impact on the financial results
of HSN, the Company has successfully managed the distribution agreement process
in the past, and believes it will continue to do so.
BROADCAST TELEVISION DISTRIBUTION
Home Shopping Network has entered into affiliation agreements with
television stations to carry HSN, America's Store or HSE programs. As of
December 31, 2001, Home Shopping Network had affiliation agreements with 7
full-time, full-power television stations, 33 part-time, full-power television
stations and 95 low-power television stations for the carriage of HSN, America's
Store or HSE programs. The affiliation agreements have terms ranging from
several weeks to several years. All television station affiliates receive an
hourly or monthly fixed rate for airing HSN, America's Store or HSE programs. A
full-power television station is generally carried by cable operators within the
station's coverage area. For more information, see "Regulation--Communications
Industry--Must-Carry/Retransmission Consent." Low-power stations are rarely
carried by cable systems and may be displaced by broadcast digital television
transmissions.
11
In addition to these affiliation agreements with independently owned
television stations, USA formerly carried HSN on a full-time basis on 10 of its
13 owned and operated full-power television stations (three of the 10 stations
did not carry HSN during all of 2001) and 27 low-power television stations. On
December 7, 2000, USA entered into an agreement to transfer its 13 full-power
television stations and its minority interest in 4 other full-power television
stations (three of which carried HSN) to Univision in a series of closings in
2001, with the final payment made in January 2002 and on January 14, 2002, the
last of the USA stations converted to Univision programming. Two of the
full-power television stations in which USA had a minority interest continue to
carry HSN pursuant to affiliation agreements with Home Shopping Network. USA
also sold the 27 low-power television stations to Ventana Television, Inc.,
subject to long-term affiliation agreements with Home Shopping Network, with USA
retaining a 25% interest in the low-power television stations.
As noted in the Company's previous filings, the majority of the USA stations
sold to Univision are located in the largest markets in the country and aired
HSN on a 24-hour basis. Home Shopping Network entered into agreements with major
cable operators in the aforementioned markets under which those cable operators
will transition HSN from broadcast to satellite feed upon disaffiliation. Home
Shopping Network expects that it will successfully manage the process of
disaffiliation. A majority of HSN customers in these markets who receive HSN
only through over-the-air broadcast television will not be able to receive HSN
unless they subscribe to a cable or satellite service that offers HSN. As a
result of switching these markets directly to cable carriage, HSN lost
approximately 12 million homes and accordingly, HSN's operating results have
been and will be affected. Fortunately, sales from broadcast only homes are much
lower than sales from cable homes. As a result, HSN's losses attributable to
disengagement are expected to be limited. HSN anticipates losing sales, which
translates on a pro forma basis for 2001, of $108 million and Adjusted EBITDA
(as defined below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and which USA previously referred to as
"EBITDA") of $15 million. These anticipated losses are consistent with previous
disclosures, in which it was stated that disengagement losses would equal
approximately 6% of HSN's sales and Adjusted EBITDA. In addition, in order to
effectively transfer HSN's distribution to cable (which has been accomplished),
USA will incur charges of approximately $100 million in the form of payments to
cable operators and related marketing expenses. In effect, this approximately
$100 million payment will reduce USA's pre-tax proceeds from the Univision
transaction from $1.1 billion to approximately $1 billion. These disengagement
costs are excluded from Adjusted EBITDA. Approximately $4.1 million of these
costs were incurred in 2001 and $35.9 million are expected to be incurred in
2002. USA believes that its disengagement costs increased to the higher end of
USA's anticipated range of costs, since USA was required to achieve a certain
portion of disengagement after the Univision announcement and with specified
end-dates for continuing broadcast distribution.
DIRECT BROADCAST SATELLITE DISTRIBUTION
Home Shopping Network has entered into affiliation agreements with the two
largest direct broadcast satellite operators to carry HSN. The agreements are
multi-year arrangements, and obligate the direct broadcast satellite operator to
deliver a minimum number of HSN subscribers throughout the term in consideration
for a distribution payment and a commission based on net merchandise sales to
such subscribers. The direct broadcast satellite operators are also obligated to
assist with the promotional efforts of Home Shopping Network by carrying
commercials promoting HSN and by distributing Home Shopping Network's marketing
materials to its subscribers.
INTERNATIONAL HOME SHOPPING NETWORK VENTURES
GERMANY. Home Shopping Network owns 41.9% of H. O. T. Home Order Television
AG ("HOT Germany"), a joint venture that operates a German language shopping
business that is broadcast 24 hours a day. HOT Germany has now been re-branded
as Home Shopping Europe--Germany. Home
12
Shopping Network has entered into a shareholders agreement with another
shareholder of HOT Germany, Georg Kofler, which, among other things, provides
that Mr. Kofler will vote his shares in HOT Germany, representing approximately
15% of HOT Germany, as directed by Home Shopping Network on certain matters
including the election of a majority of the members of the Supervisory Board of
HOT Germany. Mr. Kofler may not sell his shares of HOT Germany until
December 2003, after which time Home Shopping Network has a right of first
refusal with respect to such shares. The other shareholders in HOT Germany are
Thomas Kirch, owning approximately 33%, and Quelle AG, owning approximately
10.1%. Home Shopping Network, Georg Kofler and the other shareholders of HOT
Germany are currently discussing alternative arrangements with respect to their
relationship. Home Shopping Network has guaranteed certain bank loans to
Mr. Kofler by agreeing to purchase, at a price not to exceed $50 million,
Mr. Kofler's shares in HOT Germany that have been pledged to the banks providing
the loans in the event of a default by Mr. Kofler.
EUROPE. On December 17, 1999, USA entered into an agreement with Thomas and
Leo Kirch and Georg Kofler pursuant to which each agreed to cooperate with each
other to pursue live televised shopping and related e-commerce opportunities in
Europe. Pursuant to this agreement, the parties formed HOT Networks AG, a German
stock corporation owned 46.67% by Home Shopping Network ("HOT Networks"), which,
through its subsidiaries, operates (as described below) shopping and related
businesses in Italy, the UK, Belgium and France and has an interest in a German
broadcast station featuring transactional travel and gaming programming. There
is currently no voting arrangement in place between Home Shopping Network and
Georg Kofler with respect to HOT Networks as there is with respect to HOT
Germany, or with any other shareholder of HOT Networks, and, therefore, Home
Shopping Network does not control HOT Networks. HOT Networks has incurred net
losses in each of its past two fiscal years and will require additional funding
for its operations. In addition, HOT Networks has funding obligations with
respect to its investment in Euvia, which entity is described below. Each of the
international operations is at an early stage of development and the Company can
provide no assurance that these businesses will continue at their current levels
of operations. Home Shopping Network and the other shareholders of HOT Networks
are currently discussing alternative arrangements with respect to their
relationship.
ITALY. Home Shopping Europe S.p.A ("Home Shopping Europe--Italy")
broadcasts Italian-language televised shopping programming via an Italian
national broadcast network. H.O.T. Home Order Television Europe GmbH ("HOT
Europe") owns 87.5% and, as of 2001, Convergenza, a Belgian company, owns
12.5% of Home Shopping Europe-Italy. Home Shopping Network has a 37.2%
non-voting equity interest in HOT Europe and HOT Networks, Georg Kofler and
Thomas Kirch are also shareholders in that entity, but all voting rights in
HOT Europe are held, and HOT Europe is controlled, by Messrs. Kofler and
Kirch.
As of December 31, 2001, Home Shopping Europe--Italy owned 100% of the
equity of an entity formerly known as Vallau Italia Promomarket ("VIP") and
now called Home Shopping Europe Broadcasting S.p.A. that operates an Italian
national broadcast network. VIP had applied for a license to operate a
national broadcast network in Italy that was denied by the Italian
authorities in May 2000. However, an appeal has been filed and a stay of the
government's order issued until the decision to deny the license is
reviewed. The stay of the order denying the license allows Home Shopping
Europe Broadcasting S.p.A. to continue broadcasting until the appeal is
heard and a decision rendered or the stay is dismissed or vacated. There can
still be no assurance that Home Shopping Europe Broadcasting S.p.A. will be
granted a license in Italy. As of the end of 2001, Home Shopping
Europe--Italy was broadcasting 24 hours a day, seven days a week with
11 hours of live programming each day. In the event a national broadcast
license or authorization is not granted after the above-mentioned
litigation, Home Shopping Europe--Italy would be required to seek
alternative means of distributing its programming. Currently, there are
limited available means of distributing television programming on a
nationwide basis and there can be no assurance that alternative means of
distribution can be secured.
13
UNITED KINGDOM. In October 2001, HOT Networks started broadcasting
English-language televised shopping business called Home Shopping Europe--UK
in St. Albans outside London and which is broadcast 24 hours a day, seven
days a week in the United Kingdom.
EUVIA. In 2001, HOT Networks purchased 48.6% of Euvia Media AG & Co. KG
("Euvia"), the primary asset of which is a German broadcast station called
Neun Live. Euvia programming includes transactional travel programming under
the name "sonnenklar" and other interactive programming. The other two
shareholders in Euvia are ProSiebenSat.1 Media (a company controlled by
Thomas Kirch) and Christiane zu Salm, CEO of Euvia, with whom HOT Networks
has entered into a voting agreement, giving HOT Networks control of Euvia.
BELGIUM/FRANCE. In 2000, HOT Networks began a French-language televised
shopping business that was formerly called "HOT Le Grand Magasin" (now
called Home Shopping Europe en Francais) from a facility in Brussels,
Belgium and which is broadcast 24 hours a day, seven days a week in Belgium
and France.
BELGIUM/NETHERLANDS. In 2001, HOT Networks also began a Dutch-language
televised shopping business that is called Home Shopping Europe en het
Nederlands that is produced and broadcast from the same facilities in
Brussels, Belgium as Home Shopping Europe en Francais.
CHINA. In June 2000, Home Shopping Network purchased a 21% take in TVSN
(China) Holdings Ltd. and will also have the ability to purchase a larger stake
in that company over the next several years. TVSN, through its Chinese partners,
broadcasts a televised shopping business 18 hours a day in Mandarin Chinese from
facilities in Shanghai, People's Republic of China. TVSN currently reaches over
16 million full-time equivalents households in China.
JAPAN. In 1997, Home Shopping Network acquired a 30% interest in Jupiter
Shop Channel Co. Ltd., a venture based in Tokyo. Jupiter Shop Channel broadcasts
televised shopping 24 hours a day, of which 60 hours per week are devoted to
live shopping. Jupiter Shop Channel has reached agreements to be available in
approximately 3.37 million full-time equivalent households as of December 31,
1999. Liberty Media International, Inc., a subsidiary of Liberty, owns a 50%
interest in Jupiter Programming Co. Ltd. that is the 70% shareholder in the
venture.
SPANISH LANGUAGE NETWORKS. During 2001, Home Shopping Network continued to
operate Home Shopping en Espanol (also known as Home Shopping Espanol). At the
end of 2001, Home Shopping Espanol was producing nine hours of live programming
a day that was aired 24 hours a day, seven days a week in the United States.
Puerto Rico: The Company entered an agreement in December 2000 to purchase three
television stations in Puerto Rico: WAVB-TV, San Juan, Puerto Rico; WVEO-TV,
Aguadilla, Puerto Rico; and WVOZ-TV, Ponce, Puerto Rico. Pursuant to a separate
affiliation agreement, the owner of these stations broadcast Home Shopping
Espanol's programming from February 1, 2001 through January 7, 2002. On
December 14, 2001, prior to closing, the Company terminated the purchase
agreement by and in accordance with its terms. The Company has now sued the
owner of the stations for the return of the Company's $1.8 million deposit
currently held in escrow. The owner of the stations has filed an answer and
counterclaim, opposing the Company's right to the return of its deposit and
claiming that the Company improperly terminated the purchase agreement. Home
Shopping Espanol programming is no longer broadcast on those three stations in
Puerto Rico, but is still distributed in approximately 37,000 cable households
on the island. Mexico: Home Shopping Espanol began distribution of its
programming in Mexico as of the end of May 2001 24 hours a day, seven days a
week. Three hours are broadcast live each day from Home Shopping Espanol's
studios in St. Petersburg, FL to the Mexican audience. The Company is reviewing
its strategic plans for its Spanish Language Networks.
14
HSN.COM
Home Shopping Network operates HSN.com as a transactional e-commerce site.
HSN.com serves as an alternative store front that allows consumers to shop for
merchandise from Home Shopping Network's inventory, rather than just viewing the
current product offering on Home Shopping Network's television programming.
HSN.com offers specialized product shopping areas based on product
categories, key brands, guest personalities and other areas of interest. HSN.com
also offers editorial and informational content, such as photographs and
information about Home Shopping Network show hosts and guest personalities, tips
for consumers on improving their lives, customer service and television
programming information. HSN.com also offers special features such as streaming
video of Home Shopping Network's television programming, and live chats with
celebrity guests.
HSN.com provides Home Shopping Network with a means of reaching additional
consumers who may not watch or purchase from its television shopping
programming, and to increase total purchases by its existing customers.
HSN.com was profitable on an operating basis within three months of its
launch in 1999, and has grown to become an important selling platform for Home
Shopping Network, generating approximately 10% of U.S. sales by the end of 2001,
and greater revenue in the final quarter of 2001 than in all of 2000.
TICKETING
Ticketmaster(1) is a leading provider of automated ticketing services with
over 7,000 domestic and foreign clients, including many of the foremost
entertainment facilities, promoters and professional sports franchises.
Ticketmaster is also a leading local portal and electronic commerce company that
provides in-depth local content and services to help people get things done
online. Ticketmaster's principal online businesses are ticketing, personals,
city guide and camping reservations. Ticketmaster's family of websites includes
ticketmaster.com, Match.com, citysearch.com, reserveamerica.com, museumtix.com,
ticketweb.com, evite.com and livedaily.com, among others. Ticketmaster's
businesses are operated in three segments: (1) ticketing, (2) personals and
(3) city guide. Ticketing includes both online and offline ticketing and camping
reservations operations, Match.com includes online personals, and Citysearch and
Related includes city guides and Ticketmaster's other online properties. The
ticketing operations are discussed is this section. Ticketmaster's personals,
city guides and other businesses are discussed below under "Match.com" and
"Citysearch and Related", respectively.
Ticketmaster provides its clients with comprehensive ticket inventory
control and management, a broad distribution network and dedicated marketing and
support services. Ticket orders are received and fulfilled through
operator-staffed call centers, independent sales outlets remote to the facility
box office and through the ticketmaster.com website. Ticketing revenue is
generated principally from service charges and order processing fees received by
Ticketmaster for tickets sold on its clients' behalf. Ticketmaster generally
serves as an exclusive agent for its clients and typically has no financial risk
for unsold tickets.
Ticketmaster sold 86.7 million tickets in fiscal 2001, generating revenues
of $579.7 million. Gross transaction value for fiscal 2001 was $3.6 billion.
- ------------------------
(1) Unless the context otherwise requires, references to "Ticketmaster"
include Ticketmaster (the company formerly known as Ticketmaster
Online-Citysearch, Inc.) and Ticketmaster Group, Inc. and their
predecessors, wholly owned subsidiaries, majority-owned or controlled
subsidiaries and ventures and their licensees. These companies were combined
in January 2001 and the name of the combined company was changed to
"Ticketmaster." See "Corporate History--CERTAIN INTERACTIVE GROUP
TRANSACTIONS--TICKETMASTER TRANSACTIONS."
15
Ticketmaster has continued to expand its ticketing operations into
territories outside of the U.S., and has experienced growth in these markets as
the number of tickets sold has increased from 14.2 million to 17.8 million from
fiscal 2000 to fiscal 2001, resulting in increased revenues from international
ticket sales.
Ticketmaster also has expanded its ticket distribution capabilities through
the continued development of the ticketmaster.com website and related
international websites, which are designed to promote ticket sales for live
events and disseminate event information. Ticketmaster has experienced
significant growth in ticket sales through its websites in recent years and this
trend is expected to continue during the next several fiscal years. For the year
ended December 31, 2001, online ticket sales through ticketmaster.com and
related websites accounted for approximately 32.1% of Ticketmaster's ticketing
business, with ticket sales of approximately 27.8 million tickets having a gross
dollar value of over $1.3 billion.
Ticketmaster believes that its proprietary operating system and software,
which is referred to as the Ticketmaster System, and its extensive distribution
capabilities provide it with benefits that enhance Ticketmaster's ability to
attract new clients and maintain its existing client base. The Ticketmaster
System, which includes both hardware and software, is typically located in a
data center that is managed by Ticketmaster staff. The Ticketmaster System
provides a single, centralized inventory control and management system capable
of tracking total ticket inventory for all events, whether sales are made on a
season, subscription, group or individual ticket basis. All necessary hardware
and software required for the use of the Ticketmaster System is installed in a
client's facility box office, call centers or remote sales outlets. The
Ticketmaster System is capable of processing over 100,000 tickets per hour, and
each of its 26 regional computer systems can support 32,000 users, of which as
many as 5,000 can theoretically be actively using the system at any one time.
Ticketmaster has a comprehensive ticket distribution system that includes
approximately 3,300 retail Ticket Center outlets and 16 worldwide call centers
with approximately 1,750 operator and customer service positions. Ticketmaster
provides the public with convenient access to tickets and information regarding
live entertainment events. Ticket purchasers are assessed a convenience charge
for each ticket sold outside of the venue box office by Ticketmaster on behalf
of its clients. These charges are negotiated and included in Ticketmaster's
contracts with its clients. The versatility of the Ticketmaster System allows it
to be customized to satisfy a full range of client requirements.
Ticketmaster generally enters into written agreements with its clients
pursuant to which it agrees to provide the Ticketmaster System and related
systems purchased by the client, and to serve as the client's exclusive ticket
sales agent for all sales of individual tickets sold to the general public
outside of the facility's box office, including any tickets sold at remote sales
outlets, over the phone or via the Internet, for a specified period, typically
three to five years. Pursuant to an agreement with a facility, Ticketmaster
generally is granted the right to sell tickets for all events presented at that
facility, and as part of such arrangement Ticketmaster installs the necessary
ticketing equipment in the facility's box office. An agreement with a promoter
generally grants Ticketmaster the right to sell tickets for all events presented
by that promoter at any facility, unless the facility is covered by an exclusive
agreement with Ticketmaster or another automated ticketing service company.
Ticketmaster generally does not buy tickets from its clients for resale to
the public and typically has no financial risk for unsold tickets. All ticket
prices are determined by Ticketmaster's clients. Ticketmaster's clients also
generally determine the scheduling of when tickets go on sale to the public and
what tickets will be available for sale through Ticketmaster. Facilities and
promoters, for example, often handle group sales and season tickets in-house.
Ticketmaster only sells a portion of its clients' tickets, the amount of which
varies from client to client and varies as to any single client from year to
year.
Ticketmaster believes that the Ticketmaster System provides its clients with
numerous benefits, including (1) broader and expedited distribution of tickets,
(2) centralized control of total ticket
16
inventory as well as accounting information and market research data,
(3) centralized accountability for ticket proceeds, (4) manageable and
predictable transaction costs, (5) wide dissemination of information about
upcoming events through Ticketmaster's call centers, ticketmaster.com and other
media platforms, (6) the ability quickly and easily to add additional
performances if warranted by demand and (7) marketing and promotional support.
Pursuant to its contracts with clients, Ticketmaster is granted the right to
collect from ticket purchasers a per ticket convenience charge on all tickets
sold at remote sales outlets, by telephone, through ticketmaster.com and other
media. There is an additional per order "order processing" fee on all tickets
sold by Ticketmaster at other than remote sales outlets. Generally, the amount
of the convenience charge is determined during the contract negotiation process,
and typically varies based upon numerous factors, including the services to be
rendered to the client, the amount and cost of equipment to be installed at the
client's box office and the amount of advertising and/or promotional allowances
to be provided, as well as the type of event and whether the ticket is purchased
at a remote sales outlet, by telephone, through ticketmaster.com or otherwise.
Any deviations from those amounts for any event are negotiated and agreed upon
by Ticketmaster and its client prior to the commencement of ticket sales. During
fiscal 2001, the convenience charges generally ranged from $1.50 to $8.25 per
ticket. Average revenue per ticket (which includes convenience charges and order
processing fees and other revenue sources directly related to the sale of
tickets) was $6.11 in fiscal 2001. Generally, the agreement between Ticketmaster
and a client will also establish the amounts and frequency of any increases in
the convenience charge and order processing fees during the term of the
agreement.
The agreements with certain of Ticketmaster's clients may also provide for a
client to participate in the convenience charges and/or order processing fees
paid by ticket purchasers for tickets bought through Ticketmaster for that
client's events. The amount of such participation, if any, is determined by
negotiation between Ticketmaster and the client. Some agreements also may
provide for Ticketmaster to make participation advances to the client, generally
recoupable by Ticketmaster out of the client's future right to participations.
In isolated instances, the client may negotiate the right to receive an upfront,
non-recoupable payment from Ticketmaster as an incentive to enter into the
ticketing service agreement.
Ticketmaster.com, Ticketmaster's primary online ticketing website, is a
leading online ticketing service. The service enables consumers to purchase
tickets for live music, sports, arts and family entertainment events presented
by Ticketmaster's clients and related merchandise over the Web. Consumers can
access the ticketmaster.com service at www.ticketmaster.com, from Ticketmaster's
other owned and operated websites, including citysearch.com, and through
numerous direct links from banners and event profiles hosted by third party
websites. In addition to these services, the ticketmaster.com website and
related international websites provide local information and original content
regarding live events for Ticketmaster clients throughout the United States,
Canada, Norway, Ireland and the United Kingdom.
Since the commencement of online ticket sales in November 1996,
ticketmaster.com has experienced significant growth in the volume of tickets
sold through its website. Gross transaction dollars for ticket sales through its
website increased from approximately $223,000 in November 1996 to
$115.1 million in December 2001. Similarly, tickets sold on the ticketmaster.com
website in November 1996 represented less than 1% of total tickets sold by
Ticketmaster, while tickets sold online in the quarter ended December 31, 2001
represented approximately 33.9% of tickets sold.
In addition, Ticketmaster's ticketing segment includes its other ticketing
companies, TM VISTA, Inc. (formerly know as 2b Technology, Inc.) and
TicketWeb Inc., which were acquired by Ticketmaster in June 2000 and May 2000,
respectively.
TM VISTA is a Richmond, Virginia-based visitor management software developer
and offline and online ticketing company. In 2001, TM VISTA changed its name
from 2b Technology to reflect the
17
focus on its core software product, the VISTA ticketing system. TM VISTA targets
venues such as museums, cultural institutions and historic sites through its
websites tmvista.com and museumtix.com. Representative clients include the
Guggenheim Museum and the Los Angeles County Art Museum.
TicketWeb is a leading provider of self-service, Internet-based box-office
ticketing operations. TicketWeb revenue is generated principally from
convenience charges and order processing fees received by TicketWeb for tickets
sold on its clients' behalf. TicketWeb's primary clients are small- to
medium-sized venues and event promoters that generally sell fewer than 5,000
tickets per year. In exchange for a license fee, TicketWeb provides its clients
with password-protected access to TicketWeb's proprietary system, TicketWeb 2.0.
Using a standard Internet web browser, TicketWeb clients can perform a full
range of box-office operations, such as create and edit events, monitor ticket
sales, download will-call lists and take advantage of TicketWeb's sales and
marketing tools.
Also included in the ticketing segment is Ticketmaster's wholly-owned
subsidiary, ReserveAmerica Holdings, Inc., a campground reservation services
company acquired in February 2001. ReserveAmerica is a leading provider of
outdoor recreation reservation services and software to United States federal
and state agencies for camping activities, recreation ticketing and other access
privileges to public land attractions. ReserveAmerica also offers its software
and services to private campgrounds. The ReserveAmerica system permits the
general public to make camping reservations and obtain access to public
recreation attractions over the Internet, by telephone or in person.
ReserveAmerica's Internet sites (www.reserveamerica.com and www.reserveusa.com)
service up to 30,000 visitors daily, and its three telephone call centers are
located in New York, California and Wisconsin. ReserveAmerica also utilizes a
portion of Ticketmaster's call center located in Orlando, Florida.
EXPEDIA
USA acquired a controlling interest in Expedia, Inc. on February 4, 2002.
Expedia is a leading provider of travel planning services for leisure and small
business travelers. Expedia-Registered Trademark- is one of the largest
predominantly online travel agencies in the U.S. and, in 2001, was ranked the
seventh largest travel agency in the U.S by Travel Weekly. Expedia operates
websites offering travel planning services located at Expedia.com,
Expedia.co.uk, Expedia.de, Expedia.ca-TM-, Expedia.nl and Expedia.it. Expedia
also provides travel planning services through Voyages-sncf.com, as part of a
joint venture with SNCF, the state-owned railways group in France. In addition,
Expedia provides travel planning services through its telephone call centers and
on private-label travel websites through its WWTE business. WWTE is a division
of Travelscape, Inc., a wholly owned subsidiary of Expedia, Inc. With its recent
acquisition of Classic Custom Vacations, Expedia also provides premier travel
packages through its network of travel agents and travel agencies.
Expedia has developed a global travel marketplace in which travel suppliers
can reach, in a highly efficiently manner, a large audience of consumers who are
actively planning and purchasing travel. Expedia offers suppliers a broad range
of merchandising strategies designed to increase their revenues. Expedia
currently offers travel services provided by 450 airlines, 43,000 lodging
properties, all major car rental companies, numerous vacation packagers and
cruise lines and many thousand destination service merchants such as
restaurants, attractions and local transportation and tour providers.
Expedia has developed innovative and robust technology to power its
marketplace. In particular, Expedia's Expert Searching and Pricing platform
(ESP) is an industry leading platform that includes two components: a
fare-searching engine that enables broader and deeper airline fare and schedule
searches; and a common database platform that allows Expedia and its customers
to bundle all types of travel services together dynamically, which further
enhances Expedia's ability to cross-sell or package inventory. ESP has helped
Expedia become one of the largest online packagers of travel.
Expedia allows customers to purchase travel services under two different
business models: the agency model and the merchant model. Under the agency
model, Expedia acts as an agent in the transaction, passing a customer's
reservation to the airline, hotel, car rental company or destination
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service provider. Expedia receives a commission from the travel supplier for its
services as an agent. In an agency transaction, the supplier determines the
retail price paid by the customer, and the supplier is the merchant. Under the
merchant model, an Expedia subsidiary purchases inventory from suppliers at
negotiated rates, determines the retail price that the customer pays and
processes the transactions as the merchant in the transaction. Acting as a
merchant enables Expedia to bypass intermediaries and achieve a significantly
higher level of gross profit per transaction than in the agency model.
Integrating the merchant inventory with the ESP technology platform has allowed
Expedia to create product offerings that benefit both customers and suppliers.
Expedia's business relies heavily upon its intellectual property rights. The
software code, informational databases, and other components that make up
Expedia's travel planning service are protected by copyright registrations and
patent applications. Trademarks, service marks and logos associated with the
names "Expedia," the "Airplane Design," "Travelscape," "Las Vegas Reservation
Services," "Rent-a-Holiday" and "WWTE" provide and promote brand recognition for
Expedia's travel planning service. As of March 9, 2002, Expedia also uses
trademarks, service marks and logos associated with the names "Classic," "Bird
of Paradise Design," "Classic Custom Vacations," "Classic Destination
Management," "Classic Package Vacations," "Classic Resorts of America," "Classic
Vacations," "Haddon Holidays" and "The Classic Collection." Consumers have come
to recognize and associate the "Expedia" brand with Expedia's service. Expedia
also relies on trademark and trade secret protection law, copyright law, patent
law and confidentiality and/or license agreements with its employees, customers,
associates and others to protect its proprietary rights. Expedia vigorously
pursues the defense and regulation of its copyrights, patents, trademarks and
service marks in the United States and internationally.
Expedia has several arrangements relating to intellectual property with
Microsoft Corporation, its former parent and a current USA shareholder, many of
which were recently amended and extended. Expedia licenses certain retail
products and other technology from Microsoft. All of the licenses relating to
Expedia specific software content and data are royalty-free, irrevocable and
perpetual. Pursuant to a hosting services agreement, Microsoft provides Expedia
with internet service provider services for its Expedia websites. Pursuant to a
map server agreement, Microsoft licenses to Expedia certain server technology
related to the Expedia Maps service whereby Microsoft will develop, maintain,
host and serve maps to the Expedia websites. Pursuant to a patent assignment
agreement, Microsoft assigned to Expedia all of Microsoft's patents relating to
the operation of Expedia's websites with a limited license of such patents from
Expedia to Microsoft.
HOTEL RESERVATIONS
Hotel Reservations Network is a leading consolidator of hotel and other
lodging accommodations. Hotel Reservations Network contracts with lodging
properties in advance for volume purchases and guaranteed availability of rooms
at wholesale prices and sells these rooms to consumers, often at significant
discounts to published rates. In addition, these supply relationships often
allow Hotel Reservations Network to offer its customers accommodation
alternatives for otherwise unavailable dates. At December 31, 2001, Hotel
Reservations Network had room supply agreements with over 4,500 lodging
properties in 178 major markets in North America, the Caribbean, Western Europe
and Asia.
Following Hotel Reservations Network's acquisition of TravelNow.com Inc. in
February 2001, Hotel Reservations Network began offering its customers the
ability to book hotel rooms at over 40,000 hotels (in addition to the hotels
with which it has wholesale supply agreements) in over 5,000 cities, air travel
on 300 airlines, and car rentals through over 60 car rental companies.
Hotel Reservations Network markets its lodging accommodations primarily over
the Internet through its own websites, www. hotels.com, www.hoteldiscount.com,
www.180096hotel.com, www. condosaver.com and www.travelnow.com, through
third-party websites and through its telephone call centers. Hotel Reservations
Network has negotiated affiliate marketing agreements with many of the
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leading travel-related websites including Travelocity, nwa.com (operated by
Northwest Airlines), Americawest.com (operated by America West Airlines), Cheap
Tickets, Vegas.com, Hotelguide.com, Bestfares.com, Yupi.com, and over 16,000
other affiliate websites. Hotel Reservations Network is also prominently
featured on and directly linked to most of the leading Internet search engines
and online communities, including America Online, Lycos, Yahoo!, Citysearch,
Excite and Infoseek. Through these agreements, its accommodations are
prominently featured on and linked to these affiliated websites on a co-branded
or private label basis.
Hotel Reservations Network has room supply relationships with a wide range
of independent hotel operators and lodging properties, as well as hotels
associated with national chains, including Hilton, Sheraton, Wyndham, Hyatt,
Westin, Radisson, Best Western, Doubletree and Hampton Inn. Hotel Reservations
Network believes that these suppliers view it as an efficient distribution
channel to help maximize their overall revenues and occupancy levels. Although
Hotel Reservations Network contracts in advance for volume room commitments, its
supply contracts often allow it to return unsold rooms without penalty within a
specified period of time. In addition, because Hotel Reservations Network
contracts to purchase rooms in advance, it is able to manage billing procedures
for the rooms it sells and thereby maintain direct relationships with its
customers. Hotel Reservations Network has developed proprietary revenue
management and reservation systems software that is integrated with its websites
and call center operations. These systems and software enable Hotel Reservations
Network to accurately monitor its room inventory and provide prompt, efficient
customer service. Hotel Reservations Network believes that its supply contracts
and revenue management capabilities differentiate it from retail travel agencies
and other commission-based resellers of accommodations.
OTHER TRAVEL INTERESTS
On July 14, 2001, USA entered into an acquisition agreement to acquire 100%
of the equity of National Leisure Group ("NLG"). On October 29, 2001, USA and
NLG agreed to terminate the acquisition agreement and USA agreed to acquire a
$20 million preferred interest in National Leisure Group. In addition, USA and
NLG announced an agreement that names NLG as a preferred provider of cruise and
vacation packages to USA's new travel cable channel.
TELESERVICES
Precision Response Corporation and its subsidiaries ("PRC") is a leading
full-service provider of outsourced Consumer Care services. PRC offers a
fully-integrated mix of traditional call center and e-commerce customer care
solutions, to service and care for the consumers of its clients, which include
both large corporations and internet-focused companies.
PRC offers an integration of teleservices, e-commerce customer care
services, information technology, which includes database marketing and
management, and fulfillment services as part of a one-stop solution, providing a
cost-effective and efficient method for its clients to manage their growing
customer service and marketing needs. PRC has developed proprietary Customer
Relationship Management (CRM) technology specifically for consumer care. This
CRM technology effectively delivers the integration of communications services
and is supported by a robust back-end database. CRM is the practice of
identifying, attracting and retaining the best customers to generate profitable
revenue growth. PRC is typically involved in all stages of formulating,
designing and implementing its clients' customer service and marketing programs.
USA believes that this integrated, solution-oriented approach, combined with the
sophisticated use of advanced technologies, provides a distinct competitive
advantage in attracting and retaining clients seeking cost-effective ways to
contact and service prospective and existing customers.
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In late 2000 and throughout 2001, PRC augmented its existing consumer care
offerings through several acquisitions. Its acquisition of Access Direct
Telemarketing, Inc. ("ADT"), a proactive consumer care company, and Hancock
Information Group, a high-tech business to business lead acquisition firm,
strengthened PRC's outbound service capabilities, further rounding out its suite
of services. Also in 2001, PRC acquired Avaltus, Inc., an eLearning and Learning
Content Management solution provider, to expand its training organization as
well as its service and product offerings.
PRC's consumer care operations allow clients to establish and maintain
direct communications with their customers. PRC is experienced in a wide range
of industries including travel, telecommunications, financial services, consumer
goods and services, hospitality, and energy. PRC believes that its experience,
combined with superior training of representatives and leading-edge technology,
enables it to service consumer oriented industries in a highly effective manner.
PRC's primary source of revenue is its consumer care activities generally
comprised of inbound (customer-initiated) and outbound teleservicing, as well as
other means such as e-mail, web collaboration and online chat/IP telephony, all
of which involve direct communication with the clients' consumers. The majority
of revenues are derived from inbound teleservicing. Inbound teleservicing
consists of longer-term customer care and customer service programs that tend to
be more predictable than other teleservicing revenues.
In handling inbound calls, customer care representatives respond to a
variety of customer requests, including inquiries, billing questions,
complaints, direct mail response and order processing and provide technical
support. In many cases, the PRC customer care representative will save and
retain a consumer on behalf of the client or upsell them to a complementary
service offering by educating and informing such consumers with respect to its
clients' products and services. The complexity of inbound calls ranges from
simple one-dimensional data look-ups to more complex multi-system navigation and
analysis or sophisticated technical help and trouble shooting. Automated call
distributors and digital telephony switches identify each inbound call by an
"800" number, then routes the customer's call to a customer care associate
trained and dedicated to that particular client's program.
PRC's outbound services traditionally included conducting customer
satisfaction and preference surveys and cross-selling client products, as well
as providing proactive customer management with the goal of increased sales and
enhanced customer retention. The acquisitions of ADT and Hancock Information
Group have added more proactive service calling to PRC's suite of outbound
services. Both of these companies specialize in enhancing the sales of its
clients' products and services through the use of outbound calling.
In addition to its traditional teleservices-based customer care services,
PRC provides, and continues to develop, a total consumer care solution for
companies conducting business over the internet. PRC provides e-mail response
and management services ("click-to-email"), live web-based customer care
services ("click-to-talk", "click-to-chat"), proactive web services, and
customer information and database management to companies engaged in e-commerce
and other forms of internet communications on a fully outsourced, turnkey basis.
PRC offers a wide variety of information technology services including
formulating, designing and customizing teleservicing and electronic
applications, programming, and demographic and psychographic profiling.
Information technology specialists design, develop and manage applications for
each client's unique customer service and marketing programs. PRC has developed
a specialized component-based development software strategy with related
proprietary products for its teleservicing, e-commerce and fulfillment customer
care services.
Fulfillment services include high-speed laser and electronic document
printing, lettershop and automated mailing, pick and pack capabilities, e-mail
and web-based tracking and order-entry
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communications. While fulfillment services represent a relatively small portion
of PRC's revenues, they enable the support of full-service customer care and
marketing programs by managing and fulfilling requests for literature, products
and other specialty items and by permitting the rapid distribution of client
marketing information and products.
PRC seeks to develop and maintain long-term relationships with its clients
and targets those companies that have the potential for generating recurring
revenues due to the magnitude of their customer service departments or marketing
programs. Although PRC enters into written contracts with its clients, generally
either party retains the right to terminate on varying periods of prior notice.
The contracts generally do not assure a specific level of revenue or designate
PRC as the exclusive service provider. Contracts typically encompass all aspects
of the relationship with the client, together with all applicable charges.
PRC's teleservicing charges are primarily based on a fixed hourly fee for
dedicated service; however, PRC does engage in transaction-based pricing
arrangements for certain of its clients' business segments. Charges for database
marketing and management services are based on an hourly rate or on the volume
of information stored. Charges for fulfillment services are typically assessed
on a transaction basis, with an additional charge for warehousing products for
clients. PRC assesses separate charges for program design, development and
implementation, database design and management, training or retraining of
personnel, processing and access fees and account services, where appropriate.
Billing charges for internet customer care and electronic message servicing are
based on hourly rates and on a transaction basis, respectively, or a combination
of charges thereof. Overall, PRC's business continued to be adversely affected
by an economy-related slowdown in the outsourcing of consumer care programs,
particularly in the telecommunications and financial services areas.
MATCH.COM
Match.com is a leading online matchmaking and dating service that offers
single adults a convenient and private environment for meeting other singles.
Match.com, in combination with the One & Only Network, another online personals
company operated by Match.com, features more than 2.5 million members with
profiles. As of December 31, 2001, the personals operations had 382,150 paying
subscribers.
Match.com is designed to provide adults with a secure, fun environment for
meeting other single adults. Match.com provides users with access to other
users' personal profiles and enables a user interested in meeting another user
to send email messages to that user through Match.com's double-blind anonymous
email system. Email recipients can respond, or not, depending on their interest
in the sender. Match.com offers users a free service that includes searching,
matching and responding to emails from Match.com users; should the user elect to
initiate email contact with another Match.com user, Match.com charges a
subscription fee, starting with a single-month term, with discounts for longer
term subscriptions. Match.com seeks to maintain a balanced number of male and
female users by, among other things, forming relationships with women-oriented
Internet sites. Match.com also has implemented a number of measures designed to
keep the site secure for use by single women.
Match.com has entered into partnerships and strategic alliances with third
parties in order to increase subscriptions in general as well as to target
particular segments of its potential subscriber base. Typically, these partners
earn a commission on each customer subscription they sell into the Match.com
service. Match.com expects to continue to pursue strategic alliances and
partnerships domestically and in foreign markets, both through its affiliate
program and through agreements with third parties, in an effort to expand its
overall subscriber base and to encourage subscriptions from targeted audiences.
Match.com purchases advertising on websites, including strategic placement of
ads on web pages
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related to romance and personals, and television in an effort to increase
subscriptions and promote the Match.com brand name.
In September 1999, Ticketmaster purchased One & Only Network, another
Internet personals company, which also operates an online affiliate program
focused on online matchmaking. These affiliates are able to join the One & Only
Network for free, and earn commissions on each customer subscription they sell
into One & Only Network's online matchmaking service. One & Only Network is
operated as part of the Match.com network, and Ticketmaster is focusing its
partnership and advertising efforts on building the Match.com system and brand.
CITYSEARCH AND RELATED
Citysearch.com is a network of local city guide sites that offer primarily
original local content for major cities in the United States and abroad, as well
as practical transactional tools to get things done online. The city guides
provide up-to-date, locally produced information about a city's arts and
entertainment events, bars and restaurants, recreation, community activities and
businesses (shopping and professional services), real estate related
information, as well as local sports and weather updates. Citysearch also
features a comprehensive directory listing, similar to a yellow pages directory,
of local businesses in over 3,000 zip codes in the United States. In addition,
Citysearch city guides let people act on what they learn by supporting online
business transactions, including ticketing, hotel and restaurant reservations,
and matchmaking through affiliations with leading ecommerce websites providing
these products.
Ticketmaster has citysearch.com sites in 106 cities in the United States,
103 of which are owned and operated by Ticketmaster and the remaining three of
which are partner-led. During 2001, Ticketmaster reduced the number of domestic
markets in which Ticketmaster maintains local sales and content staff for from
33 to 15, reflecting a realignment of the city guide focus to a more regionally-
based structure. During 2001, Ticketmaster also increased the number of its
partner-led international citysearch.com sites from 21 to 43. Ticketmaster's
international media partners bring capital, brand recognition, promotional
strength and local knowledge to their city guides and allow Ticketmaster to
build out its international network of sites faster than it could solely through
owned and operated sites.
Citysearch provides local, regional and national businesses with a wide
range of Web advertising options designed to reach growing local audiences.
Throughout 2001, Citysearch shifted focus from comprehensive Web site design and
hosting, toward advertising solutions that are more targeted and client driven.
City guide revenues are generated through the sale of online advertising,
both local and national, product licensing and consulting services and to a
smaller extent, transaction fees from affiliate partners. Local advertising
revenues are derived primarily from sale of self-enrollment enhanced listings in
search results, in context advertising, targeted electronic mail promotions and
targeted sponsorship packages. In addition, while becoming a smaller part of the
total revenue stream, Citysearch continues to generate local advertising income
from Web site development, hosting and placement in Citysearch's directory
listings.
Also included in the city guide segment is Evite, Inc., a free online
invitation service acquired by Ticketmaster in March 2001. In addition to its
invitation service, Evite offers a reminder service, polling, payments
collection, restaurant and concert listings, event shopping and local resources.
Evite now averages more than 3.6 million sent invitations a month.
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USA ELECTRONIC COMMERCE SOLUTIONS
USA Electronic Commerce Solutions ("ECS") was formed in October 1999 as a
wholly owned subsidiary of USA. ECS operates and manages online stores by
partnering with third parties with strong brands that are committed to using the
Internet as a means of providing content and information to further enhance
these brands. Within the context of these brand extensions, ECS creates direct
selling experiences online and offline by developing, operating and managing the
direct selling environment and infrastructure. ECS' services include
fulfillment, customer service and customer care, website e-commerce enablement,
merchandising, marketing, catalog distribution and direct sales via television.
ECS has obtained exclusive electronic commerce rights from the National
Hockey League for its NHL.com site; the National Basketball Association for its
NBA.com site; Turner Sports Interactive, Inc., a subsidiary of AOL Time Warner,
for its NASCAR.com website; SportsLine, Inc. for its CBS SportsLine.com and
mvp.com sites; and the PGA Tour for all of its Tour-branded websites, including
PGATour.com. Pursuant to multi-year agreements with these partners, ECS
(directly and through its relationships with other USA affiliates) provides
their respective sites with electronic commerce capability, integrated media and
marketing services, database-driven offers and promotion, and, in some cases,
catalog production and distribution, in addition to fulfillment, customer
service and merchandising services.
STYLECLICK
Styleclick, a majority owned subsidiary of USA, provides e-commerce
technology and services to companies in search of effective and profitable
out-sourced online strategies. Styleclick offers such business clients a range
of services and products, including website design, development and hosting,
product imaging, online sales, and merchandising technologies. Clients' websites
are hosted on servers owned or leased by Styleclick and rely on a combination of
third party and Styleclick proprietary technology to operate. Styleclick
generates revenue from clients via service fees charged for such design,
construction, operations and maintenance services.
In March 2001, Styleclick announced certain changes including a new company
organization designed to advance its offering of scalable commerce services. At
that time, Styleclick announced that its Board of Directors had elected Lisa
Brown to the office of Chief Executive Officer of Styleclick and Robert Halper
to the office of President and Chief Operating Officer of Styleclick. Ms. Brown
also serves as Chief Executive Officer and President of ECS, and Mr. Halper also
serves as Executive Vice President, Operations and Finance, of ECS.
Styleclick entered into a services agreement with ECS that became effective
March 20, 2001. Pursuant to the services agreement, ECS provides certain
business operations and financial services to Styleclick at cost. Also pursuant
to the services agreement, ECS has agreed to use its reasonable efforts, as
determined by ECS, to engage Styleclick to provide ECS's non-affiliated
customers with technological services of the type provided by Styleclick to
third parties to the extent that Styleclick has the capacity to provide such
services itself in a timely manner.
ECS was Styleclick's largest customer during 2001. During the three months
ended December 31, 2001, 98%, of Styleclick's revenues came from ECS as a
customer of Styleclick with respect to Styleclick's provision of services to
four of ECS' customers: Turner Sports Interactive, Inc., SportsLine.com, Inc.,
the PGA Tour and the NHL. ECS-related business accounted for 40% of Styleclick's
2001 revenues, and 80% of Styleclick's 2001 revenues exclusive of revenues
attributable to FirstJewelry.com and FirstAuction.com, websites which Styleclick
shut down in 2001. Styleclick expects that ECS will continue to represent
substantially all of Styleclick's revenue in 2002. Accordingly,
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Styleclick is dependent upon ECS's ability to sell services, including the
services provided by Styleclick, to its existing and future customers. However,
Styleclick cannot be certain that ECS will use Styleclick's services in any
particular instance or at all. ECS's inability to attract new clients, or its
decision not to utilize the services of Styleclick, would have a material
adverse effect on Styleclick's business, financial condition and results of
operations.
In 2001, Styleclick began to focus on e-commerce services and technology
while eliminating its online retail business. During this transition, Styleclick
continued to incur significant net losses from continuing operations and has a
net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. Styleclick is considering its options with respect
to the situation.
USA ENTERTAINMENT GROUP
CABLE AND STUDIOS
USA CABLE
USA Cable operates four domestic advertiser-supported 24-hour cable
television networks, USA Network, Sci Fi Channel, Trio and NewsWorld
International ("NWI"). Since its inception in 1977, USA Network has grown into
one of the nation's most widely distributed and viewed satellite-delivered
television networks. According to Nielsen Media Research, as of December 2001,
USA Network was available in approximately 85.2 million U.S. households (81% of
the total U.S. households with televisions). For the 2001 year, USA Network tied
for the second highest primetime rating of any domestic basic cable network,
with an average rating of 1.7 in primetime for the 12-month period (Source:
Nielsen Media Research). USA Network is a general entertainment network
featuring original series and movies, theatrical movies, off-network television
series and major sporting events, designed to appeal to the available audiences
during particular viewing hours. In general, USA Network's programming is
targeted at viewers between the ages of 25 to 54.
Sci Fi Channel was launched in 1992. It has been one of the fastest-growing
satellite-delivered networks since its inception. According to Nielsen Media
Research, as of December 2001, Sci Fi Channel was available in approximately
77 million U.S. households (73% of the total U.S. households with
televisions)--making it almost a fully-distributed network. Sci Fi Channel
features science fiction, horror, fantasy and paranormal programming. In
general, Sci Fi Channel's programming is designed to appeal to viewers between
the ages of 25 to 54. According to Nielsen Media Research, Sci Fi Channel
averaged a primetime 0.8 rating for calendar year 2001, making it a top ten
network in its targeted demographic. The Channel has just entered its second
year as the largest provider of original dramatic series in primetime on cable.
In addition to the services described above, Sci Fi Channel has its own
website, SCIFI.COM, which was launched in 1995. SCIFI.COM is an online science
fiction resource, featuring original entertainment, daily news, feature stories,
games and special events that focus on science fiction, science fact, fantasy,
horror, the paranormal and the unknown.
Trio and NWI were acquired by USA Cable from the Canadian Broadcasting
Corporation ("CBC") and Power Broadcasting Inc. in May 2000. TRIO relaunched in
June 2001 as "popular arts television" featuring the best in film, fashion,
music, stage and popular culture. NWI is a 24-hour international news channel
that presents hourly newscasts every hour as well as long-form contemporary
magazine shows. As of December 31, 2001, Trio was available in over 14 million
U.S. households and NWI was available in 10 million U.S. households.
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USA Cable's four networks derive virtually all of their revenues from two
sources. The first is the per-subscriber fees paid by the cable operators and
other distributors. The second is from the sale of advertising time within the
programming carried on each of the networks.
PROGRAMMING AND TRANSMISSION. USA Network's program line-up features
original series, produced exclusively for it (E.G., COMBAT MISSIONS, DEAD ZONE)
and approximately 10-15 movies also produced exclusively for it each year. USA
Network's programming also includes off-network series such as JAG, NASH
BRIDGES, WALKER, TEXAS RANGER, LAW & ORDER: SPECIAL VICTIMS UNIT and LAW &
ORDER: CRIMINAL INTENT, and major theatrically-released feature films. USA
Network is home to the AFI LIFE ACHIEVEMENT AWARDS, ECO-CHALLENGE, exclusive
midweek coverage of the U.S. OPEN TENNIS CHAMPIONSHIPS, THE WESTMINSTER KENNEL
CLUB DOG SHOW, and early round coverage of THE MASTERS, the RYDER CUP and major
PGA Tour golf events.
Sci Fi Channel's program lineup includes original programs, such as CROSSING
OVER WITH JOHN EDWARD, FARSCAPE, STARGATE: SG-1, and RIVERWORLD. Additionally,
Sci Fi features the best of futures past, with popular vintage series ranging
from THE TWILIGHT ZONE to LOST IN SPACE to digitally-remastered episodes of the
original STAR TREK series. The Channel continuously updates its library with
popular sci-fi fare such as the new STRANGE WORLD, THE OUTER LIMITS, TALES FROM
THE CRYPT, EARTH: FINAL CONFLICT, and BABYLON 5.
USA Network and Sci Fi Channel typically enter into long-term agreements for
their major off-network series programming. Their original series commitments
usually start with less than a full year's commitment (generally, a pilot
episode), but contain options for further production over several years. These
original productions will include specials, series, and made-for-television
movies. USA Network (and to a lesser extent, Sci Fi Channel) acquires theatrical
films in both their "network" windows and "pre-syndication" windows. Under these
arrangements, the acquisition of such rights is often concluded many years
before the actual exhibition of the films begins on the network. Each network's
original films start production less than a year prior to their initial
exhibition. Both networks typically obtain the right to exhibit both their
acquired theatrical films and original films numerous times over multiple year
periods.
TRIO's programming includes exclusive original series and specials as well
as acquired series. In 2002, TRIO plans to introduce its first original series,
THE SCORE, from legendary producers Phil Ramone and Norman Lear. It also plans
several original specials as well as the exclusive national coverage of the 2002
New Orleans Jazz and Heritage Festival. Acquired programs include acclaimed
films, classic concerts, pop culture magazines "Media TV," "Hot Type" and "The
Designers" as well as iconic, one-of-a-kind series like ROWAN & MARTIN'S
LAUGH-IN and the award-winning SESSIONS AT WEST 54TH ST.
NWI's line-up is anchored at the top of every hour by the newscast,
INTERNATIONAL NEWSFIRST, covering the latest news from around the world,
including business, sports, weather and entertainment. Throughout the day NWI
also features daily world newscasts presently licensed from broadcasters in
Mexico, Russia, China, Germany, Japan and Canada, which are presented both in
the original language and with an English translation. Under a long-term supply
agreement, NWI's programming is produced by CBC in Canada.
USA Cable's four networks distribute their programming service on a 24-hour
per day, seven-day per week basis. All four networks are distributed in all 50
states and Puerto Rico via satellite for distribution by cable television
systems and direct broadcast satellite systems and for satellite antenna owners
by means of satellite transponders owned or leased by USA Cable. Any cable
television system or individual satellite dish owner in the United States and
its territories and possessions equipped with standard satellite receiving
facilities is capable of receiving USA Cable's services.
26
USA Cable has the full-time use of four transponders on two domestic
communications satellites. USA Cable has protection in the event of the failure
of its transponders. When the carrier provides services to a customer on a
"protected" basis, replacement transponders (I.E., spare or unassigned
transponders) on the satellite may be used in the event the "protected"
transponder fails. Should there be no replacement transponders available, the
"protected" customer will displace a "preemptible" transponder customer on the
same satellite. The carrier also maintains a protection satellite and should a
satellite fail completely, all "protected" transponders would be moved to the
protection satellite that is available on a "first fail, first served" basis.
A transponder failure that would necessitate a move to another transponder
on the same satellite would not result in any significant interruption of
service to those that receive USA Cable's programs. However, a failure that
would necessitate a move to another satellite temporarily may affect the number
of cable systems that receive USA Cable programs as well as other programming
carried on the failed satellite, because of the need to install equipment or to
reorient earth stations. The projected ends of life of the two satellites
utilized by USA Cable are January 2005 and March 2006, respectively.
USA Cable's control of two different transponders on each of two different
satellites would enable it to continue transmission of USA Network and Sci Fi
Channel should either one of the satellites fail. USA Cable does not have this
capability for Trio and NWI. Although USA Cable believes it is taking reasonable
measures to ensure its continued satellite transmission capability, there can be
no assurance that termination or interruption of satellite transmission will not
occur. Such a termination or interruption of service by one or both of these
satellites could have a material adverse effect on the operations and financial
condition of USA. The availability of replacement satellites and transponders
beyond current arrangements is dependent on a number of factors over which USA
Cable has no control, including competition among prospective users for
available transponders and the availability of satellite launching facilities
for replacement satellites.
Each of the networks enters into agreements with cable operators and other
distributors that agree to carry the programming service, generally as part of a
package with other advertiser-supported programming services. These agreements
are multi-year arrangements, and obligate the distributor to pay USA Cable a fee
for each subscriber to the particular programming service. From time to time, a
USA Cable network will be distributed on one or more cable systems without a
distribution agreement in effect while the parties negotiate a new agreement, a
process that may be protracted. While the cessation of carriage by a major cable
operator would have a negative impact on the financial results of USA Cable, the
Company has successfully managed the distribution agreement process in the past,
and believes it will continue to do so.
STUDIOS USA
USA through Studios USA produces and distributes television programs
intended for initial exhibition on television and home video in both domestic
and international markets. These productions include original programming for
network television and first-run syndication through local television stations.
Studios USA also is the exclusive domestic distributor of the Universal
television library. In addition to the activities of Studios USA, other USA
business units are also engaged in financing and distributing television
programs for exhibition on USA Network and Sci Fi Channel.
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Studios USA and its predecessor companies have produced programming for
network television since the early 1950s and Studios USA remains a major
supplier of network and first-run syndication programming today, including
LAW & ORDER, LAW & ORDER: SPECIAL VICTIMS UNIT, THE DISTRICT, THE JERRY SPRINGER
SHOW and MAURY (hosted by Maury Povich). For the 2001/02 broadcast season,
Studios USA launched a new series for CBS, THE AGENCY, and two new series for
NBC from LAW & ORDER creator, Dick Wolf, entitled LAW & ORDER: CRIMINAL INTENT
and CRIME & PUNISHMENT. LAW & ORDER: CRIMINAL INTENT and LAW & ORDER: SPECIAL
VICTIMS UNIT have both been renewed for the 2002/03 season, while LAW & ORDER
has been ordered through the 2004/05 season.
Television production generally includes four steps: development,
pre-production, principal photography and post-production. The
production/distribution cycle represents the period of time from development of
the property through distribution and varies depending upon such factors as type
of product and primary form of exhibition. Development of television programs
and films begins with ideas and concepts of producers and writers, which form
the basis of a television series or film. Producers and writers are frequently
signed to term agreements generally providing Studios USA with exclusive use of
their services for a term ranging from one to five years in the case of
producers and one to two years in the case of writers. Term agreements are
signed with such talent to develop network comedy and drama and first-run
syndication programming. Term agreements are also signed with actors, binding
them to Studios USA for a period of time during which Studios USA attempts to
attach them to a series under development. These term agreements represent a
significant investment for Studios USA.
In the case of network development, the ideas and concepts developed by
producers and writers are presented to broadcast networks to receive their
approval and financial participation in the development of a "pilot" that could
possibly become a commitment from the network to license a minimum number of
episodes based on the pilot. In general, the production cycle for network
programming begins with the presentation of pilot concepts to network
broadcasters in the fall of each year. Alternatively, Studios USA may elect to
self-finance a project, and then market the completed script or produced pilot
to the various networks. In any case, each May, networks release their fall
schedules, committing to the series production of pilots, renewing existing
programs and canceling others. Networks typically commit to seven to thirteen
episodes for such new series with options to acquire additional episodes for a
negotiated license fee and twenty-two episodes for a renewed series. Production
on these series begins in June and continues through March, depending upon the
network commitment. The network broadcast season runs from September through
May. Studios USA incurs production costs throughout the production cycle up
through completion of an episode while networks remit a portion of the license
fees to Studios USA upon the beginning of episodic production and a portion upon
delivery of episodes.
Several of Studios USA's subsidiary companies are individually and
separately engaged in the development and/or production of television programs.
Certain of these subsidiaries are also signatories to various collective
bargaining agreements within the entertainment industry. The most significant of
these are the agreements with the Writers Guild of America ("WGA"), the
Directors Guild of America ("DGA") and the Screen Actors Guild ("SAG") which
agreements typically have a term of several years and then require
re-negotiation. The current WGA agreement expires on May 1, 2004, the DGA
agreement expires on June 30, 2005 and the SAG agreement expires on June 30,
2004.
TELEVISION PRODUCTION CUSTOMERS. Studios USA produces television programs
for the U.S. broadcast networks for prime time television exhibition. Certain
television programs are initially licensed for network television exhibition in
the U.S. and are simultaneously syndicated outside the U.S. Historically,
Studios USA customers for network television product have been concentrated with
the three oldest major U.S. television networks: ABC, CBS and NBC. In recent
years, the Fox Broadcasting Company, UPN and the WB Network have created new
networks, decreasing to some extent Studios USA's dependence on ABC, CBS and NBC
and expanding the outlets for its network
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product. Programming consists of various weekly series, including the returning
productions LAW & ORDER, LAW & ORDER: SPECIAL VICTIMS UNIT, THE DISTRICT, two
new series from LAW & ORDER creator Dick Wolf, entitled LAW & ORDER: CRIMINAL
INTENT and CRIME & PUNISHMENT on NBC and THE AGENCY on CBS. In the initial
telecast season, the network license provides for the production of a minimum
number of episodes, with the network having the option to order additional
episodes for both the current and future television seasons. The success of any
one series may be influenced by the time period in which the network airs the
series, the strength of the programs against which it competes, promotion of the
series by the network and the overall commitment of the network to the series.
Generally, network licenses give the networks the exclusive right to
broadcast new episodes of a given series for a period of time, generally from
four to seven years and sometimes with further options thereafter. Recently,
series produced by Studios USA have been distributed on a "dual platform" basis.
In the case of LAW & ORDER: SPECIAL VICTIMS UNIT and LAW & ORDER: CRIMINAL
INTENT, for example, the USA Network shares the initial exhibition "window" with
NBC. Studios USA also produces television film product that is initially
syndicated directly to independent television stations for airing throughout the
broadcast day and to network affiliated stations for non-primetime airing.
Studios USA has also been distributing programs on a "dual platform" basis
in cable and in syndication. For example, INVISIBLE MAN currently is distributed
on a dual platform basis on the Sci Fi Channel and in first-run syndication, and
commencing with the 2001-02 broadcast season, Sci Fi's CROSSING OVER WITH JOHN
EDWARD also has been dual platformed on Sci Fi Channel and in first-run
syndication.
Studios USA licenses television film product to independent stations and
directly to network affiliated stations in return for either a cash license fee,
barter or part-barter and part-cash. Barter syndication is the process whereby
Studios USA obtains commitments from television stations to broadcast a program
in certain agreed upon time periods. Studios USA retains advertising time in the
program in lieu of receiving a cash license fee, and sells such retained
advertising time for its own account to national advertisers at rates based on
the projected number of viewers. By placing the program with television stations
throughout the United States, an "ad hoc" network of stations is created to
carry the program. The creation of this ad hoc network of stations, typically
representing a penetration of at least 80% of total U.S. television households,
enables Studios USA to sell the commercial advertising time through advertising
agencies for sponsors desiring national coverage. The rates charged for this
advertising time are typically lower than rates charged by U.S. broadcast
networks for similar demographics since the networks coverage of the markets is
generally greater. In order to create this ad hoc network of stations and reach
80% of total U.S. television households, Studios USA must syndicate its
programming with stations that are owned and operated by the major broadcast
networks and station groups, which are essentially entities which own many
stations in the major broadcast markets across the United States. Without
commitments from broadcast network stations and station groups, the necessary
market penetration may not be achieved which may adversely affect the chances of
success in the first-run syndication market.
Generally, television films produced for broadcast networks or barter
syndication (or those financed by USA Cable Entertainment LLC for cable
exhibition) provide license fees and/or advertising revenues that cover only a
portion of the anticipated production costs. The recoverability of the balance
of the production costs and the realization of profits, if any, is dependent
upon the success of other exploitation including international syndication
licenses, subsequent basic cable and domestic syndication licenses, releases in
the home video market, merchandising and other uses. Pursuant to an agreement
with Universal which will terminate upon consummation of the Vivendi
Transaction, Studios USA has the right to include eligible product in
Universal's international free television output and volume agreements with
television broadcasters in major international territories. These agreements
represent a substantial revenue source for Studios USA.
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DISTRIBUTION. In general, during the initial production years of a
primetime series for the broadcast networks (E.G., seasons one to four),
domestic network and international revenues fall short of production costs. As a
result, the series will likely remain in a deficit position until sold in the
domestic syndication market. The series will be available for airing in the
off-network syndication market after a network's exclusivity period ends,
typically the September following the completion of the third or fourth network
season (or the subsequent season if the series were a mid-season order). For a
successful series, the syndication sales process generally begins during the
second or third network season. The price that a series will command in
syndication is a function of supply and demand. Studios USA syndicated series
are sold for cash and/or bartered services (I.E., advertising time), typically
for a period of at least five years. Barter transactions have played an
increasingly important role in the syndication process as they can represent a
majority of the distributor's syndication revenue.
Studios USA distributes its current programming domestically. In addition,
Studios USA is the exclusive domestic distributor of Universal's large
television library, with programming dating back to the 1950s and including such
series as ALFRED HITCHCOCK PRESENTS; THE VIRGINIAN; MARCUS WELBY, M.D.; DRAGNET;
COLUMBO; KOJAK; THE ROCKFORD FILES; MURDER SHE WROTE; MAGNUM P.I.; MIAMI VICE;
COACH; and NORTHERN EXPOSURE.
In addition, Universal currently has the exclusive right, with limited
exceptions, to distribute all Studios USA programming internationally. In that
regard, Universal has entered into several output and volume agreements with
international television broadcasters that include programming produced by
Studios USA, including agreements in Germany, France, Spain, Italy and the
United Kingdom. These agreements generally provide that the licensor in a given
territory shall have exclusive first-run free television rights to all Universal
or Studios USA product, or alternatively, provide mechanisms by which the
licensor generally commits to license a minimum number per year of first-run
series and first-run television movies during a specified term in the territory.
Pursuant to the terms of the current distribution arrangement between USA and
Universal, USA's eligible programming will have the first right to participate
in Universal's international output and volume agreements with international
television broadcasters. This agreement will be terminated upon consummation of
the Vivendi Transaction.
FILMED ENTERTAINMENT
USA Films primarily produces and distributes theatrical motion pictures.
Eleven films were released theatrically in 2001, among them GOSFORD PARK and THE
MAN WHO WASN'T THERE. GOSFORD PARK was nominated for seven academy awards, and
won the award for best screenplay (original) and THE MAN WHO WASN'T THERE was
nominated for one academy award. TRAFFIC, released initially on December 21,
2000, achieved North American box office of $123,000,000, USA Films' highest
grossing film to date. In 2001, USA Films was ranked third among independent
theatrical distributors in market share, behind Miramax and New Line. In 2002,
USA Films expects to distribute approximately ten films, including POSSESSION (a
co-production with Warner Brothers), DELIVER US FROM EVA, FAR FROM HEAVEN and
EIGHT WOMEN, directly or indirectly to theatrical exhibitors in the United
States and internationally, to home video markets and to television.
REGULATION
USA and its subsidiaries are subject to various laws and regulations. The
following summary does not purport to be a complete discussion of all enacted or
pending regulations and policies that may affect USA's businesses. This summary
focuses primarily on the enacted federal and state legislation specific to USA's
businesses.
TELEPHONE SALES REGULATION
Telephone sales practices are regulated at both the Federal and state level.
The rules of the Federal Communications Commission (the "FCC") under the Federal
Telephone Consumer Protection
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Act of 1991 (the "TCPA") prohibit the initiation of telephone solicitations to
residential subscribers before 8:00 a.m. or after 9:00 p.m. (local time at the
called party's location), prohibit the use of automated telephone dialing
equipment to call certain telephone numbers, and contain certain disclosure
requirements (including a requirement that the caller must give a telephone
number or address, during the call, where the seller can be reached). In
addition, the FCC rules require teleservicers to have procedures in place to
maintain lists of residential customers who do not want to receive telephone
solicitations to add customers to that list if they so request, and to avoid
making calls to those customers. The FCC rules also prohibit the use of
pre-recorded or artificial voice calls to consumers (with limited exceptions)
and advertising via telephone facsimile machines. The FCC, private individuals
and state attorneys general may seek both injunctive and monetary relief for
violation of these FCC rules. Monetary damages may be awarded for the greater of
actual damages or $1,500 per offense for willful violation of these rules.
The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC")
to issue regulations prohibiting misrepresentation in telephone sales. In
August 1995, the FTC issued rules under the TCFAPA. These rules set forth
disclosure requirements for telemarketers when placing calls, prohibit deceptive
telemarketing acts or practices during solicitation, provide guidelines on
collecting payments by check and credit cards, provide restrictions on abusive
telephone solicitation practices and promulgate certain record keeping
requirements. The FTC, private individuals and state attorneys general may seek
both injunctive and monetary damages for violation of these FTC rules. Penalties
may range up to $10,000 for each intentional violation of these rules.
On January 22, 2002, the FTC proposed to amend its telemarketing rules to,
among other things, (1) establish a centralized, national "do not call" registry
to enable consumers to eliminate most telemarketing calls by calling a toll-free
number and adding their phone number to the registry; (2) prohibit telemarketers
from receiving a consumer's credit card or other account number from anyone but
the consumer, or from improperly sharing it with anyone else for use in
telemarketing; and (3) prohibit telemarketers from blocking or otherwise
subverting "Caller ID" systems.
In addition to permitting the FTC, private individuals and state attorneys
general to seek both injunctive and monetary damages for violation of the FTC's
Telemarketing Sales Rule, the new rules, like the old rules, would not prohibit
state attorneys general from also seeking remedies under state law.
Written comments on the FTC proposed amendments to the Telemarketing Sales
Rule are due on March 29, 2002. The proposed amendments, if enacted, would
likely become effective within six to twelve months from that date.
USA believes that its subsidiaries subject to these regulations, principally
PRC, are in compliance with the TCPA and FCC rules thereunder and with the FTC's
rules under the TCFAPA. USA is unable to predict that its effects, if any, on
its revenues and the manner in which it does business if either or both of the
FTC and FCC revise their regulations as now proposed.
Most states have enacted or are considering legislation to regulate
telephone solicitations. For example, some states require telemarketers to be
licensed and bonded by state regulatory agencies prior to soliciting purchasers
within that state. Additionally, telephone sales in many states cannot be final
unless a written contract is delivered to, and signed and returned by the buyer
and may be canceled within three business days. Some states also have enacted,
or are considering enacting, state-wide "do-not-call" lists, the violation of
which would subject the telemarketer to steep fines. Penalties for violation of
these state telemarketing regulations vary from state to state and include civil
as well as criminal penalties. From time to time, bills are introduced in
Congress that, if enacted, would regulate the use of credit information, and
telemarketing. Several of such bills are now pending.
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REGULATION OF THE INTERNET
The following summary does not purport to be a complete discussion of all
enacted or pending regulations and policies that may affect USA's businesses as
they relate to the Internet. This summary focuses primarily on the enacted
federal, state and international legislation specific to online businesses such
as those conducted by certain of USA's subsidiaries. For further information
concerning the nature and extent of federal, state and international regulation
of online businesses, please review public notices and rulings of the U.S.
Congress, state and local legislature and international bodies.
Due to the growth of the Internet and online commerce, coupled with
publicity regarding Internet fraud, new laws and regulations are continually
being considered (at the federal, state and international level) regarding
property ownership, sales and other taxes, pricing and content, advertising,
intellectual property rights, libel, user privacy, and information security. New
laws or different applications of existing laws would likely impose additional
burdens on companies conducting business online and may decrease the growth of
the Internet or commercial online services. In turn, this could decrease the
demand for products and services offered by certain of USA's subsidiaries or
increase their cost of doing business.
TAXES. Federal legislation imposing limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998 and extended in 2001.
The Internet Tax Non-Disclosure Act, as this legislation is known, exempts
certain types of sales transactions conducted over the Internet from multiple or
discriminatory state and local taxation through November 1, 2003. It is possible
this legislation will not be renewed when it terminates. Failure to renew this
legislation could allow state and local governments to impose taxes on
Internet-based sales, and these taxes could decrease the demand for products and
services offered by certain of USA's subsidiaries or increase their cost of
operations.
PRIVACY. Customers provide USA's various businesses with personally
identifiable information (PII) that has been specifically and voluntarily given.
PII includes information that can identify a customer as a specific individual,
such as name, phone number, or e-mail address. This information is used
primarily for the purpose of responding to and fulfilling customer requests for
the products and services offered by USA's subsidiaries. USA cannot predict
whether any of the proposed privacy legislation currently pending will be
enacted and the effect, if any, it would have on USA's businesses.
CURRENT US FEDERAL PRIVACY REGULATION. The federal government has enacted
and is considering laws and regulations relating to consumer privacy. The most
far-reaching of these current laws are focused on financial institutions, health
care providers, and companies that voluntarily solicit information from
children. The "Unsolicited Electronic Mail Act of 1999" has been enacted to
protect individuals, families, and internet service providers from unsolicited
and unwanted electronic mail, commonly referred to as spamming. Additionally,
the Federal Trade Commission has a role in consumer privacy protection and is
involved with related enforcement activities.
CURRENT STATE PRIVACY REGULATION. Most states have enacted or are
considering legislation to regulate consumer information on the Internet. Much
of this legislation is focused on financial institutions and health care
providers. The legislation that has become state law is a small percentage of
the number still pending, and is similar to what has been enacted at the federal
level.
CURRENT INTERNATIONAL PRIVACY REGULATION. The primary international privacy
regulations to which certain of USA's international operations are subject are
Canada's Personal Information and Protection of Electronic Documents Act and the
European Union Data Protection Directive:
- Canada: The Personal Information and Protection of Electronic Documents
Act (PIPEDA) provides Canadian residents with privacy protections in
regard to transactions with businesses and organizations in the private
sector. PIPEDA recognizes the individual's right to privacy of their
personal information. Additionally, it recognizes the need of
organizations to collect, use
32
and share personal information and establishes rules for handling personal
information. On January 1, 2004, PIPEDA extends to the collection, use, or
disclosure of personal information in the course of any commercial
activity within a province.
- Europe: Individual countries within the European Union (EU) have specific
regulations related to the transborder dataflow of personal information
(i.e., sending personal information from one country to another). The EU
Data Protection Directive encompasses many of these individual regulations
and requires companies doing business in EU member states to comply with
its standards. It provides for specific regulations requiring all non-EU
countries doing business with EU member states to provide adequate data
privacy protection when sending personal data from any of the EU member
states.
Effective July 25, 2000, the EU member states adopted a safe harbor
arrangement that provides that U.S. organizations can adopt procedures that
comply with European privacy regulations and can certify their compliance
through notice to the U.S. Department of Commerce. Participation in the safe
harbor is voluntary and indicates that the organization provides an adequate
level of privacy protection and qualifies the company to receive data from EU
member states. A company does not have to join the safe harbor to be in
compliance with the EU Data Protection Directive. It may choose instead to seek
approval for the data transfers from the specific individual. U.S. companies
that avail themselves of the safe harbor arrangement are subject to oversight
and possible enforcement actions by the Federal Trade Commission or the
Department of Transportation (which has authority over "ticket agents") if they
violate the provisions of their certification. Such violations may be found to
be unfair and deceptive practices.
Currently, few laws and regulations apply directly to the Internet and
commercial online services and, to the extent such laws exist or apply to
certain of USA's businesses, USA believes it is in compliance with all of them.
TRAVEL INDUSTRY REGULATION
USA's travel related businesses must comply with laws and regulations
relating to the travel industry and the sale of travel services. These include
registering with various states as a seller of travel, complying with certain
disclosure requirements and participating in state restitution funds. Both the
Federal Trade Commission and the Department of Transportation take the position
that their regulations prohibiting unfair and deceptive advertising practices
apply to USA's travel businesses. On December 3, 2001, Expedia entered into a
Consent Order with the Department of Transportation that resolved an allegation
that Expedia's Fare Calendar feature did not properly include airline fuel
surcharges in its advertised fare. Expedia modified this feature, and the
Consent Order acknowledges that Expedia has corrected the problem. No other
enforcement actions are pending.
In addition, USA's travel businesses are indirectly affected by regulatory
and legal uncertainties affecting travel suppliers and computer reservation
systems. The U.S. Department of Transportation is considering applying rules
that are similar to its computer reservations systems rules to online travel
services. The current rules are effective through March 31, 2003. If the U.S.
Department of Transportation elects to regulate online travel service providers'
fare displays, it may limit the ability of USA's businesses to merchandise air
travel.
COMMUNICATIONS INDUSTRY
The communications industry, including the operation of television broadcast
stations, cable television systems, satellite distribution systems and other
multichannel distribution systems and, in some respects, vertically integrated
cable programmers, is subject to substantial federal regulation, particularly
under the Communications Act of 1934, as amended (the "Communications Act"), and
the rules and regulations promulgated thereunder by the Federal Communications
Commission ("FCC").
33
CABLE PROGRAMMING. The Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Act") prohibits a cable operator from engaging in unfair
methods of competition that prevent or significantly hinder competing
multichannel video programming distributors from providing satellite-delivered
programming to their subscribers. The FCC has adopted regulations to
(1) prevent a cable operator that has an attributable interest, including voting
or non-voting stock ownership of at least 5%, in a programming vendor from
exercising improper influence over the programming vendor in the latter's
dealings with competitors to cable; and (2) to prevent a programmer in which a
cable operator has an attributable interest from discriminating among cable
operators and other multichannel video programming distributors, including other
cable operators.
Cable television systems are also subject to regulation pursuant to
franchises granted by a municipality or other state or local governmental
entity.
BROADCAST TELEVISION LICENSE GRANT AND RENEWAL. The Communications Act
provides that a broadcast license, including the licenses controlled by USA
affiliates, may be granted to any applicant upon a finding that the public
interest, convenience and necessity would be served thereby, subject to
limitations. Television stations operate according to broadcasting licenses that
are usually granted by the FCC for a maximum permitted term of eight years,
subject to renewal upon application to the FCC.
DIGITAL TELEVISION. The FCC has taken a number of steps to implement
digital television service (including high-definition television) in the United
States, including the adoption of a final table of digital channel allotments
and rules for the implementation of digital television. The table of digital
allotments provides each existing television station licensee or permittee with
a second broadcast channel to be used during the transition to digital
television, conditioned upon the surrender of one of the channels at the end of
the digital television transition period. The FCC has set a target date of
May 2002 for completion of construction of digital television facilities and
2006 for expiration of the digital transition period, subject to biennial
reviews to evaluate the progress of digital television, including the rate of
consumer acceptance.
Material developments in the DTV roll-out could have an impact on Home
Shopping Network's business. For example, in the future, low-power television
affiliates of Home Shopping Network may have to cease operations due to
irremediable interference to or from new digital television allocations.
MUST-CARRY/RETRANSMISSION CONSENT. Full-power television broadcasters are
required to make triennial elections to exercise either "must-carry" or
"retransmission consent" rights with respect to their carriage by cable systems
in each broadcaster's local market. By electing must-carry rights, a television
broadcaster demands carriage on a specified channel on cable systems within its
television market (defined by Nielsen as a Designated Market Area (DMA)).
Alternatively, if a television broadcaster chooses to exercise retransmission
consent rights, it can prohibit cable systems from carrying its signal or grant
the appropriate cable system the authority to retransmit the broadcast signal
for a fee or other consideration. Home Shopping Network is affected by the
must-carry rules in that cable systems have fewer channels available for cable
programming services, such as Home Shopping Network, because of mandatory
carriage requirements. The FCC currently is conducting a rulemaking proceeding
to determine whether, in certain circumstances, it should require carriage of a
television station's digital and analog signals.
SHVIA. The Satellite Home Viewer Improvement Act ("SHVIA"), which was
enacted on November 29, 1999 provides, among other things, for a statutory
copyright license to enable satellite carriers to retransmit local television
broadcast stations into the stations' respective local markets. SHVIA does not
require satellite carriers to deliver local stations into their local
market--so-called "local-into-local" service. However, as of January 1, 2002, a
satellite carrier that chooses to carry at least one local television broadcast
station signal pursuant to the statutory copyright must also carry any other
full power local television station in the market that requests carriage. In
certain instances, a satellite carrier is not required to carry duplicative
signals of commercial television stations serving the
34
same local market. Satellite carriers will be prohibited from providing
local-into-local service without the consent or must-carry election of a
station, but stations will be obligated to engage in good faith retransmission
consent negotiations with the carriers.
COMMUNITY BROADCASTERS PROTECTION ACT. The Community Broadcasters
Protection Act of 1999 (CBPA) established a new Class A television status that
offers certain protections to "qualifying" low power television (LPTV) stations
from full-power television service. In order to qualify for Class A status, an
LPTV station must meet specific criteria contained in the CBPA. Alternatively,
the CBPA allows the FCC to grant Class A status to any LPTV station if the FCC
finds that such a grant would serve the public interest, convenience and
necessity.
REGULATIONS APPLICABLE TO BROADCAST STATIONS AND CABLE SYSTEMS. Cable
television operators also are subject to regulations concerning the commercial
limits in children's programming, and closed captioning. The FCC's closed
captioning rules, which became effective January 1, 1998, provide for the phased
implementation, beginning in the year 2000, of a universal on-screen captioning
requirement with respect to the vast majority of video programming. The
captioning requirement applies to programming transmitted by broadcast
television stations and cable programming networks.
The FCC has adopted rules that take effect as of April 1, 2002 requiring
certain cable networks, among others, to provide an oral description of the
video portion of certain programming to benefit the visually impaired. USA
Network is one of the cable networks that may need to comply with these
regulations.
As part of a directive in the Telecommunications Act, the broadcast and
cable television industries have adopted, and the FCC has approved a voluntary
content ratings system which, when used in conjunction with so-called "V-Chip"
technology, would permit the blocking of programs with a common rating. The FCC
directed that all television receiver models with picture screens 13 inches or
greater be equipped with "V-Chip" technology under a phased implementation that
began on July 1, 1999. USA cannot predict how changes in the implementation of
the ratings system and "V-Chip" technology will affect its business.
OTHER REGULATORY CONSIDERATIONS.
USA and its subsidiaries are also subject to varying degrees of other
government regulation. Ticketmaster is regulated by certain state and local
regulations, including, but not limited to, a law in Georgia that establishes
maximum convenience charges on tickets for certain sporting events. Other
legislation that could affect the way Ticketmaster does business, including
legislation that would regulate the amount of convenience charges and order
processing fees, are introduced from time to time in federal, state and local
legislative bodies. Ticketmaster is unable to predict whether any such
legislation will be adopted and, if so, the impact thereof on its business.
Ticketmaster has recently introduced, and intends to continue to introduce
in the future, new products and services. Many of these products and services
have either never previously existed or have developed rapidly due to the fast
rate of change in Internet-based business models. As a result, the impact of
existing laws and regulations on these new products and services is uncertain.
Ticketmaster believes that its new products and services comply with existing
laws and regulations, but there can be no assurance that such laws and
regulations will not in the future be applied to these new products and services
in unforeseen ways. As such, the impact of the application of such laws and
regulations on certain of Ticketmaster's businesses cannot be foreseen and may
have a material adverse effect on such businesses and the applicable products
and services.
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Ticketmaster's products and serviced are subject to various sales and use
tax provisions under applicable State and local law. The application of such tax
provisions to Ticketmaster's historical and new products and services is subject
to interpretations by the applicable taxing authority. Ticketmaster believes it
is compliant with these tax provisions, but there can be no assurance that
taxing authorities will not take a contrary position and that such position will
not result in a material adverse effect to Ticketmaster's business, financial
condition and results of operations.
The industries served by PRC are also subject to varying degrees of
government regulation, including state qualification and licensing requirements.
PRC works closely with its clients and their advisors to develop the scripts to
be used by PRC in connection with making customer contacts and to comply with
any state qualifications and/or licensing necessary to perform the services for
clients. PRC generally requires its clients to indemnify PRC against claims and
expenses arising with respect to PRC's services performed on its clients'
behalf.
Increasing concern over consumer privacy, including regulations relating to
the use of the Internet with customer care and service, has led to the
introduction from time to time of proposed legislation, including at the federal
level, that could impact the Company's businesses. The Company cannot predict
whether any of these types of legislation will be enacted and what effect, if
any, it would have on the Company and its subsidiaries.
TRADEMARKS, TRADENAMES, COPYRIGHTS AND DOMAIN NAMES
USA regards its domain names and similar intellectual property as critical
to its success. USA relies on a combination of laws and contractual restrictions
with its employees, customers, suppliers, affiliates and others to establish and
protect its proprietary rights. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our intellectual property
without authorization. In addition, there can be no assurance that others will
not independently develop substantially similar intellectual property. USA has
registered and continues to register, when appropriate, its trade and service
marks as they are developed and used, and USA vigorously protects its trade and
service marks. However, effective trademark protection may not be available or
may not be sought by us in every country in which our products and services are
made available. Our failure to protect our intellectual property in a meaningful
manner could materially adversely affect our business or result in erosion of
our brand names.
From time to time we may be subject to legal proceedings and claims in the
ordinary course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by our
company. In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation,
regardless of outcome or merit, could result in substantial costs and diversion
of management and technical resources, any of which could materially harm our
business.
COMPETITION
USA INTERACTIVE GROUP
HOME SHOPPING NETWORK
The Home Shopping Network business operates in a highly competitive
environment. It is in direct competition with traditional retail merchandisers
ranging from large department stores to specialty shops, other electronic
retailers, direct marketing retailers such as mail order companies, companies
that sell from catalogs, other discount retailers and companies that market
through computer technology.
Home Shopping Network competes with certain other companies which have an
affiliation or common ownership with cable operators, which now market
merchandise by means of live television. QVC, a competitor of HSN, is controlled
by Comcast Corporation. Liberty, which holds a substantial
36
equity interest in USA and USANi LLC, currently owns 43% of QVC, and has entered
into a stockholders agreement with Comcast Corporation under which Comcast
Corporation controls the day-to-day operations of QVC. A number of other
entities are engaged in direct retail sales businesses that utilize television
in some form and which target the same markets in which Home Shopping Network
operates. Some competitors of the Home Shopping Network business are larger and
more diversified than USA.
VIEWERSHIP. The Home Shopping Network business also competes for access to
its customers and for audience share and revenue with broadcasters and
conventional forms of entertainment and information, such as programming for
network and independent broadcast television stations, basic and pay cable
television services, satellite master antenna systems, home satellite dishes and
home entertainment centers, newspapers, radio, magazines, outdoor advertising,
transit advertising and direct mail. In particular, the price and availability
of programming for cable television systems affect the availability of these
channels for HSN, America's Store and HSE programming and the compensation which
must be paid to cable operators for carriage of HSN, America's Store and HSE
programming.
CHANNEL CAPACITY. In addition, due to a number of factors, including the
development of cable operator owned programming, the competition for channel
capacity has substantially increased. With the advent of digital cable and new
compression technologies on the horizon, this competition for channel capacity
may substantially decrease, although additional competitors may have the
opportunity to enter the marketplace. No prediction can be made with respect to
the viability of these technologies or the extent to which they will ultimately
impact the availability of channel capacity. A substantial portion of USA's
businesses, including HSN and USA Cable, are affected by changes in channel
capacity and competition among programming providers for available channel
capacity.
HSN INTERNATIONAL
HSN competes internationally with traditional retailers, direct marketing
retailers and others electronic retailers. There are operators throughout the
world that either ofer 24-hour electronic retailing or are using infomercials
and small amount of live programming that compete with HSN's international
operations.
HSN.COM
Home Shopping Network operates HSN.com, an Internet retailing service that
competes with numerous bricks-and-mortar retailers, other online and offline
retail operations, and catalog merchants. A number of the online competitors
have a larger user base and have expertise in developing online commerce. USA
believes that the principal competitive factors in this market are scale,
selection of goods, customer service, reliability of delivery, brand
recognition, convenience and accessibility, price, quality of search tools and
system reliability.
TICKETING OPERATIONS
Ticketmaster's ticketing business, including ticketmaster.com, faces
competition and potential competition from other national and regional ticketing
service companies and entertainment organizations with ticketing capabilities,
as well as from its clients who may elect to fulfill ticketing distribution and
management functions through their own systems. Not all facilities, promoters
and other potential clients use the services of an automated ticketing company,
choosing instead to distribute their tickets through their own internal box
offices or other distribution channels. Accordingly, Ticketmaster competes with
the facilities, promoters and other potential clients for the right to
distribute their tickets at retail outlets, by telephone and on the Internet.
Other companies compete with Ticketmaster by selling stand-alone automated
ticketing systems to enable the facilities to do their own ticketing. Several of
Ticketmaster's competitors have operations in multiple locations, while others
compete principally in one specific geographic location. Ticketmaster
37
experiences substantial competition for potential client accounts and renewals
of contracts on a regular basis. Accordingly, there can be no assurance that
prospective or renewal clients will enter into contracts with Ticketmaster
rather than Ticketmaster's competitors (including clients that choose to
self-distribute with, or without, the assistance of the numerous companies that
support self-distribution). Ticketmaster competes on the basis of products and
service provided, capability of the ticketing system, its distribution network,
reliability and price.
As an alternative to purchasing tickets through Ticketmaster, ticket
purchasers generally may purchase tickets from the facility's box office at
which an event will be held or by season, subscription or group sales directly
from the venue or promoter of the event. Although Ticketmaster's clients may
process sales of these tickets through the Ticketmaster System, Ticketmaster
derives no convenience charge revenue from the ticket purchasers with respect to
those ticket purchases.
Ticketmaster believes that the principal competitive factors for all its
services, including its ticketing, personals and city guide businesses, include:
depth, quality and comprehensiveness of content; ease of use; distribution;
search capability; and brand recognition.
EXPEDIA
The travel planning services market is rapidly evolving and intensely
competitive. Expedia competes on the basis of feature differentiation and
usability, which are products of its technology leadership; breadth and value of
travel products and services offered; customer service; and quality of travel
planning content and advice.
In the United States, Expedia competes with other travel planning services
providers offering inventory from multiple suppliers, and with suppliers selling
their own inventory direct to consumers. Expedia also competes with
supplier-owned sites, as well as consortiums of suppliers such as Orbitz,
Hotwire and Hotel Distribution Systems. Expedia competes with
predominantly-offline travel agencies and entities that aggregate fares from
multiple web sites and/or suppliers. Expedia also competes with many of these
same parties and others in the provision of private-label booking services.
Internationally, Expedia competes with a set of participants that varies on a
market-by-market basis.
HOTEL RESERVATIONS
The market for travel products and services, including lodging
accommodations, is intensely competitive and is easy to enter. Hotel
Reservations Network believes that competition for lodging accommodations is
based predominantly on price, selection and availability of lodging
alternatives, selection of destination markets, ease of use, customer service,
reliability and travel-related content.
Hotel Reservations Network competes against other consolidators of lodging
accommodations, hotels, travel agencies and other online and offline travel
services. As a distributor, Hotel Reservations Networks is at risk that the
hotel owners will favor other distributors (or self-distribution) at the expense
of Hotel Reservations Network. Currently, most hotels sell their services
through travel agencies, travel wholesalers or directly to customers, mainly by
telephone. Increasingly, major hotels are offering travel products and services
directly to consumers through their own websites. USA believes that this trend
will continue.
Hotel Reservations Network also competes against numerous travel-related
websites. Although Hotel Reservations Networks currently has agreements with
some of these websites under which Hotel Reservatons Network's booking engine is
prominently displayed on and integrated into these websites, there can be no
assurance that these affiliations will continue in the future or that they will
continue to be beneficial to Hotel Reservations Network's business and Hotel
Reservations Network may find itself in competition with these affiliates. In
addition, in February 2002, five major hotel chains and Pegasus Solutions
announced plans to market lodging accommodations over the Internet through
multiple websites using a "merchant" business model similar to Hotel
Reservations Network's business model.
38
As demand for online travel products and services grows, Hotel Reservations
Network believes that companies already involved in the online travel products
and services industry, as well as traditional travel suppliers and travel
agencies, will increase their efforts to develop services that more closely
resemble Hotel Reservations Network's online products and services.
In addition, some of Hotel Reservations Network's current and potential
competitors have greater brand recognition, longer operating histories, larger
customer bases and significantly greater financial, marketing and other
resources than Hotel Reservations Network and may enter into strategic or
commercial relationships with larger, more established and well-financed
companies. Some of Hotel Reservations Network's competitors may be able to
secure services and products from travel suppliers on more favorable terms,
devote greater resources to marketing and promotional campaigns and devote
substantially more resources to website and systems development than Hotel
Reservations Network. New technologies and the continued enhancement of existing
technologies also may increase competitive pressures on Hotel Reservations
Network. There can be no assurance that Hotel Reservations Network will be able
to compete successfully against current and future competitors or address
increased competitive pressures.
TELESERVICES
The consumer care industry in which PRC operates is very competitive and
highly fragmented. Competitors range in size from very small firms offering
specialized applications and short-term projects, to large independent and
international firms and the in-house operations of many clients and potential
clients. In-house interactive customer communications organizations comprise the
largest segment of the industry. The industry includes a number of non-captive
interactive customer service operations. In addition, PRC also competes with
large technology and consulting firms in situations where it has not partnered
with such firms with respect to a potential business opportunity. PRC believes
that the principal competitive factors in its industry are a reputation for
quality, sales and marketing results, price, technological expertise and
application, and the ability to promptly provide clients with customized and
creative solutions and approaches to their customer service and marketing needs.
PRC believes that it competes favorably with other companies with respect to the
foregoing factors for large-scale, ongoing customer service and marketing
programs where the principal competitive factor is quality. PRC has not
generally chosen to compete for high-volume outbound marketing programs where
the principal competitive factor is price. Certain competitors may have
capabilities and resources greater than PRC's which may be a competitive
disadvantage in bidding for very large programs.
MATCH.COM
The dating services business is very competitive. Match.com's and One & Only
Network's primary competitors include the personals sections of newspapers and
magazines, free dating services, other pay-dating services, including local
online offerings from stand-alone dating websites or local media.
CITYSEARCH AND RELATED
The markets for local content and services are highly competitive and
diverse. Citysearch's primary competitors include online providers of local
content, numerous search engines and other site aggregation companies, media,
telecommunications and cable companies, Internet service providers and niche
competitors which focus on a specific category or geography and compete with
specific content offerings provided by Citysearch, paper city guides and
listings contained in various newspapers and magazines. Many of Ticketmaster's
city guide competitors have greater financial and marketing resources than it
has and may have significant competitive advantages through other lines of
business and existing business relationships. Furthermore, additional major
media and other companies with financial and other resources greater than
Ticketmaster may introduce new Internet products addressing the local
interactive content and service business in the future.
39
USA ELECTRONIC COMMERCE SOLUTIONS
ECS competes with a number of companies in providing end-to-end commerce
solutions to third parties. ECS also competes with companies that provide
certain portions of its operations, including fulfillment and customer service
providers, transaction enablers and consulting firms. In addition, as demand for
electronic retailing grows, other service providers may increase their efforts
to develop services that compete with those offered by ECS. ECS believes that
the principal competitive factors in its business are scalability, depth of
e-commerce offering and ability to offer end-to-end solutions. There can be no
assurance that ECS will be able to compete successfully against current and
future competitors.
STYLECLICK
Styleclick faces competition from companies that currently, or could
readily, provide e-commerce services similar to those offered by Styleclick.
Certain of Styleclick's competitors may be advantaged as compared to Styleclick
with respect to technology, client lists, scale and access to capital. In
addition, Styleclick potentially faces competition from companies that possess
the technology and expertise necessary to effectively operate large-scale
e-commerce businesses, but that may not currently offer such services to
third-parties. Styleclick's challenges in meeting its obligations to its
existing customers may make it difficult for Styleclick to attract or adequately
service new customers. Styleclick believes that the principal competitive
factors in this market are selection of goods, customer service, reliability of
delivery, brand recognition, website convenience and accessibility, price,
quality of search tools and system reliability. There can be no assurance that
Styleclick will be able to compete successfully against current and future
competitors.
USA ENTERTAINMENT
CABLE AND STUDIOS
USA CABLE
USA Cable competes for access to its customers and for audience share and
revenue with broadcasters and other forms of entertainment. Cable operators and
other distributors only contract to carry a limited number of the available
networks. Therefore, they may decide not to offer a particular network to their
subscribers, or they may package a network with other networks in a manner that
only a portion of their subscribers will receive the service (for example, by
charging an additional fee). In addition, there has been increased consolidation
among cable operators, so that USA Cable's networks have become increasingly
subject to the carriage decisions made by a small number of operators. This
consolidation may reduce the per-subscriber fees received from cable operators
in the future. The consolidation also means that the loss by any network of any
one or more of its major distributors could have a material adverse impact on
that network. The competition for advertising revenues also has become more
intense as the number of television networks has increased. While many factors
affect advertising rates, ultimately they are dependent on the numbers and types
of viewers that a program attracts. As more networks compete for viewers, it
becomes increasingly difficult to increase or even maintain a network's number
of viewers. Moreover, to do so may require a network to spend significantly
greater amounts of money on programming. Therefore, greater pressure may be
placed on the networks' ability to maintain advertising revenue levels and to
try and generate increases. Both USA Cable and Studios USA are affected by
competition for advertising revenues. The competition for third-party
programming is likely to increase. Many networks, including USA Cable's
networks, are affiliated with companies that produce programming. This
programming is becoming increasingly difficult to acquire by third parties or
unaffiliated networks. As a result, there is likely to be strong competition to
acquire remaining programming.
40
STUDIOS USA
PROGRAMMING. Studios USA operates in a highly competitive environment. The
production and distribution of television programming are highly competitive
businesses. Television programs produced by Studios USA compete with all other
forms of network and syndication programming, as well as other forms of
entertainment. Competition is also faced from other major television studios and
independent producers for creative talent, writers and producers. The
profitability of Studios USA is dependent upon factors such as public taste that
is volatile, shifts in demand, economic conditions and technological
developments.
In 1995, the FCC repealed its financial interest and syndication rules
("fin-syn rules"). The fin-syn rules were adopted in 1970 to limit television
network control over television programming and to foster the development of
diverse programming sources. The rules had restricted the ability of the three
established, major U.S. televisions networks (I.E., ABC, CBS and NBC) to own and
syndicate television programming. The repeal of the rules has increased in-house
production of television programming for the networks' own use. As a result of
the repeal of the fin-syn rules, the industry has become increasingly vertically
integrated, with all of the major broadcast networks, with the exception of NBC,
being aligned with a major studio. In addition, the three major broadcast
networks have their own in-house or affiliated production units. There can be no
assurance that these changes will not have a negative impact on Studios USA's
business as its network customers are now able to choose between their own
product and Studios USA's product in making programming decisions. Nonetheless,
up through the current 2001/02 season, Studios USA has continued to remain one
of the primary independent suppliers of U.S. television programming.
FILMED ENTERTAINMENT
USA Films operates in a highly competitive environment as the production and
distribution of theatrical motion pictures and home videos are highly
competitive businesses. USA Films competes with other independent distributors
and the major film studios as well as other forms of entertainment and leisure
time activities. Competition has increased notably in the "independent" film
sector due to the emergence of new production and distribution entities (some of
which are subsidiaries of the major film studios) and increased production and
marketing costs.
EMPLOYEES
As of the close of business on December 31, 2001, USA and its subsidiaries
employed approximately 16,900 full-time employees, with approximately 1,060
employees employed by USA Cable and Studios USA, 4,470 employees employed by
Electronic Retailing, 720 employees employed by Hotel Reservations, 60 employees
employed by Styleclick, 110 employees employed by USA Films, 4,620 employees
employed by Ticketmaster, including Citysearch and Match.com, 5,790 employees
employed by Teleservices and 70 employees employed by USA Electronic Commerce
Solutions. Of these employees, 5,660 were employed by USA through USANi LLC. In
addition, as of December 31, 2001, Expedia employed 896 full-time employees. USA
believes that it generally has good employee relationships, including with
employees represented by unions and guilds.
ITEM 2. PROPERTIES
USA's facilities for its management and operations are generally adequate
for its current and anticipated future needs. USA's facilities generally consist
of executive and administrative offices, fulfillment facilities, warehouses,
operations centers, call centers, television production and distribution
facilities, satellite transponder sites and sales offices.
All of USA's leases are at prevailing market (or "most favorable") rates
and, except as noted, with unaffiliated parties. USA believes that the duration
of each lease is adequate. USA believes that its
41
principal properties, whether owned or leased, are adequate for the purposes for
which they are used and are suitably maintained for such purposes. Most of the
office/studio space is substantially utilized, and where significant excess
space exists, USA leases or subleases such space to the extent possible. USA
anticipates no future problems in renewing or obtaining suitable leases for its
principal properties.
CORPORATE
USA maintains its principal executive offices at Carnegie Hall Tower, 152
West 57th Street, New York, New York that consists of approximately 29,850
square feet leased by USA through October 30, 2005 and an additional 6,100
square feet leased by USA through August 31, 2008.
USA INTERACTIVE GROUP
HOME SHOPPING NETWORK
Home Shopping Network owns an approximately 480,000 square foot facility in
St. Petersburg, Florida, which houses its Home Shopping Network television
studios, broadcast facilities, administrative offices and training facilities.
Home Shopping Network also leases 40,000 square feet of modular buildings
located at this facility.
Home Shopping Network owns two warehouse-type facilities totaling
approximately 84,000 square feet near Home Shopping Network's main campus in St.
Petersburg, Florida. These facilities have been used for returns processing,
retail distribution and general storage.
Home Shopping Network leases a 41,000 square foot facility in Clearwater,
Florida for its video and post-production operations. Home Shopping Network
expects to terminate this lease and vacate the facility in 2002.
Home Shopping Network owns and operates a warehouse consisting of 163,000
square feet located in Waterloo, Iowa, which is used as a fulfillment center. In
addition, Home Shopping Network rents additional space in Waterloo, Iowa
consisting of 50,000 square feet.
Home Shopping Network owns and operates a warehouse located in Salem,
Virginia, consisting of approximately 780,000 square feet, which is used as a
fulfillment center. In addition, Home Shopping Network leases one additional
location in Salem, Virginia consisting of 194,750 square feet and two additional
locations in Roanoke, Virginia consisting of 70,000 square feet and 383,000
square feet. Home Shopping Network plans to terminate the lease for the 70,000
square foot location and vacate the space in 2002.
Home Shopping Network leases 450,000 square feet of a 817,750 square foot
warehouse in Fontana, California, which it opened as an additional fulfillment
facility in 2001. The remainder of this facility is leased by other subsidiaries
of USA.
Home Shopping Network's retail outlet subsidiary leases three retail stores
in the Tampa Bay area and one in the Orlando areas, totaling approximately
86,425 square feet.
HSN INTERNATIONAL
Home Shopping Europe--Germany owns no real estate in Germany, although it
leases approximately 3,200 square meters in Ismaning, Germany (outside Munich)
for offices and studios.
TICKETMASTER
Ticketmaster's corporate offices are housed at 3701 Wilshire Boulevard, Los
Angeles, California, where it currently leases approximately 73,700 square feet
under leases expiring in 2003 and 2006. Ticketmaster leases office space in
various cities throughout the United States, the United Kingdom,
42
Ireland, Canada, Norway, Germany and France. As of December 31, 2001,
Ticketmaster had approximately 835,500 square feet of space under lease, with
scheduled expirations ranging from April 2002 to June 2014.
Ticketmaster owns an operating office in Vancouver, Canada. Ticketmaster
owned an office building in West Hollywood, California, which it sold to USA on
February 1, 2001.
EXPEDIA
Expedia's headquarters are located in Bellevue, Washington in a leased space
consisting of approximately 108,000 square feet. The leases for these spaces
expire from 2003 to 2007. Expedia also leases space in Tacoma, Washington, Ft.
Lauderdale, Florida and Washington, D.C.
Travelscape, Inc., a subsidiary of Expedia, is headquartered in Las Vegas,
Nevada. Travelscape leases office space consisting of approximately 53,000
square feet in Las Vegas, Nevada. As a result of its acquisition of the Classic
Custom Vacation assets in March 2002, Expedia also leases office space in San
Jose, California and warehouse space in Post Falls, Idaho.
Expedia also leases office space in Brussels, Belgium; Toronto, Canada;
London, England; Milan, Italy; and near Munich, Germany.
HOTEL RESERVATIONS
Hotel Reservations Network's operations are headquartered in Dallas, Texas,
where it leases an aggregate of approximately 47,000 square feet of office
space. The lease for this space expires in 2003.
TravelNow.com's offices are located in Springfield, Missouri, where it
currently leases approximately 12,500 square feet of office space. The lease for
this space expires in 2002. TravelNow has entered into lease of approximately
15,000 square feet of office space commencing in May 2002.
Hotel Reservations Network also leases office space in Ft. Worth and Pharr,
Texas, Miami, Florida, Grand Haven, Michigan, Atlantic City, New Jersey,
Burbank, California, and Paris, France.
TELESERVICES
PRC's headquarters are located in Plantation, Florida, where it leases
approximately 45,000 square feet of space under a lease expiring in March 2010,
with options to renew for up to an additional 15 years.
As of December 31, 2001, PRC had 20 customer interaction centers. PRC added
two centers as a result of the Hancock Information Group acquisition and, in
addition, opened two centers and closed two centers.
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As of December 31, 2001, PRC operated the following customer interaction
centers:
APPROXIMATE NUMBER OF
APPROXIMATE WORKSTATIONS AT
LOCATION SQUARE FEET DECEMBER 31, 2001
- -------- ----------- ---------------------
Miami, Florida.............................................. 29,000 300
Kendall, Florida............................................ 24,000 405
Orlando, Florida............................................ 34,000 610
Margate, Florida............................................ 34,000 580
Miami-Glades, Florida(1).................................... 138,000 1,405
Coconut Creek, Florida...................................... 26,000 205
East Kendall, Florida....................................... 12,000 165
Sunrise, Florida(1)......................................... 41,000 445
Cutler Ridge, Florida(2).................................... 109,000 940
Shreveport, Louisiana....................................... 35,000 340
Cedar Rapids (Westdale), Iowa............................... 6,000 135
Cedar Rapids, Iowa(1)....................................... 9,000 90
Coralville, Iowa............................................ 13,000 150
Ames, Iowa.................................................. 12,000 180
Marshalltown, Iowa.......................................... 9,000 130
Des Moines (Euclid), Iowa................................... 12,000 170
Des Moines (Army), Iowa..................................... 14,000 150
West Mifflin, Pennsylvania.................................. 64,000 520
Longwood, Florida(1)........................................ 25,000 125
Maitland, Florida........................................... 18,000 130
7,175
In addition to the above facilities, and as a result of its acquisition of
Avaltus in August 2001, PRC leases approximately 10,000 square feet of space in
Salt Lake City, Utah and approximately 22,000 square feet of space in Denver,
Colorado under leases expiring in February 2002 and November 2003, respectively.
PRC leases all of the above facilities, with the exception of the facility
located in Sunrise, Florida, which it owns. The leases for these facilities
expire between 2002 and 2022, assuming the exercise of all renewal options.
- ------------------------
(1) Certain administrative and operational departments are also located in this
facility.
(2) In its pending chapter 11 bankruptcy case, K-Mart Corporation has rejected
PRC's sub-lease of the premises located at 19500 S. Dixie Highway, Cutler
Ridge, Florida and has rejected K-Mart's original lease of the premises made
with the landowner, all pursuant to the provisions of 11 U.S.C.
section 365. The landowner has commenced an action is state court to evict
PRC from the premises, for possession and for unlawful detainer, which
action PRC intends to vigorously defend. PRC has answered and served
affirmative defenses to the complaint filed by the landowner and has
asserted a counterclaim for unjust enrichment based on improvements PRC made
to the premises.
MATCH.COM
Ticketmaster's personals businesses are located in Richardson, Texas, where
it currently leases approximately 31,300 square feet under a lease expiring in
2005.
CITYSEARCH AND RELATED
Ticketmaster's city guide headquarters are located in Pasadena, California,
where it currently leases approximately 48,200 square feet under a lease
expiring on March 31, 2002. Ticketmaster has leased
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approximately 36,900 square feet at 3731 Wilshire Blvd., Los Angeles,
California, under a lease expiring 2006 and intends to move its city guide
headquarters to such space in the first and second quarters of 2002.
Ticketmaster also leases local office space for its city guide business in
approximately 14 cities throughout the United States. Local offices range in
size from less than 2,000 square feet to 7,500 square feet and have lease terms
that range from month-to month to seven years. None of such leases expires later
than 2005, except for the San Francisco lease that expires in 2006.
USA ELECTRONIC COMMERCE SOLUTIONS
The executive offices of USA Electronic Commerce Solutions are located at
810 Seventh Avenue, 18th Floor, New York, New York. Approximately 15,500 square
feet are maintained under a lease expiring in 2010. ECS also maintains
approximately 6,000 square feet of additional space at the same address under a
sublease expiring in 2007.
STYLECLICK
Styleclick's headquarters are in Chicago, where it leases 10,500 square feet
under a lease expiring 2005. Styleclick also leases a 23,000 square feet
facility in Culver City, California under a lease expiring in 2006, a 4,800
square foot facility in High Point, North Carolina under a lease that expires in
2004, and an additional 10,000 square feet in Los Angeles, under a lease
expiring in 2002, each of which it subleases to a third party.
USA ENTERTAINMENT
CABLE AND STUDIOS
The executive offices of USA Cable are located at 1230 Avenue of the
Americas, New York, New York 10020. USA Cable leases approximately 168,000
square feet at this office space under a lease that continues until March 31,
2005, subject to two five-year options to continue the term. USA Cable also has
smaller offices in Chicago (affiliate relations and sales), Detroit (sales), and
Los Angeles (affiliate relations, sales and programming).
USA Cable also leases approximately 55,000 square feet in a facility in
Jersey City, New Jersey, where USA Cable has its broadcast operations center.
This space is used to originate and transmit the USA Network, Sci Fi Channel,
Trio, and NWI signals. Post-production for USA Networks, Sci Fi Channel, and
Trio, including audio production, editing, graphics and duplication, also is
performed at this location. The lease for this space continues through
April 30, 2009, and there are options to continue the term beyond that time.
Studios USA currently conducts its domestic television production and
distribution operations primarily from its executive and administrative offices
in West Hollywood, California (in a facility owned by USA, located at 8800
Sunset Boulevard, West Hollywood, California 90069) and in New York City (in
leased office space located at 1325 Avenue of the Americas, New York, New York
10019). Additionally, Studios USA has four domestic sales offices located in
Atlanta, Chicago, Dallas and New York City. Production facilities in Southern
California are leased primarily from Universal on its Universal City lot on an
as-needed basis depending upon production schedules. Studios USA also leases
production facilities in New York City for the production of LAW & ORDER, LAW &
ORDER: CRIMINAL INTENT, SALLY and MAURY, in New Jersey for LAW & ORDER: SPECIAL
VICTIMS UNIT and in Chicago for production of THE JERRY SPRINGER SHOW.
FILMED ENTERTAINMENT
USA Films' executive offices are located in New York, New York.
Approximately 15,000 square feet are maintained under a lease expiring on
June 30, 2009.
USA Films also maintains offices in Beverly Hills, California, where it
currently leases approximately 20,000 square feet under a lease expiring on
May 31, 2007.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, USA and USANi LLC and their subsidiaries
are parties to litigation involving property, personal injury, contract and
other claims. The amounts that may be recovered in these matters may be subject
to insurance coverage. Although amount received in litigation are not expected
to be material to the financial position or operations of USA and USANi LLC,
this litigation, regardless of outcome or merit, could result in substantial
costs and diversion of management and technical resources, any of which could
materially harm our business.
LITIGATION RELATING TO THE CONTRIBUTION OF USA ENTERTAINMENT ASSETS TO JOINT
VENTURE WITH VIVENDI UNIVERSAL S.A.
USA and its directors, along with Vivendi Universal S.A. and Liberty Media
Corporation, have been named as defendants in purported stockholder class and
derivative actions filed in the Court of Chancery, County of New Castle, State
of Delaware. Each of these actions, which are substantially identical, are
brought on behalf of a purported class consisting of public stockholders of USA
not affiliated with any of the defendants and as a purported derivative action
in the right of USA. The complaints in the actions allege, among other things,
that "[t]he transfer of the USA Entertainment Group and its assets to the [VUE
Joint Venture] represents a break-up" of USA; that this transfer is "wrongful,
unfair and harmful" to the public stockholders of USA; that the transfer, and
related transactions, represent breaches of fiduciary duty by the individual
defendants; that the board of directors of USA has not fulfilled its alleged
duties in connection with the transaction because defendants were allegedly
under a duty to seek the highest price available for the USA Entertainment
Group; that specified defendants (i.e., Mr. Diller, Vivendi, Liberty and the
representatives of Vivendi and Liberty on the USA board of directors) are being
disproportionately "enriched" by the proposed transaction in relation to the
public stockholders; that the defendants have "failed to fully disclose the true
value of USA's Entertainment Group" and the alleged future financial benefits
which Vivendi, Liberty and Mr. Diller will obtain; and that the individual
defendants approved Mr. Diller's alleged usurpation of a corporate opportunity.
The complaints also allege that Vivendi and Liberty have aided and abetted the
individual defendants in their alleged breaches of fiduciary duty. As relief,
the complaints seek, among other things, a declaration that the proposed joint
venture is "unfair, unjust and inequitable"; an injunction against consummation
of the transactions; an award of damages in an unspecified amount; and an order
"[r]equiring defendants to conduct a proper process in the break up of [USA]."
On February 11, 2002, the Chancery Court issued an order consolidating the
actions under the caption, IN RE: USA NETWORKS, INC. SHAREHOLDERS LITIGATION,
Consolidated Civil Action No. 19236-NC. USA believes the allegations of the
complaints are entirely without merit and intends to vigorously defend the
actions.
HOME SHOPPING NETWORK CONSUMER CLASS ACTION
On November 15, 1999, Home Shopping Network was named as a defendant in a
consumer class action lawsuit entitled BRUCE TOMPKINS, HENRIETTA BUCK AND JODI
HABEL HILL ON BEHALF OF THEMSELVES AND ALL OTHER SIMILARLY SITUATED INDIVIDUALS
V. PROTEVA, INC., HOME SHOPPING NETWORK, INC. D/B/A HOME SHOPPING NETWORK AND
THE HOME SHOPPING NETWORK, JOHN ROBERTS, VIVIAN ROBERTS MCKINLEY, KN CHAN,
WILLIAM LYNCH AND BRIAN JORDAN, filed in the Chancery Division of the Circuit
Court of Cook County, Illinois, Case No. 99 CH 12013. The action is purportedly
brought on behalf of consumers who were alleged to have purchased a Proteva
personal computer from one of the defendants and experienced one of the three
following conditions: (a) the computer was or became defective upon purchase or
soon thereafter, (b) a defendant refused or failed to honor the rebate offer
which was offered as part of the sale, or (c) a defendant refused or failed to
provide customer service as purportedly advertised. In the complaint, the
plaintiffs assert causes of action for consumer fraud, breach of implied
warranty of merchantability and unjust enrichment and seek compensatory and
punitive damages along with interest, costs and attorneys' fees. Home Shopping
Network filed an answer to the complaint.
46
The plaintiffs filed an amended class action complaint that, among other
things: (i) added an additional named plaintiff, Susan Leff, (ii) added Home
Shopping Club LP, Warrantech Helpdesk, Inc., Banctech Service Corp. and
Timespace Internet, Inc. as named defendants, (iii) removed two individuals as
named defendants, Vivian Roberts McKinley and Kn Chan, and (iv) expanded the
existing warranty cause of action to also apply to breach of express warranty.
On May 9, 2000, Home Shopping Network, Inc. and Home Shopping Club LP (the "HSN
Defendants") filed a motion to dismiss the amended complaint. On May 23, 2000,
the Cook County Circuit Court addressed the HSN Defendants' motion to dismiss by
entering an Order that, in pertinent part, required the plaintiffs to file a
second amended complaint. On June 6, 2000, the plaintiffs filed a second amended
class action complaint that, among other things, added an additional named
plaintiff, Anastasia Kolias, and asserted two additional causes of action for
negligent misrepresentation and breach of contract. The HSN Defendants filed an
answer and affirmative defenses to the second amended complaint.
On December 1, 2000, the plaintiffs filed a third amended class action
complaint that, among other things: (i) added an additional named plaintiff,
Wayne Varner, (ii) removed three corporate defendants, Warrantech
Helpdesk, Inc., Banctec Services Corp. and Timespace Internet, Inc., and
(iii) removed causes of actions for negligent misrepresentation and breach of
contract. The HSN Defendants filed an answer and affirmative defenses to the
third amended complaint. On February 27, 2001, the plaintiffs filed a motion for
class certification.
On June 1, 2001, the Court entered an Order granting plaintiffs' motions to
voluntarily dismiss plaintiffs Henrietta Buck and Anastasia Kolias from the
lawsuit. On July 2, 2001, the HSN Defendants together with certain other
defendants filed a consolidated brief in opposition to plaintiffs' motions for
class certification. On or about July 23, 2001, the plaintiffs sought and were
granted leave to file a fourth amended class action complaint that added an
additional named plaintiff, Monetha Harris. The HSN Defendants have filed an
answer and affirmative defenses to the fourth amended complaint. In addition, on
September 6, 2001, the HSN Defendants filed a revised consolidated brief in
opposition to plaintiffs' motion for class certification to which the plaintiffs
replied. A hearing on the motion for class certification was held on
November 13, 2001. On December 14, 2001, the Court granted class certification
for an Illinois class only (plaintiffs were seeking nationwide class
certification). The parties are engaged in discovery and the HSN Defendants
continue to vigorously defend this action.
URBAN LITIGATION
Beginning in October 1996, Home Shopping Club, Inc. ("HSC"), predecessor in
interest to HSN LP, withheld monthly payments under the Affiliation Agreement
with Urban Broadcasting Corporation due to breaches of the Affiliation Agreement
by Urban. Urban contested this action. In addition, on January 10, 1997, Urban
filed an Emergency Request for Declaratory Ruling with the FCC requesting an
order that the requirement in the Affiliation Agreement that Urban broadcast at
full-power violates the FCC's rules, or alternatively, requesting that the FCC
revise the terms of the Affiliation Agreement to bring it into compliance with
its Rules. Urban also requested that the FCC undertake an inquiry into USA's
actions of withholding payments to Urban to determine whether USA is fit to
remain an FCC licensee. On December 17, 1999, Urban filed a Supplement to
Emergency Request for Declaratory Relief requesting that the FCC (1) set a
deadline for reformation of several agreements between the parties, (2) rule
that the station's power authorized level is lower than the level set by current
authorizations and (3) agree not to pass on any applications for assignment or
transfer of the station. Certain entities controlled by USA filed an opposition
to this Request on January 10, 2000 to which Urban replied on January 27, 2000.
As of this date, no ruling has been issued by the FCC.
On October 23, 1997, HSC filed suit against Urban in the Circuit Court for
Arlington County, Virginia seeking a judicial declaration that it was entitled
to withhold the payments in dispute because of Urban's breaches of the
Affiliation Agreement. Urban responded with counterclaims and began a related
action in the Circuit Court against HSC, HSN, Inc. (now USA) and Silver King
Broadcasting of Virginia, Inc. (now USA Station Group of Virginia, Inc.
("USA-SGV")). Urban asserted contract and
47
tort claims related to HSC's decision to withhold affiliation payments. A trial
was held on April 5-7, 1999. At the conclusion of Urban's case, the court ruled
that Urban's evidence be struck and that judgment be entered in favor of HSC,
USA and USA-SGV on all counts of Urban's First Amended Motion for Judgment.
Further, the court ruled that the related chancery action, which had been
consolidated with the law action for trial, be severed for further proceedings
at some future date. A Final Order of Judgment concerning the above rulings was
entered by the court on May 5, 1999. On May 3, 1999, HSC, USA and USA-SGV filed
a Motion for Summary Judgment directed to all remaining counts in the chancery
action. Urban has appealed the judgment in the law action to the Virginia
Supreme Court. In addition, on June 11, 1999, judgment was entered in favor of
HSC, USA and USA-SGV on all Urban's counterclaims in the chancery suit, and the
trial court granted HSC's request for a declaratory judgment that HSC had not
breached the Affiliation Agreement. Urban failed to file a timely appeal of the
judgment in the chancery suit. Based on Urban's failure to appeal the chancery
suit, USA has moved to dismiss Urban's appeal in the related law action. A
hearing on the motion to dismiss was heard on February 16, 2000. On March 1,
2000, the Virginia Supreme Court granted the motion to dismiss and dismissed
Urban's petition for appeal related to the at-law action. On or about March 15,
2000, Urban filed a petition for rehearing which was denied by the Virginia
Supreme Court on April 21, 2000.
On April 20, 2000, Urban filed a motion in the U.S. Bankruptcy Court for the
Eastern District of Virginia seeking to have that Court reopen Urban's prior
Chapter 11 case and clarify certain factual and legal matters contained within
the Court's September 30, 1996 confirmation order. In addition, Amresco Funding
Corporation, the entity that provided Urban with bankruptcy exit financing,
joined in Urban's motion. By Order dated May 3, 2000, the Court denied Urban's
motion. On May 15, 2000, Urban filed a motion requesting that the Court
reconsider its May 3, 2000 ruling, or, in the alternative, amend findings of
fact. By Memorandum Opinion and Order dated June 9, 2000, the Court denied
Urban's motion to reconsider, or, in the alternative, to amend findings of fact.
On November 12, 1999, the Arlington County Circuit Court granted USA-SGV a
default judgment against Urban arising from Urban's defaults on the Loan
Agreement for $10,552,060.64, plus interest, plus $8,131 in attorneys fees and
costs. Urban has noted an appeal of this judgment. Urban's appeal of this
judgment was denied by the Virginia Supreme Court on June 2, 2000, and Urban's
petition for rehearing was denied on July 21, 2000.
On August 1, 2000, Urban and Mr. Theodore M. White, President and owner of
all of the voting stock of Urban, filed voluntary petitions under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Columbia. USA-SGV filed motions on August 3, 2000 requesting the Court to:
(a) transfer venue of Urban's bankruptcy case from the U.S. Bankruptcy Court for
the District of Columbia to the U.S. Bankruptcy Court for the Eastern District
of Virginia, and (b) appoint a Chapter 11 trustee for Urban. The U.S. Bankruptcy
Court for the District of Columbia granted USA-SGV's motion to transfer venue.
An evidentiary hearing on USA-SGV's motion for entry of an order directing
appointment of a Chapter 11 trustee for Urban was scheduled to occur before the
Bankruptcy Court for the Eastern District of Virginia on November 29, 2000. On
November 29, 2000, the parties entered into a Stipulation and Consent Order Re
Motion to Appoint Chapter 11 Trustee.
On or about June 27, 2001, USA-SGV transferred its claim against Urban to
USA Broadcasting, Inc. On April 6, 2001, the U.S. Bankruptcy Court for the
Eastern District of Virginia approved a sale of Urban Broadcasting Corporation's
("Urban") assets for the sum of $60,000,000. The closing of the sale of the
Urban assets occurred on August 20, 2001. Pursuant to an order of the Bankruptcy
Court, the purchaser paid the balance of the purchase price to counsel for Urban
to be held in trust. The Bankruptcy Court rejected Urban's amended plan of
reorganization and Univision of Virginia, Inc.'s plan of liquidation and the
Court directed the appointment of a Chapter 11 Trustee. The proceeds of the sale
are sufficient to pay all of Urban's creditors in full, including USA
Broadcasting, Inc.'s judgment claim, and leave substantial funds for
distribution to Urban's equity holders.
48
On February 26, 2002, the Court entered an Order allowing and authorizing
the Trustee to pay USA's judgment claim against Urban in the approximate amount
of $15 million. USA has received this payment. USA also is asserting a claim
against Urban for attorneys fees and costs in the amount of approximately
$1 million. That matter is set for hearing before the Court on April 15, 2002.
TICKETS.COM LITIGATION
On July 23, 1999, Ticketmaster Online-Citysearch and Ticketmaster
Corporation filed a Complaint seeking damages and injunctive relief against
Tickets.com, Inc. ("Tickets.com"), entitled TICKETMASTER CORPORATION AND
TICKETMASTER ONLINE-CITYSEARCH, INC. V. TICKETS.COM, INC., Case No. 99-07654
HLH, in the United States District Court for the Central District of California.
Ticketmaster claims that Tickets.com violates Ticketmaster's legal and
contractual rights by, among other things, (i) providing deep-links
toTicketmaster's internal web pages without Ticketmaster's consent,
(ii) systematically, deceptively and intentionally accessing Ticketmaster's
computers and computer systems and copying verbatim Ticketmaster event pages
daily and extracting and reprinting Ticketmaster's Uniform Resource Locators
("URLs") and event data and information in complete form on Tickets.com's
website and (iii) providing false and misleading information about Ticketmaster,
the availability of tickets on the Ticketmaster website, and the relationship
between Ticketmaster and Tickets.com. On January 7, 2000, Ticketmaster filed a
first amended complaint. Tickets.com filed a motion to dismiss Ticketmaster's
first amended complaint on or about February 23, 2000, which was denied in part
and granted in part with leave to amend. Ticketmaster filed a second amended
complaint on April 21, 2000.
On March 3, 2000, Ticketmaster filed a motion for preliminary injunction,
requesting the Court to enjoin Tickets.com from, among other things,
deep-linking and "spidering" to Ticketmaster's internal web pages, accessing
Ticketmaster's computers and computer systems and copying Ticketmaster's event
pages, and providing misleading and false information about Ticketmaster, the
availability of tickets on the Ticketmaster website and the relationship between
Ticketmaster and Tickets.com. On July 31, 2000, the Court held a hearing. On
August 11, 2000, the Court issued a ruling denying Ticketmaster's motion for
preliminary injunction. On September 8, 2000, Ticketmaster filed a notice of
appeal of the Court's order denying Ticketmaster's motion for preliminary
injunction. On January 11, 2001, the Ninth Circuit Court of Appeals affirmed the
District Court's order denying Ticketmaster's motion for preliminary injunction.
On May 30, 2000, Tickets.com filed its Answer to Ticketmaster's second
amended complaint and counterclaims against Ticketmaster Corporation and
Ticketmaster Online-Citysearch, Inc. Tickets.com asserted claims for relief
against Ticketmaster for violations of the Sherman Act, sections 1 and 2,
violations of California's Cartwright Act, violations of California's Business
and Professions Code section 17200, violations of common law restraint of trade
and unfair competition and business practices, interference with contract and
declaratory relief. Tickets.com claimed that Ticketmaster Corporation's
exclusive agreements with Ticketmaster Online-Citysearch, Inc., venues,
promoters and other third parties injure competition, violate antitrust laws,
constitute unfair competition and interfere with Tickets.com's prospective
economic advantages. On July 19, 2000, Ticketmaster filed a motion to dismiss
any claim based in whole or in part on Ticketmaster's alleged litigation conduct
as well as Tickets.com's ninth claim for relief under California's antitrust
laws (the Cartwright Act). On September 25, 2000, the court entered an order
denying Ticketmaster's motion on the ground that Tickets.com has the right to
pursue some discovery on the issues raised in the motion before the issue can
properly be resolved.
The Court recently amended the pre-trial schedule setting September 1, 2002
as the discovery cut-off date, January 3, 2003 as the date for the final
pre-trial conference, and has indicated that the trial will be set to commence
in February 2003. The parties currently are actively engaged in document and
deposition discovery in the matter. Tickets.com seeks monetary damages that, if
awarded, would have a material adverse effect on Ticketmaster. Ticketmaster is
vigorously defending against the claims
49
brought by Tickets.com. However, Ticketmaster can give no assurances that
Ticketmaster will not incur material damages or costs in connection with the
litigation.
CLASS ACTION LITIGATION RELATED TO MAGAZINE SALES
FLORIDA: On or about December 18, 2000, Ticketmaster Corporation and
Time, Inc. were named as defendants in a purported class action lawsuit filed in
the Florida Circuit Court of the Thirteenth Judicial Circuit in Hillsborough
County. The lawsuit is entitled VICTORIA MCLEAN V. TICKETMASTER CORPORATION AND
TIME, INC., Case No. G0009564. The lawsuit alleges that the offering for sale by
Ticketmaster Corporation of subscriptions to Entertainment Weekly magazine, a
publication of Time, Inc., as an agent of Time, Inc., involves a pattern of
criminal activity, conspiracy and unfair and deceptive trade practices by
allegedly disclosing credit card account information to third parties without
express written consent and unauthorized posting to credit card accounts. As the
prayer for relief in the lawsuit, the plaintiff seeks to have the Court enjoin
the business practices of which the plaintiff has complained. In addition, the
plaintiff seeks treble monetary damages, as well as attorneys' fees and the
costs for pursuing the action. Ticketmaster Corporation and Time, Inc. filed a
motion to dismiss the complaint on various grounds.
On or about May 30, 2001, the plaintiff filed an amended complaint that
purported to add a second consumer as a plaintiff. In response to the amended
complaint, Ticketmaster and Time requested that their motion to dismiss be taken
off calendar, and on July 23, 2001, Ticketmaster filed an Answer. Discovery is
in its beginning stages. Ticketmaster believes the lawsuit is without merit and
expects to vigorously defend against the lawsuit.
MICHIGAN: On or about August 17, 2001, Ticketmaster L.L.C. and Time, Inc.
were named as defendants in a purported class action lawsuit in the Circuit
Court for the County of Macomb, State of Michigan. The lawsuit is entitled GLENN
R. MATECUN, AND ALL OTHERS SIMILARLY SITUATED V. TICKETMASTER L.L.C. AND
TIME, INC., Case No. 01-3573 CP. On or about January 11, 2002, the plaintiff
filed his First Amended Complaint, alleging that Ticketmaster is providing
credit card information to Time so that Time can sell unwanted magazine
subscriptions without the consumer's knowledge or consent in violation of
various Michigan state laws. Plaintiff seeks monetary damages, treble damages,
exemplary damages, attorney' fees and equitable relief. Discovery is in the
beginning stages. Ticketmaster believes the case is without merit and intends to
vigorously defend against the lawsuit.
RTL LITIGATION
On August 25, 2000, RTL Plus Deutschland Fernsehen GMBH & Co. Betriebs-KG,
Companie Luxembourgeoise de Telediffusion S.A. and UFA Film-Und Fernseh-GMBH &
Co. KG (collectively "RTL") filed a complaint in the Netherlands against
Universal Studios International B.V. ("USI"). USI, the international
distribution entity of Universal Studios, Inc., has the rights, subject to
various exemptions, to distribute internationally certain television programs
owned by Studios USA and other USA entities. The complaint involves a 10-year
"output" agreement between RTL and USI, signed July 30, 1996, pursuant to which,
among other things, certain television programs owned by Studios USA and other
USA entities are distributed in Germany (the "RTL Output Agreement"). The RTL
Output Agreement also includes "co-production" provisions under which RTL
acquires an equity interest in certain programs. The complaint, based on
equitable doctrines of "mistake of fact" and "unforeseen circumstances,"
requests the court to modify or nullify RTL's licensing and "co-production"
obligations with respect to current television programs. Studios USA and its
affiliated companies are not parties to the RTL Output Agreement. On
November 22, 2000, USA moved to intervene or, alternatively, to join USI, in the
Netherlands proceeding.
On July 18, 2001, the Court in The Netherlands permitted USA to join USI as
a co-defendant in the proceeding, but not to intervene as an independent party
capable of asserting rights on its own
50
behalf. On November 20, 2001, a portion of the dispute was settled. With respect
to the remainder of the dispute, USA filed its Statement of Defense on
January 16, 2002. Studios USA and its affiliated entities believe the RTL
complaint to be without merit, and intend to vigorously protect their interests.
ASCAP LITIGATION
USA Cable's networks, USA Network, Sci Fi Channel, Trio and NWI, along with
most other satellite-delivered networks, are involved in continuing disputes
regarding the amounts to be paid by it for the performance of copyrighted music
in the repertories of the American Society of Composers, Authors and Publishers
("ASCAP") and by Broadcast Music, Inc. ("BMI"). The payments to be made to ASCAP
will be determined in a "rate court" proceeding under the jurisdiction of the
U.S. District Court for the Southern District of New York. In the initial phase
of this proceeding, it was determined that USA Network must pay ASCAP interim
license fees calculated at 0.3% of the gross revenues of USA Network. The same
interim fee subsequently has been agreed to for Sci Fi Channel, Trio and NWI.
This fee level is subject to upward or downward adjustment based on the ultimate
outcome of the rate court proceeding, or as the result of future negotiations.
The relevant time periods are subsequent to January 1, 1986 with respect to USA
Network and subsequent to launch with respect to Sci Fi Channel, Trio and NWI.
As to BMI, interim fees are being paid by USA Network, Sci Fi Channel, Trio and
NWI. These interim fees are subject to upward or downward adjustment, based on a
future negotiated resolution or submission of the issue to BMI's own federal
"rate court." USA Network's fees to BMI are final through June 30, 1992 and
interim thereafter. The fees of the remaining services are interim from their
dates of launch. USA cannot predict the final outcome of these disputes, but
does not believe that it will have a material impact on its financial results.
TRACY KEENAN WYNN, ET AL. V. NATIONAL BROADCASTING COMPANY, INC., ET AL.
On October 20, 2000, plaintiffs, a group of television writers over the age
of forty, filed a purported class action in the United States District Court for
the Central District of California Western Division, against many talent
agencies, television networks and studios, including Studios USA LLC, alleging
that the defendants were discriminating against older writers by not hiring them
for writers positions. In November, 2000, plaintiffs filed an amended complaint
adding new plaintiffs, and alleging claims for relief against Studios USA LLC
(and others) for: (1) Violation of Federal and State Civil Rights Laws,
including the Age Discrimination in Employment Act, 29 U.S.C. Section 623, the
California Fair Employment and Housing Act, California Government Code Sections
12940 and 12941, and the New York Human Rights Law, N.Y. Exec. Law Section 296;
(2) Aiding and Abetting Violations of Civil Rights Laws; (3) Conspiracy to
Violate Civil Rights (with other commonly owned or affiliated defendants); and
(4) Breach of the Collective Bargaining Agreement under the Labor Management
Relations Act, 29 U.S.C. Section 301.
Studios USA LLC filed a motion to dismiss this action, or in the
alternative, to sever the claims against Studios USA LLC from the claims against
the other defendants, based on, among other things, the fact that plaintiffs
have alleged a twenty-year conspiracy against a company that was incorporated
only several years ago, and the fact that there are a lack of specific
allegations against Studios USA LLC. The hearing on the motion, originally set
for February 12, 2001, was taken off the calendar and the judge took the matter
under submission without oral argument. On January 24, 2002, the Court granted
Studios USA LLC's motion to dismiss as well as most of the defendants' joint
motions. Plaintiffs may amend their complaint. If they do amend, they would have
to sue Studios USA alone, not in a general action against other defendants. They
could not join other plaintiffs unless they established specific factual
similarities based on specific actions by Studios USA against the particular
plaintiff. As Studios USA successfully argued in its separate motion, a
plaintiff would need to allege specific behavior of Studios USA to state a claim
against Studios USA, and plaintiffs can not sue Studios USA, a three year old
company, for the purported twenty year conspiracy. Studios USA LLC
51
believes it is unlikely that this claim will present any material liability to
the Company and intends to vigorously defend against any potential future
lawsuit.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
USA's common stock is quoted on The Nasdaq Stock Market ("NASDAQ") (Symbol:
USAI). There is no established public trading market for USA's Class B common
stock.
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USA's common stock and Class B common stock, payable in the form of a
dividend to stockholders or record as of the close of business on February 10,
2000. The 100% stock dividend was paid on February 24, 2000. All share numbers
give effect to such stock split.
The following table sets forth, for the calendar periods indicated, the high
and low sales prices per share for USA's common stock on Nasdaq:
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................... $24.94 $17.69
Second Quarter.............................................. 28.20 20.16
Third Quarter............................................... 28.44 16.45
Fourth Quarter.............................................. 27.84 17.45
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................... $29.06 $19.13
Second Quarter.............................................. 24.00 16.88
Third Quarter............................................... 25.94 20.00
Fourth Quarter.............................................. 22.38 16.19
The bid prices reported for these periods reflect inter-dealer prices,
rounded to the nearest cent, and do not include retail markups, markdowns or
commissions, and may not represent actual transactions.
There were approximately 6,500 stockholders of record as of February 15,
2002 and the closing price of USA's common stock that day was $30.25. Because
many of our shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of beneficial
stockholders represented by these record holders.
USA has paid no cash dividends on its common stock to date and does not
anticipate paying cash dividends on its common stock in the immediate future.
Additionally, USA's current loan facilities preclude the payments of dividends
on common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of USA for
each of the years in the five year period ended December 31, 2001. This data was
derived from USA's audited consolidated financial statements and reflects the
operations and financial position of USA at the dates and for the periods
indicated. The information in this table should be read with the financial
statements and accompanying notes and other financial data pertaining to USA
included herein. In August 2001, the Company completed its previously announced
sale of all of the capital stock of certain USA Broadcasting ("USAB")
subsidiaries that own 13 full-power television stations and minority interests
in four additional full-power stations to Univision Communications Inc.
("Univision"). USAB is presented as a discontinued operation for all periods
presented. On February 4, 2002, USA completed its acquisition of a controlling
interest in Expedia, Inc. ("Expedia") through a merger of one of its
52
subsidiaries with and into Expedia. On December 17, 2001, USA and Vivendi
Universal, S.A. ("Vivendi") announced a transaction (the "Vivendi Transaction")
in which USA's Entertainment Group, consisting of USA Cable, Studios USA, and
USA Films, would be contributed to Vivendi Universal Entertainment, a new joint
venture controlled by Vivendi. The Vivendi Transaction is subject to USA
shareholder vote, including the approval of 66 2/3% of the outstanding USA
common stock and USA preferred stock, voting together as a single class, and
excluding shares held by Vivendi, Liberty, Mr. Diller and their respective
affiliates, as well as other customary regulatory approvals, and there can be no
assurance that the transaction will be completed.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997(1) 1998(2)(3) 1999(4) 2000(5) 2001(6)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenues....................... $1,377,145 $2,759,896 $3,371,745 $4,596,152 $5,284,807
Operating profit................... 105,753 249,904 269,914 56,326 233,825
Earnings (loss) from continuing
operations....................... 34,209 63,892 16,515 (88,588) (125,052)
Earnings (loss) before cumulative
effect of accounting change...... 13,061 76,874 (27,631) (147,983) 392,795
Net earnings (loss)................ 13,061 76,874 (27,631) (147,983) 383,608
Basic earnings (loss) per common
share from continuing operations
(7):............................. 0.16 0.22 0.05 (0.25) (0.33)
Diluted earnings (loss) per common
share from continuing operations
(7):............................. 0.15 0.19 0.04 (0.25) (0.33)
Basic earnings (loss) per common
share before cumulative effect of
accounting change (7):........... 0.06 0.27 (.08) (0.41) 1.05
Diluted earnings (loss) per common
share before cumulative effect of
accounting change (7):........... 0.06 0.21 (.08) (0.41) 0.61
Basic earnings(loss) per common
share (7):....................... 0.06 0.27 (.08) (0.41) 1.03
Diluted earnings (loss) per common
share (7):....................... 0.06 0.21 (.08) (0.41) 0.60
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................... $ 60,941 $ 443,408 $ 381,046 $ 355,157 $1,380,936
Total assets....................... 2,670,796 8,316,190 9,233,227 10,473,870 11,703,052
Long-term obligations, net of
current maturities............... 448,346 775,683 574,979 552,501 544,667
Minority interest.................. 372,223 3,633,597 4,492,066 4,817,137 4,968,369
Stockholders' equity............... 1,447,354 2,571,405 2,769,729 3,439,871 3,945,501
Other Data:
Net cash provided by (used in):
Operating activities............... $ 47,673 $ 256,929 $ 401,577 $ 372,507 $ 669,932
Investing activities............... (82,293) (1,201,912) (413,968) (524,556) 51,935
Financing activities............... 108,050 1,297,654 55,948 58,346 64,008
Effect of exchange rate changes.... -- (1,501) (123) (2,687) (3,663)
Adjusted EBITDA.................... 198,373 496,612 627,745 810,695 893,713
53
Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") is defined as operating profit plus
(1) depreciation and amortization, (2) amortization of cable distribution fees
(3) amortization of non-cash distribution and marketing expense and
(4) disengagement expenses. Adjusted EBITDA is presented here as a management
tool and as a valuation methodology. Adjusted EBITDA does not purport to
represent cash provided by operating activities. Adjusted EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. Adjusted EBITDA may
not be comparable to calculations of similarly titled measures presented by
other companies.
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------------
1997(1) 1998(2)(3) 1999(4) 2000(5) 2001(6)
-------- ---------- -------- -------- --------
Operating profit.......................... $105,753 $249,904 $269,914 $ 56,326 $233,825
Depreciation and amortization............. 71,231 215,811 324,506 693,642 572,765
Amortization of cable distribution fees... 19,261 22,089 26,680 36,322 43,975
Amortization of non-cash distribution
fees, marketing, and compensation
expense................................. 2,128 8,808 6,645 24,405 39,096
Disengagement expenses.................... -- -- -- -- 4,052
-------- -------- -------- -------- --------
Adjusted EBITDA........................... $198,373 $496,612 $627,745 $810,695 $893,713
-------- -------- -------- -------- --------
- ------------------------
(1) The consolidated statement of operations data include the operations of
Ticketmaster since the acquisition by USA of its controlling interest in
Ticketmaster on July 17, 1997.
(2) The consolidated statement of operations data include the operations of USA
Networks and Studios USA since their acquisition by USA from Universal on
February 12, 1998 and Citysearch since its acquisition by USA on
September 28, 1998. For more information about the Ticketmaster
Online-Citysearch transaction, see "Corporate History."
(3) Net earnings for the year ended December 31, 1998 include a pre-tax gain of
$74.9 million related to USA's sale of its Baltimore television station
during the first quarter of 1998 and a pre-tax gain of $109.0 million
related to the Citysearch transaction during the fourth quarter of 1998.
(4) The consolidated statement of operations data include the operations of
Hotel Reservations Network since its acquisition by USA on May 10, 1999 and
the operations of October Films and the domestic film distribution and
development businesses of Universal, which was previously operated Polygram
Filmed Entertainment, referred to as USA Films, since their acquisition by
USA on May 28, 1999. Net earnings for the year ended December 31, 1999
includes a pre-tax gain of $89.7 million related to the sale of securities.
(5) Includes a pre-tax gain of $104.6 million related to the Styleclick
transaction, a pre-tax gain of $3.7 million related to the Hotel
Reservations Network initial public offering, and a pre-tax charge of
$145.6 million related to impairment of Styleclick goodwill.
(6) Includes a gain of $517.8 million, net of tax, related to the sale of
capital stock of certain USA Broadcasting subsidiaries and an after-tax
expense of $9.2 million related to the cumulative effect of adoption as of
January 1, 2001 of SOP 00-2, Accounting By Producers or Distribution of
Films.
(7) Earnings (loss) per common share data and shares outstanding retroactively
reflect the impact of the two-for-one stock splits of USA's common stock and
Class B common stock paid on February 24, 2000 and March 26, 1998. All share
numbers give effect to such stock splits.
54
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
USA Networks, Inc. ("USA" or the "Company") (Nasdaq: USAI) is organized into
two groups, the USA Interactive Group and the USA Entertainment Group. The USA
Interactive Group consists of Home Shopping Network (including HSN International
and HSN.com); Ticketmaster (Nasdaq: TMCS), which operates Ticketmaster,
Ticketmaster.com, Citysearch and Match.com; Hotel Reservations Network (Nasdaq:
ROOM); Electronic Commerce Solutions; Styleclick (OTC: IBUY); Precision Response
Corporation; and Expedia, Inc. (as of February 4, 2002) (Nasdaq: EXPE). The USA
Entertainment Group consists of USA Cable, including USA Network and Sci Fi
Channel and Emerging Networks TRIO, Newsworld International and Crime; Studios
USA, which produces and distributes television programming; and USA Films, which
produces and distributes films.
On February 4, 2002, USA completed its acquisition of a controlling interest
in Expedia, Inc. ("Expedia") through a merger of one of its subsidiaries with
and into Expedia. See below for further discussion under "Subsequent Events".
On December 17, 2001, USA and Vivendi Universal, S.A. ("Vivendi") announced
a transaction (the "Vivendi Transaction") in which USA's Entertainment Group,
consisting of USA Cable, Studios USA, and USA Films, would be contributed to
Vivendi Universal Entertainment, a new joint venture controlled by Vivendi. See
below for further discussion under "Subsequent Events".
On January 31, 2001, Ticketmaster Online-Citysearch, Inc. and Ticketmaster
Corporation, both of which are subsidiaries of USA, completed a transaction
which combined the two companies. The combined company has been renamed
"Ticketmaster." Under the terms of the transaction, USA contributed Ticketmaster
Corporation to Ticketmaster Online-Citysearch and received 52 million
Ticketmaster Online-Citysearch Class B Shares. The Ticketmaster Class B common
stock is quoted on the Nasdaq Stock Market.
In August 2001, the Company completed its previously announced sale of all
of the capital stock of certain USA Broadcasting ("USAB") subsidiaries that own
13 full-power television stations and minority interests in four additional
full-power stations to Univision Communications Inc. ("Univision"). Total cash
proceeds were $1.1 billion, of which $510.4 million was collected in fiscal year
2001 and $589.6 million in January 2002. The gain on the sale of the stations
was $517.8 million, net of tax of $377.4 million. The majority of the stations
sold are located in the largest markets in the country and aired HSN on a
24-hour basis. See further discussion of the disengagement process below.
A number of USA's businesses are currently held by two non-wholly owned
subsidiaries, Home Shopping Network, Inc. ("Holdco") and USANi LLC. USA
maintains control and management of Holdco and USANi LLC, and manages the
businesses held by USANi LLC, in substantially the same manner as they would be
if USA held them directly through wholly owned subsidiaries. The other principal
owners of these subsidiaries are Liberty Media Corporation ("Liberty") and
Vivendi, through Universal Studios, Inc ("Universal") and other subsidiaries.
USA has the contractual right to require the exchange of the Holdco shares held
by Liberty for shares of USA. Following such exchange and after giving effect to
the Vivendi Transaction, Holdco and USANi LLC will become wholly owned, thereby
simplifying USA's corporate and capital structure.
SUBSEQUENT EVENTS
EXPEDIA TRANSACTION
On February 4, 2002, USA completed its acquisition of a controlling interest
in Expedia through a merger of one of its subsidiaries with and into Expedia.
Immediately following the merger, USA owned all of the outstanding shares of
Expedia Class B common stock, representing approximately 64.2% of
55
Expedia's then outstanding shares, and 94.9% of the voting interest in Expedia.
On February 20, 2002, USA acquired 936,815 shares of Expedia common stock,
increasing USA's ownership to 64.6% of Expedia's the then outstanding shares,
with USA's voting percentage remaining at 94.9%. In the merger, USA issued to
former holders of Expedia common stock who elected to receive USA securities an
aggregate of 20.6 million shares of USA common stock, 13.1 million shares of $50
face value 1.99% cumulative convertible preferred stock of USA and warrants to
acquire 14.6 million shares of USA common stock at an exercise price of $35.10.
Expedia will continue to be traded on Nasdaq under the symbol "EXPE," the USA
cumulative preferred stock trades on OTC under the symbol "USAIP" and the USA
warrants trade on Nasdaq under the symbol "USAIW."
Pursuant to the terms of the USA/Expedia transaction documents, Microsoft
Corporation, which beneficially owned 33,722,710 shares of Expedia common stock,
elected to exchange all of its Expedia common stock for USA securities in the
merger. Expedia shareholders who did not receive USA securities in the
transaction retained their Expedia shares and received for each Expedia share
held 0.1920 of a new Expedia warrant.
CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE
On December 17, 2001, USA announced it had entered into an agreement with
Vivendi pursuant to which USA would contribute USA's Entertainment Group to a
limited liability entity (Vivendi Universal Entertainment, "VUE") to be
controlled by Vivendi, to which Vivendi would contribute the film, television
and theme park businesses of Universal Studios, Inc. ("Universal"). Upon
consummation of the Vivendi transaction, the joint venture will be controlled by
Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi,
5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment
for a 15-year period, (ii) a $750 million face value Class A preferred interest
in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled
in cash at its then face value at maturity; (iii) a $1.75 billion face value
Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a
3.6% annual cash dividend, callable and puttable after 20 years, to be settled
by Universal at its then face value with a maximum of approximately 56.6 million
USA common shares, provided that Universal may substitute cash in lieu of shares
of USA common stock (but not USA Class B common stock), at its election; (iv) a
5.44% common interest in VUE, generally callable by Universal after five years
and puttable by USA after eight years, which may be settled in either Vivendi
stock or cash, at Universal's election, and (v) a cancellation of Universal's
USANi LLC interests currently exchangeable into USA common shares including
USANi LLC interests obtained from Liberty in connection with a related
transaction (see immediately below).
Related to the transaction, Liberty will exchange 7,079,726 shares of USANi
LLC for shares of USA common stock, and subsequently transfer to Universal
25,000,000 shares of USA common stock, its remaining 38,694,982 shares of USANi
LLC, as well as the assets and liabilities of Liberty Programming France (which
consist primarily of 4,921,250 shares of multiThematiques S.A., a French
entity), in exchange for 37,386,436 Vivendi ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share. Barry Diller, USA's chairman and chief executive officer, will receive a
common interest in VUE with a 1.5% profit sharing percentage, with a minimum
value of $275.0 million, in return for his agreeing to specified non-competition
provisions and agreeing to serve as chairman and chief executive officer of VUE.
USA and Mr. Diller have agreed that they will not
56
compete with Vivendi's television and filmed entertainment businesses (including
VUE) for a minimum of 18 months.
The Vivendi Transaction is subject to USA shareholder vote, including the
approval of 66 2/3% of the outstanding USA common stock and USA preferred stock,
voting together as a single class, and excluding shares held by Vivendi,
Liberty, Mr. Diller and their respective affiliates, as well as other customary
regulatory approvals, and there can be no assurance that the transaction will be
completed.
ADOPTION OF NEW ACCOUNTING RULES FOR GOODWILL
Effective January 1, 2002, all calendar year companies will be required to
adopt Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Other Intangible Assets." The new rules eliminate amortization of
goodwill and other intangible assets with indefinite lives and establish new
measurement criterion for these assets. Although it has not completed its
assessment, the Company anticipates a write-off of $325 million to $425 million
primarily related to the Citysearch and Precision Response ("PRC") businesses.
Although Citysearch and PRC are expected to generate positive cash flows in the
future, due to cash flow discounting techniques to estimate fair value as
required by the new rules, the future discounted cash flows may not support
current carrying values. The expected range for the Citysearch write-off is $75
million to $125 million and for PRC $250 million to $300 million. The rules are
expected to reduce USA's annual amortization by approximately $350 million.
ADJUSTED EBITDA
Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") is defined as operating profit plus (1)
depreciation and amortization, (2) amortization of cable distribution fees (3)
amortization of non-cash distribution and marketing expense and
(4) disengagement expenses. Adjusted EBITDA is presented here as a management
tool and as a valuation methodology. Adjusted EBITDA does not purport to
represent cash provided by operating activities. Adjusted EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. Adjusted EBITDA may
not be comparable to calculations of similarly titled measures presented by
other companies.
The following is a reconciliation of Operating Income to Adjusted EBITDA for
2001, 2000 and 1999.
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Operating profit............................ $233,825 $ 56,326 $269,914
Depreciation and amortization............... 572,765 693,642 324,506
Amortization of cable distribution fees..... 43,975 36,322 26,680
Amortization of non-cash distribution and
marketing expense......................... 26,384 11,665 --
Amortization of non-cash compensation
expense................................... 12,712 12,740 6,645
Disengagement expenses...................... 4,052 -- --
-------- -------- --------
Adjusted EBITDA............................... $893,713 $810,695 $627,745
-------- -------- --------
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
57
BUSINESS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: MATERIAL ADVERSE
CHANGES IN ECONOMIC CONDITIONS GENERALLY OR IN THE MARKETS SERVED BY THE
COMPANY; FUTURE REGULATORY AND LEGISLATIVE 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; THE ABILITY TO
EXPAND INTO AND SUCCESSFULLY OPERATE IN FOREIGN MARKET; AND OBTAINING AND
RETAINING KEY EXECUTIVES AND EMPLOYEES.
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
In April 2000, the Company acquired Precision Response Corporation ("PRC"),
a leader in outsourced customer care for both large corporations and high-growth
internet-focused companies (the "PRC Transaction"). On July 27, 2000, USA and
Styleclick.com Inc. ("Old Styleclick"), an enabler of e-commerce for
manufacturers and retailers, completed the merger of Internet Shopping Network
("ISN") and Styleclick.com, forming a new company named Styleclick, Inc.
("Styleclick") (the "Styleclick Transaction"). The Styleclick Transaction, the
PRC Transaction and the merger of Ticketmaster and TMCS resulted in increases in
net revenues, operating costs and expenses, other income (expense), minority
interest and income taxes. The following historical information is supplemented,
where appropriate, with pro forma information. The unaudited pro forma
information is presented below for illustrative purposes only and is not
necessarily indicative of the results of operations that would have actually
been reported had any of the transactions occurred as of January 1, 2000, nor
are they necessarily indicative of future results of operations.
INTERACTIVE
HSN--U.S.
OPERATING RESULTS
Net revenues in 2001 increased by $125.6 million, or 8.2%, to $1.66 billion
from $1.53 billion in 2000 due primarily to higher revenue from HSN.com of $86.5
million, increased continuity sales of $6.3 million and $35.9 million of revenue
generated by the Improvements business, a specialty catalogue retailer purchased
in 2001. Note that 2001 was impacted by the national tragedy of September 11th,
as on-air sales declined in the third quarter of 2001 $11.5 million due to a
dramatic, but relatively short-lived, decline in viewership following the
tragedy. HSN ceased its live programming commencing shortly after the attacks
and aired live news programming from USA Cable's NWI during that time. For 2001,
total units shipped domestically increased to 36.8 million units compared to
34.2 million units in 2000, while the on-air return rate decreased slightly to
19.6% from 19.9% in 2000. The average price point in 2001 was $48.97, compared
to $48.90 in 2000. Cost related to revenues and other costs and expenses for
2001 increased by $132.1 million, or 10.2%, to $1.4 billion from $1.3 billion in
2000 due to higher fixed overhead costs for fulfillment, including costs
incurred to build out its new California fulfillment facility (in 2002, the
center is expected to reduce shipping times to west coast customers), which
helped contribute, along with pricing incentives offered after September 11th,
to a lower on-air gross margin of 32.4% as compared to 33.8% in the prior year.
Other operating costs increased due to investments in alternative distribution
channels and continuing technology investments in HSN.com as the business
scales. Furthermore, the Company incurred higher selling and marketing costs,
including programs to attract new customers, and costs related to the
Improvements business Adjusted EBITDA in 2001 decreased $6.5 million, to $230.3
million from $236.8 million in 2000, due to increased Adjusted EBITDA of HSN.com
of $21.6 million, the continuity business of $1.5 million and $3.9 million of
Adjusted EBITDA generated by the Improvements business, offset partially by the
impact of lower on-air sales, lower margins and higher operating costs. Adjusted
EBITDA in 2001 excludes amortization of cable distribution fees of $44.0 million
in 2001 and $36.3 million in 2000. Excluding one-time charges and benefits and
the estimated impact of disengagement (discussed below), net revenues in 2001
58
increased by $131.9 million, or 8.6%, to $1.66 billion from $1.53 billion in
2000 and Adjusted EBITDA increased $1.9 million, to $231.5 million from $229.6
million in 2000. One time charges and benefits include $1.2 million related to
employee terminations in 2001 and one-time benefits of $6.3 million related to a
favorable settlement of litigation relating to an HSN broadcast affiliation
agreement and a cable affiliation agreement in 2000. See below for a discussion
of disengagement.
DISENGAGEMENT
As noted in the Company's previous filings, the majority of the USAB
stations sold to Univision are located in the largest markets in the country and
aired HSN on a 24-hour basis. As of January 2002, HSN switched its distribution
in these markets directly to cable carriage. As a result, HSN lost approximately
12 million homes and accordingly, HSN's operating results will be affected.
Fortunately, sales from broadcast only homes are much lower than sales from
cable homes. As a result, HSN's losses attributable to disengagement are
expected to be limited. HSN anticipates losing sales, which translates on a pro
forma basis for 2001, of $108 million and Adjusted EBITDA of $15 million. These
anticipated losses are consistent with previous disclosures, in which it was
stated that disengagement losses would equal approximately 6% of HSN's sales and
Adjusted EBITDA. In addition, in order to effectively transfer HSN's
distribution to cable (which has been accomplished), USA will incur charges of
approximately $100 million in the form of payments to cable operators and
related marketing expenses. In effect, this approximately $100 million payment
will reduce USA's pre-tax proceeds from the Univision transaction to $1 billion.
The impact of lost sales and Adjusted EBITDA have been presented separately to
attempt to illustrate the impact of disengagement and present results on a
comparable basis. These disengagement costs are excluded from Adjusted EBITDA.
Approximately $4.1 million of these costs were incurred in 2001 and $35.9
million are expected to be incurred in 2002. USA believes that its disengagement
costs increased to the higher end of USA's anticipated range of costs, since USA
was required to achieve a certain portion of disengagement after the Univision
announcement and with specified end-dates for continuing broadcast distribution.
The Company has supplemented its discussion of HSN's results by including a
comparison of 2001 to 2000, adjusted for the estimated impact of disengagement
on revenues and Adjusted EBITDA. In September 2001, the New York market was
disengaged. The estimated 2000 impact was lost revenue of $6.2 million and lost
Adjusted EBITDA of $0.9 million.
TICKETING OPERATIONS
Net revenues in 2001 increased by $61.1 million, or 11.8%, to $579.7 million
from $518.6 million in 2000 due to an increase in the average per ticket
convenience, order processing and delivery revenue of $6.11 in 2001 compared to
$5.71 in 2000,an increase in total tickets sold of 86.7 million in 2001 compared
to 83.0 million in 2000 and, to a lesser extent, the impact of the acquisition
of ReserveAmerica in February 2001. The gross transaction value of tickets sold
for the full year 2001 was $3.6 billion. The percentage of tickets sold online
in 2001 was approximately 32.1% as compared to 24.5% in 2000. Following
September 11th, the Company did experience reduced ticket sales, event
postponements and event cancellations, primarily in the third quarter. Also, the
Company experienced a decrease in sales of concession control systems in its
movie ticketing business in 2001 compared to 2000 due to weak economic
conditions as well as a decrease in phone upsell revenue during 2001. Cost
related to revenues and other costs and expenses in 2001 increased by $54.2
million, or 12.9%, to $473.4 million from $419.2 million in 2000, resulting
primarily from higher ticketing operations costs, including commission expenses,
and higher administrative costs. Adjusted EBITDA in 2001 increased by $6.9
million, or 6.9%, to $106.2 million from $99.4 million in 2000, and was impacted
somewhat by the lingering impact of September 11th, a decline in earnings in
selected international markets, and lower sales of concession control systems.
Adjusted EBITDA in 2001 excludes non-cash distribution and marketing expense of
$0.4 million related to barter arrangements for distribution secured from third
parties, for which USA Cable provides advertising. Excluding one-time items,
Adjusted EBITDA in
59
2001 increased by $6.2 million, or 6.2%, to $106.2 million from $100.0 million
in 2000. One time charges relate to transaction costs incurred related to the
merger of Ticketmaster and TMCS and costs related to an executive termination,
totaling $0.7 million in 2000.
HOTEL RESERVATIONS
Net revenues in 2001 increased by $208.5 million, or 63.6%, to $536.5
million from $328.0 million in 2000, resulting from a 74% increase in room
nights sold (to 4.2 million from 2.4 million), a significant expansion of
affiliate marketing programs to over 23,800 web-based and call center marketing
affiliates in 2001 from 16,200 in 2000, an increase in the number of hotels in
existing cities as well as expansion into 81 new cities and the acquisition of
TravelNow in February 2001. Note that sales were partially impacted by September
11th due to the high volume of cancellations after the attacks, but that the
fourth quarter results rebounded despite the weakened economy and a challenging
travel environment. Cost related to revenues and other costs and expenses in
2001 increased by $179.7 million, or 65.3%, to $455.0 million from $275.3
million in 2000 due primarily due to increased sales, including an increased
percentage of revenue attributable to affiliates that earn commissions (sales
from affiliate websites accounted for approximately 66% of the total revenues,
as compared to approximately 53% in the comparable period), increased credit
card fees, and increased staffing levels and systems to support increased
operations, and higher marketing costs, partially offset by lower telephone and
telephone operator costs due to the increase in Internet-related bookings. Gross
profit margin in 2001 decreased slightly to 31.0% from 31.2% due to a slight
decline in gross profit margin of HRN's historical business offset partially by
the acquisition of TravelNow, which has higher gross margins. The decline in
margin for the historical business resulted from HRN's decision to focus on
increasing market share and the dollar amount of gross profit instead of gross
profit margin. Adjusted EBITDA in 2001 increased by $28.8 million, or 54.7%, to
$81.4 million from $52.6 million in 2000. Adjusted EBITDA for 2001 and 2000
excludes non-cash distribution and marketing expense of $16.5 million and $4.3
million, respectively, related to the amortization of stock-based warrants
issued to affiliates in consideration of exclusive affiliate distribution and
marketing agreements. HRN expects that the amount of non-cash distribution and
marketing expense could grow, as certain of the warrants are performance based,
the value of which is determined at the time the performance criteria are met.
As HRN's stock price rises, the value of the warrants also increases. In
addition, Adjusted EBITDA in 2001 excludes non-cash distribution and marketing
expense of $0.5 million related to cross promotion advertising provided by USA
Cable.
TELESERVICES
Net revenues in 2001 increased by $86.2 million, or 40.6%, to $298.7 million
from $212.5 million in 2000 primarily from the addition of new clients and
expansion of certain existing relationships and the acquisition of new
businesses, offset partially by a decrease in services provided to certain
existing clients. Overall, PRC's business continued to be adversely affected by
an economy-related slowdown in the outsourcing of consumer care programs,
particularly in the telecom and financial services industries. Revenue in 2001
includes $7.1 million for services provided to other USA segments. Cost related
to revenues and other costs and expenses in 2001 increased by $95.3 million, or
53.8%, to $272.6 million from $177.3 million in 2000, due primarily to increased
operations and costs associated with obtaining new clients, including the costs
of the businesses acquired in late 2000 and in 2001. Adjusted EBITDA in 2001
decreased by $9.1 million to $26.0 million from $35.2 million in 2000. Excluding
one-time items, Adjusted EBITDA in 2001 decreased by $0.9 million to $34.3
million from $35.2 million in 2000. One-time charges relate to $8.3 million of
restructuring costs for call center operations, employee terminations and
benefits. Note that PRC was acquired by USA in April 2000. On a pro forma basis,
2001 revenues increased by $16.5 million and 2001 Adjusted EBITDA, excluding
one-time items, decreased by $10.3 million.
60
MATCH.COM
Net revenues in 2001 increased by $20.1 million, or 69.1%, to $49.2 million
compared to $29.1 million in 2000 due to increased subscription revenue, as the
personals operations had a 49% increase in the average number of personals
subscriptions in 2001 compared to 2000 and a subscription price increase
effective November 2000. Cost related to revenues and other costs and expenses
in 2001 increased by $9.8 million to $32.7 million in 2001 from $22.9 million
primarily from a new broadcast media campaign and higher operating costs to
support the increased sales volumes and increased fees paid to distribution
partners. Adjusted EBITDA in 2001 increased by $10.3 million to $16.5 million
from $6.2 million in 2000. Adjusted EBITDA in 2001 excludes $5.9 million of
non-cash distribution and marketing expense related to advertising provided by
USA Cable--$2.5 million for cross promotion advertising and $3.4 million related
to barter arrangements for distribution arrangements secured from unaffiliated
third parties.
HSN--INTERNATIONAL AND OTHER
HSN--International consists primarily of HSN--Germany and Home Shopping
Espanol, which operates Spanish language electronic retailing operations serving
customers primarily in the United States, Puerto Rico and Mexico. HSN--Germany
increased sales $22.9 million, or 10.2%, in 2001 to $247.3 million compared to
$224.4 million in 2000. The Euro did decline in value as compared to the U.S.
dollar during the year. Using a constant exchange rate (1999 chosen for all
periods presented), HSN--Germany increased sales $34.3 million, or 13.1%, in
2001 to $296.0 million compared to $261.7 million in 2000. Sales trends were
adversely impacted by the conversion to a new order management system, which
delayed certain shipments. HSN--Germany recognizes revenue upon shipment. Home
Shopping Espanol had slightly increased revenues of $4.1 million, to $23.4
million in 2001 compared to $19.3 million in 2000, resulting from increased
sales in existing markets and expansion into Mexico. Costs increased primarily
due to higher sales volume, although gross margins declined. HSN--Germany's
margins declined to 33.8% from 36.6% in 2000, due to operating challenges of the
conversion to the new order management system and increased investments in
adding an additional 4 live hours of programming and increased marketing
expenses for new product lines. Margins at Espanol declined to 17.5% in 2001
from 25.7%, due in part to costs of expansion into new territories. Adjusted
EBITDA for electronic retailing in Germany decreased $19.5 million in 2001, to
$4.8 million from $24.3 million in 2000, due to lower margins and higher
operating expenses described above. Adjusted EBITDA loss for Espanol and
International administration, widened to $29.7 million in 2001 from $11.1
million, due to higher costs related to expansion efforts and increased live
broadcasting hours. Excluding one-time items, Adjusted EBITDA for electronic
retailing in Germany decreased $17.9 million in 2001, to $6.4 million from $24.3
million in 2000. One-time items include non-recurring expenses of $1.6 million
related to employee terminations in 2001.
CITYSEARCH AND RELATED
Net revenues in 2001 decreased by $4.8 million to $46.1 million compared to
$50.9 million in 2000 due primarily to decreased advertising revenue related to
the city guides business. Cost related to revenues and other costs and expenses
(including Ticketmaster corporate expenses) in 2001 decreased by $26.9 million
to $90.5 million from $117.4 million in 2000. The decrease in revenues and costs
reflect Citysearch's initiatives to reduce operating costs and focus on higher
margin products. In January 2002, Citysearch announced a further restructuring
of its operations in pursuit of its strategy to achieve breakeven financial
performance in 2003 (excluding Ticketmaster corporate expenses). Adjusted EBITDA
loss in 2001 narrowed by $21.9 million to $44.4 million from $66.3 million in
2000. Adjusted EBITDA in 2001 excludes $11.4 million of non-cash distribution
and marketing expense related to advertising provided by USA Cable, consisting
of $9.1 million for cross promotion advertising and $2.3 million related to
barter arrangements for distribution arrangements secured from unaffiliated
third
61
parties and excludes $1.0 million of one-time costs related to employee
terminations. Excluding one-time items, Adjusted EBITDA loss in 2001 narrowed by
$20.4 million to $43.4 million from $63.8 million in 2000. One-time items
include $1.0 of non-recurring costs related to employee terminations in 2001 and
$2.5 million of non-recurring costs related to the merger of Ticketmaster and
TMCS in 2000.
ELECTRONIC COMMERCE SOLUTIONS/ STYLECLICK
Net revenues in 2001 decreased by $12.4 million to $34.2 million compared to
$46.6 million in 2000 due primarily to decreases in revenue of Styleclick caused
by the shut-down of the First Jewelry and FirstAuction.com websites, offset
partially by increases in revenue for the transactional sites that ECS manages.
Cost related to revenues and other costs and expenses in 2001 decreased by $14.2
million, due primarily to initiatives to reduce operating costs of Styleclick.
Adjusted EBITDA loss in 2001 narrowed by $1.8 million to $58.4 million in 2001
from $60.2 million in 2000. Excluding one-time items, Adjusted EBITDA loss in
2001 narrowed by $6.6 million to $53.6 million in 2001 from $60.2 million in
2000. One-time items include $4.8 million of non-recurring charges related to
consolidating Styleclick's operations in Chicago and the shutdown of the
FirstAuction.com website, and $5.0 million related to the write-down of a
commitment from USA to provide media time recorded in 2001. Regarding the media
time write-down, the commitment for the time expires on December 31, 2002 and
based on current projections, Styleclick does not believe it is likely to use
the time during this period. Note that Styleclick was acquired by USA in July
2000. On a pro forma basis, 2001 revenues for the segment decreased by $14.3
million and 2001 Adjusted EBITDA loss, excluding one-time items, narrowed by
$17.6 million. In 2001, Styleclick began to focus on e-commerce services and
technology while eliminating its online retail business. During this transition,
Styleclick continued to incur significant net losses from operations that raise
substantial doubt about Styleclick's ability to continue as a going concern.
Styleclick is considering its options with respect to the situation.
ENTERTAINMENT
CABLE AND STUDIOS
Net revenues in 2001 increased by $108.0 million, or 7.1%, to $1.63 billion
from $1.53 billion in 2000 due to significant increases in license fees earned
by Studios USA, including amounts related to the three Law & Order programs
currently airing on NBC, increased license fees earned in secondary markets,
increased revenues associated with THE DISTRICT, higher revenues earned on
reality programming, including ARREST AND TRIAL and CROSSING OVER WITH JOHN
EDWARD, offset partially by lower talk show syndication revenues. Revenues at
USA Cable increased slightly, due mainly to a $16 million positive adjustment
related to affiliate fees recorded in the third quarter of 2001. Advertising
revenue was lower than the prior year due to the weak advertising market, which
was worsened by the events of September 11th. Note that the cable networks
provided $10.7 million of advertising to Citysearch and Match.com in 2001. In
addition, the networks recognized $42.2 million of barter revenue pursuant to
agreements with unaffiliated third parties. Studios USA defers revenue
recognition for internally produced series for USA Network and Sci Fi Channel
until the product is aired on the networks. Cost related to revenues and other
costs and expenses in 2001 increased by $42.1 million, or 4.3%, to $1.0 billion
from $977.4 million in 2000 due to higher expenses incurred by Studios USA in
relation to product delivered to the broadcast networks and $13.7 million of
higher expense for development costs, offset partially by efficient use of
programming by Cable and increased usage of internally developed product by
Cable, resulting in reduced program amortization. Adjusted EBITDA in 2001
increased by $65.9 million, or 12.0%, to $613.6 million from $547.7 million in
2000. Excluding one-time items, Adjusted EBITDA in 2001 increased by $69.1
million, or 12.6%, to $616.8 million from $547.7 million in 2000. One-time items
include $3.2 million of one-time compensation expense related to a senior
executive in 2001.
62
EMERGING NETWORKS
Net revenues in 2001 increased by $3.8 million to $24.1 million from $20.3
million in 2000. Revenue in 2001 was impacted by a new affiliate distribution
deal, resulting in lower subscriber rates. Cost related to revenue increased by
$8.1 million to $35.6 million from $27.5 million in 2001 as compared to 2000 due
primarily to higher programming costs of Trio. Adjusted EBITDA loss in 2001
increased by $4.3 million, to a loss of $11.5 million.
FILMED ENTERTAINMENT
Net revenues in 2001 increased by $81.0 million, or 94.0%, to $167.0 million
compared to $86.1 million in 2000 due primarily to increased theatrical, video
and DVD revenues generated on TRAFFIC, which has grossed more than $200 million
in worldwide box office. Cost related to revenues and other costs and expenses
in 2001 increased by $72.4 million, due to higher film amortization costs
related to TRAFFIC and higher prints and advertising costs caused by the
Company's adoption of SOP 00-2, "Accounting by Producers and Distributors of
Films" in the first quarter of 2001, which require that prints and advertising
costs be expensed as incurred rather than amortized over the film's anticipated
revenue stream. Adjusted EBITDA in 2001 was $2.0 million, compared to a loss of
$6.6 million in 2000.
DEPRECIATION AND AMORTIZATION, NON-CASH COMPENSATION AND OTHER INCOME (EXPENSE)
Depreciation and amortization decreased $120.8 million to $572.8 million
from $693.6 million, due primarily to the impact in 2000 of the write-off of
Styleclick goodwill of $145.6 million. On a pro forma basis, giving effect to
the Styleclick Transaction and the PRC Transaction, depreciation and
amortization decreased $144.4 million. Amortization of non-cash compensation
expense remained stable at $12.7 million. The expense relates to non-cash
charges for the Company's bonus stock purchase program, restricted stock awards,
and stock option grants.
For the year ended December 31, 2001, net interest expense increased by
$14.2 million, compared to 2000 primarily due to lower interest earned due to
lower rates.
In the years ended December 31, 2001 and 2000, the Company realized pre-tax
losses of $30.7 million and $7.9 million, respectively, on equity losses in
unconsolidated subsidiaries resulting primarily from HOT Networks, which
operates electronic retailing operations in Europe. In 2001 and 2000, the
Company also realized pre-tax losses of $18.7 million and $46.1 million,
respectively, related to the write-off of equity investments to fair value. The
write-off in equity investments was based upon management's estimate of the
current value of the investments, considering the current business environment,
financing opportunities of the investees, anticipated business plans and other
factors. Note that the majority of investments were in Internet related
companies.
In 2001 the Company recorded a gain of $517.8 million, net of taxes of
$377.4 million related to the sale of all of the capital stock of certain USAB
subsidiaries that own 13 full-power television stations and minority interests
in four additional full-power stations to Univision. Results of operations for
the broadcasting stations for 2000 are recorded as discontinued operations. The
2000 net loss for USAB was $59.4 million, net of tax benefit of $21.3 million
In 2000, the Company realized a pre-tax gain of $104.6 million based upon
the exchange of 25% of ISN for 75% of Old Styleclick in the Styleclick
Transaction. Also, the Company realized a pre-tax gain of $3.7 million related
to the initial public offering of its subsidiary, HRN.
63
INCOME TAXES
USA's effective tax rate of 81.8% for the year ended December 31, 2001 was
higher than the statutory rate due to the impact on taxable income of
non-deductible goodwill, consolidated book losses not consolidated into taxable
income and state income taxes.
MINORITY INTEREST
Minority interest primarily represents Universal's and Liberty's ownership
interest in USANi LLC, Liberty's ownership interest in Holdco, the public's
ownership in TMCS until January 31, 2001, the public's ownership in Ticketmaster
from January 31, 2001, the public's ownership interest in HRN since February 25,
2000,the public's ownership interest in Styleclick since July 27, 2000 and the
partners ownership interest in HSN--Germany since its consolidation as of
January 1, 2000.
USA owns approximately 64.6% of Expedia, so minority interest in 2002 will
be impacted by the public's ownership interest in Expedia.
Upon completion of the Vivendi Transaction, Holdco and USA will own 100% of
the member's interest in USANi LLC. USA has the contractual right to require the
exchange of the Holdco shares held by Liberty for shares of USA. Following such
exchange and after giving effect to the Vivendi Transaction, Holdco and USANi
LLC will become wholly owned, thereby simplifying USA's corporate and capital
structure. These transactions will reduce the amount of minority interest
recorded by USA.
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
The Styleclick Transaction, the PRC Transaction, the Hotel Reservations
Network Transaction and the October Films/ PFE Transaction and the consolidation
of HSN--Germany as of January 1, 2000 resulted in increases in net revenues,
operating costs and expenses, other income (expense), minority interest and
income taxes. The following information is supplemented, where appropriate, with
pro forma information. The unaudited pro forma information is presented below
for illustrative purposes only and is not necessarily indicative of the results
of operations that would have actually been reported had any of the transactions
occurred as of January 1, 2000 and 1999, respectively, nor are they necessarily
indicative of future results of operations.
INTERACTIVE
HSN--U.S.
Net revenues in 2000 increased by $200.4 million, or 15.0%, to $1.5 billion
from $1.3 billion in 1999, resulting primarily from Home Shopping Network's core
business, which generated increased sales of $152.0 million and HSN.com, which
generated increased sales of $39.9 million on revenues of $41.6 million. Total
units shipped increased to 33.4 million units compared to 32.0 million units in
1999, and the average price point increased to $48.90 per unit as compared to
$45.47 in 1999. Furthermore, the return rate decreased to 19.9% from 20.3% in
1999. Cost related to revenues and other costs and expenses in 2000 increased by
$178.3 million, or 15.9%, to $1.3 billion from $1.1 billion in 1999 due
primarily to higher sales volume and higher selling and marketing costs.
Adjusted EBITDA in 2000 increased by $22.1 million, or 10.3%, to
$236.8 million from $214.7 million in 1999. Adjusted EBITDA excludes
amortization of cable distribution fees of $36.3 million in 2000 and $26.7
million in 1999. Excluding one-time charges and benefits, Adjusted EBITDA
increased $15.8 million, to $230.4 million from $214.7 million in 1999. One time
charges and benefits include one-time benefits of $6.3 million related to a
favorable settlement of litigation relating to an HSN broadcast affiliation
agreement and a cable affiliation agreement in 2000.
64
TICKETING OPERATIONS
Net revenues in 2000 increased by $75.9 million, or 17.1%, to $518.6 million
from $442.7 million in 1999, resulting primarily from an increase of 11% in the
number of tickets sold and an increase in revenue per ticket to $5.71 from $5.25
in 1999. The percentage of tickets sold online for 2000 is approximately 25%.
Cost related to revenues and other costs and expenses in 2000 increased by $69.8
million, or 20.0%, to $419.2 million from $349.4 million in 1999. The increase
resulted primarily from higher ticketing operations costs as a result of higher
ticketing volume, including commission expenses and credit card processing fees.
Adjusted EBITDA in 2000 increased by $6.0 million, or 6.5%, to $99.3 million
from $93.3 million in 1999. Excluding one-time items, Adjusted EBITDA in 2001
increased by $6.7 million, or 7.2%, to $100.0 million from $93.3 million in
1999. One time charges relate to transaction costs incurred related to the
merger of Ticketmaster and TMCS and costs related to an executive termination,
totaling $0.7 million in 2000.
HOTEL RESERVATIONS
Net revenues in 2000 increased by $203.9 million to $328.0 million from
$124.1 million in 1999 due to the acquisition of Hotel Reservations Network in
May 1999 as well as the expansion by HRN of affiliate marketing programs, an
increase in the number of hotels for existing cities and expansion into new
cities. As a percentage of revenues, Internet generated sales increased to 93%
in 2000 from 81% in 1999. Cost related to revenues and other costs and expenses
in 2000 increased by $170.1 million to $275.3 million from $105.2 million in
1999 due primarily to increased sales, including an increased percentage of
revenue attributable to affiliate and travel agent sales (for which commissions
are paid), increased credit card charge backs, and increased staffing levels and
systems to support increased operations, and higher marketing costs, partially
offset by lower telephone and telephone operator costs due to the increase in
Internet-related bookings. Adjusted EBITDA in 2000 increased by $33.7million to
$52.6 million from $18.9 million in 1999. As noted, Hotel Reservations Network
was acquired by USA in May 1999. On a pro forma basis, 2000 revenues increased
by $166.2 million and Adjusted EBITDA increased by $28.3 million.
TELESERVICES
Precision Response was acquired in April 2000. Actual revenues and Adjusted
EBITDA for 2000 was $212.5 million and $35.2 million, respectively. On a pro
forma basis, net revenues for the year ended December 31, 2000 increased by
$66.2 million, or 30.7%, to $282.1 million from $215.9 million in 1999. The
increase resulted from growth of new business, including Netcare services, which
generated new client revenues of $14.3 million in 2000. Cost related to revenues
and other costs and expenses for the year ended December 31, 2000 increased by
$51.9 million, or 28.0%, to $237.5 million from $185.5 million in 1999 due
primarily to increased operations. Adjusted EBITDA for the year ended December
31, 2000 increased by $14.3 million, or 46.9%, to $44.6 million from $30.4
million in 1999.
MATCH.COM
Net revenues in 2000 increased by $20.1 million to $29.1 million compared to
$9.0 million in 1999 due to the acquisition of the personals companies,
Match.com.com and Web Media Ventures in June 1999 and September 1999,
respectively. Cost related to revenues and other costs and expenses in 2000
increased by $13.5 million to $22.9 million in 2000 from $9.4 million, resulting
primarily from higher operating costs to support the increased sales volumes and
increased fees paid to distribution partners. Adjusted EBITDA in 2000 increased
by $6.6 million to $6.2 million in 2000 from a loss of $0.4 million.
65
HSN--INTERNATIONAL AND OTHER
Net revenues for 2000 increased by $272.1 million to $281.0 million from
$8.9 million in 1999 due to the consolidation of HSN--Germany as of January 1,
2000. Revenues in 1999 related to Home Shopping Espanol. Cost related to
revenues and other costs and expenses in 2000 increased by $252.9 million to
$266.3 million from $13.4 million in 1999 and Adjusted EBITDA in 2000 increased
by $19.2 million to $14.7 million from a loss in 1999 of $4.5 million. Costs
related to revenues and other costs and Adjusted EBITDA increased due to the
consolidation of HSN--Germany as of January 1, 2000. On a pro forma basis, 2000
revenues increased by $105.3 million and Adjusted EBITDA increased by $2.9
million. These results were dampened by the impact of the Euro exchange rate
decline against the dollar, which resulted in lower equivalent U.S. dollar
revenue of $35.3 million and lower Adjusted EBITDA of $3.9 million as compared
to 1999.
CITYSEARCH AND RELATED
Net revenues in 2000 increased by $23.6 million, or 86.2%, to $50.9 million
compared to $27.3 million in 1999. The increase resulted from expansion into new
cities. Cost related to revenues and other costs and expenses in 2000 increased
by $29.6 million, or 33.7%, to $117.2 million from $87.8 million in 1999 due
primarily to increased costs due to the expansion of local city guides into new
markets. Adjusted EBITDA loss in 2000 widened by $6.0 million to $66.4 million
from $60.4 million in 1999. Excluding one-time items, Adjusted EBITDA loss
widened by $3.5 million to $63.9 million from $60.4 million in 1999. One-time
items include $2.5 million of non-recurring costs related to the merger of
Ticketmaster and TMCS in 2000.
ELECTRONIC COMMERCE SOLUTIONS/STYLECLICK
Net revenues in 2000 decreased by $2.6 million to $46.6 million compared to
$49.2 million in 1999 due to decreases in the Company's auction sites of $12.2
million as compared to 1999. The decrease is due to the merger of ISN and
Styleclick and the integration of the ISN sites with the Styleclick technology,
resulting in a period of 2000 where no significant sales occurred, offset
partially by increases in ECS teleservices and Short Shopping contextual selling
spots, including spots during USA Network's coverage of the US Open. Cost
related to revenues and other costs and expenses in 2000 increased by $16.0
million due primarily to start-up costs incurred to launch the business
initiatives and other overhead expenses, offset partially by lower marketing
expenditures related to the auction business. Adjusted EBITDA loss in 2000
increased by $18.6 million. Styleclick was acquired by USA in July 2000. On a
pro forma basis, net revenue for the segment decreased $6.9 million and the
Adjusted EBITDA loss widened $15.2 million as compared to 1999.
As a result of the 2000 losses and anticipated operating losses of
Styleclick at that time, and the continuing evaluation of the operations and
technology, Styleclick determined the goodwill recorded in conjunction with the
Styleclick Merger was impaired and recorded a write-down of $145.6 million as
goodwill amortization as of December 31, 2000.
ENTERTAINMENT
CABLE AND STUDIOS
Net revenues in 2000 increased by $220.4 million, or 16.9%, to $1.5 billion
from $1.3 billion in 1999 due primarily to an increase in advertising revenues
at USA Network and a significant increase in advertising revenues and affiliate
revenues at Sci Fi Channel due to an increase in subscribers. Ratings and
affiliate revenues increased at both networks. Net revenues at Studios USA
increased due primarily to increased productions for USA Network and Sci Fi
Channel, increased deliveries of network drama and reality productions, and
increased performance of talk shows. Note that Studios USA defers revenue
recognition for internally produced series for USA Network and Sci Fi Channel
until the
66
product is aired on the networks. Cost related to revenues and other costs and
expenses in 2000 increased by $106.7 million, or 12.3%, to $977.5 million from
$870.8 million in 1999, resulting primarily from costs associated with the
increased revenues of all of the businesses, offset partially by efficient use
of programming and increased usage of internally developed product by USA,
resulting in reduced program amortization. Adjusted EBITDA in 2000 increased by
$113.8 million, or 26.2%, to $547.7 million from $433.9 million in 1999.
EMERGING NETWORKS
Net revenues increased by $19.1 million to $20.3 million in 2000 from $1.2
million in 1999 due to the acquisition of Trio and NewsWorld International on
May 19, 2000. Prior to this acquisition, the results reflect only SciFi.com.
Cost related to revenue increased by $23.3 million in 2000 as compared to 1999
due primarily to the increased revenues as well as start-up initiatives.
Adjusted EBITDA loss in 2000 increased by $4.1 million.
FILMED ENTERTAINMENT
Net revenues in 2000 increased by $21.3 million, or 32.9%, to $86.1 million
compared to $64.8 million in 1999 due primarily to increased revenues generated
in the first quarter from theatrical, foreign and television revenues, partially
offset by fewer theatrical releases in the last nine months of the year. Cost
related to revenues and other costs and expenses in 2000 increased by $34.4
million due to higher film costs. Adjusted EBITDA loss in 2000 widened by $13.1
million. USA Films was acquired by USA in May 1999. On a pro forma basis, 2000
revenues increased by $4.0 million and Adjusted EBITDA loss widened by $13.0
million.
DEPRECIATION AND AMORTIZATION, NON-CASH COMPENSATION AND OTHER INCOME (EXPENSE)
Depreciation and amortization increased $369.1 million to $693.6 million
from $324.5 million, due primarily to the impact on goodwill of the Styleclick
Transaction and the PRC Transaction and the full year impact of the Hotel
Reservations Network Transaction and the October Films/ PFE Transaction. Note
that the Company recorded a one-time write-down of the Styleclick goodwill of
$145.6 million in 2000. On a pro forma basis, depreciation and amortization
increased $243.2 million. Amortization of non-cash distribution and marketing
expense of $11.6 million in 2000 relates to expense associated with warrants
issued by HRN in connection with exclusive affiliate distribution arrangements
and advertising provided by USA Cable to Ticketmaster Online-Citysearch ("TMCS")
in consideration of equity interests. Amortization of non-cash compensation
expense increased to $12.7 million from $6.6 million in 1999. The expense
relates to non-cash charges for the Company's bonus stock purchase program,
restricted stock awards, and certain stock option grants.
For the year ended December 31, 2000, net interest expense decreased by
$14.3 million, compared to 1999 primarily due to lower borrowing levels as a
result of the repayment of bank debt in 1999 from the proceeds of equity
transactions involving Universal and Liberty.
In 2000, the Company realized pre-tax losses of $46.1 million related to the
write-off of equity investments to fair value. The write-off in equity
investments was based upon management's estimate of the current value of the
investments, considering the current business environment, financing
opportunities of the investees, anticipated business plans and other factors.
Note that the majority of investments were in Internet related companies.
In the year ended December 31, 2000, the Company realized a pre-tax gain of
$104.6 million based upon the exchange of 25% of ISN for 75% of Old Styleclick
in the Styleclick Transaction. Also, the Company realized a pre-tax gain of $3.7
million related to the initial public offering of its subsidiary, HRN.
67
In the year ended December 31, 1999, the Company realized pre-tax gains of
$89.7 million related to the sale of securities and $10.4 million from the
reversal of equity losses which were originally recorded in 1998 when the
Company made an election to have Universal buy out the Company's interest in a
joint venture established in the Universal Transaction.
INCOME TAXES
USA's effective tax rate of 52.0%, computed before the impact of the
Styleclick goodwill write-off, for which there was no tax impact, for the year
ended December 31, 2000 was higher than the statutory rate due to the impact on
taxable income of non-deductible goodwill, consolidated book losses not
consolidated into taxable income and state income taxes. The rate would have
been higher if not for the impact of the one-time gain from the Styleclick
merger and the write-off of the investments to fair value.
MINORITY INTEREST
Minority interest primarily represented Universal's and Liberty's ownership
interest in USANi LLC, Liberty's ownership interest in Holdco, the public's
ownership in TMCS, the public's ownership interest in HRN since February 25,
2000, the public's ownership interest in Styleclick since July 27, 2000 and the
other partners ownership interest in HSN-Germany since its consolidation as of
January 1, 2000.
DISCONTINUED OPERATIONS
USAB is presented as a discontinued operation for all periods presented. The
net loss for USAB for 2000 was $59.4 million, compared to a loss of $44.1
million in 1999.
PRO FORMA FINANCIAL INFORMATION FOR USA INTERACTIVE
The Company has recently completed/ announced some very significant
transactions, including USA's acquisition of a controlling interest in Expedia
(which closed February 4, 2002) and the contribution of the USA Entertainment
Group to VUE (transaction pending). Subject to the close of the pending
contribution of the entertainment assets to VUE, the Company will be renamed
"USA Interactive," and will be a leader in integrated interactivity focused on
integrating interactive assets across multiple lines of business, no longer to
be engaged in the general entertainment businesses. Due to the significance of
these transactions, we have presented below separate pro forma information for
USA Interactive. The pro forma combined condensed statements of operations
reflects USA's audited statements of operations, adjusted for the pro forma
effects of the contribution of the USA Entertainment Group to VUE, the
acquisition of Expedia, as well as the completion of the acquisitions of
Styleclick and PRC and the merger of Ticketmaster and TMCS, as if such
transactions had occurred at the beginning of the periods presented. The pro
forma information also includes the estimated impact of disengagement of Home
Shopping programming from the USAB stations.
The Vivendi Transaction is subject to USA shareholder vote, including the
approval of 66 2/3% of the outstanding USA common stock and USA preferred stock,
voting together as a single class, and excluding shares held by Vivendi,
Liberty, Mr. Diller and their respective affiliates, as well as other customary
regulatory approvals, and there can be no assurance that the transaction will be
completed.
THE PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS WHICH ACTUALLY WOULD HAVE
BEEN REPORTED HAD THESE TRANSACTIONS OCCURRED AS OF THE BEGINNING OF JANUARY 1,
2000, NOR ARE THEY NECESSARILY INDICATIVE OF USA INTERACTIVE'S FUTURE RESULTS OF
OPERATIONS.
68
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS--USA INTERACTIVE
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
NET REVENUES
HSN--U.S.(a)....................................... $1,658,904 $1,533,271
Ticketing.......................................... 579,679 518,565
Hotel Reservations Network......................... 536,497 327,977
Expedia(b)......................................... 296,936 156,656
Precision Response................................. 298,678 282,120
Match.com.......................................... 49,249 29,122
HSN--International and other(c).................... 272,569 245,714
Citysearch......................................... 46,107 50,889
ECS/ Styleclick.................................... 34,230 48,492
Intersegment elimination............................. (7,053) --
---------- ----------
Total net revenues................................. 3,765,796 3,192,806
Operating costs and expenses:
Cost related to revenues........................... 2,424,580 2,117,995
Other costs and expenses........................... 982,425 838,506
Disengagement costs(d)............................. 4,052 --
Amortization of non cash distribution and marketing
expense(e)....................................... 26,384 11,665
Amortization of non cash compensation expense(f)... 24,204 76,941
Amortization of cable distribution fees............ 43,975 36,322
Depreciation and amortization...................... 493,959 648,408
---------- ----------
Total operating costs and expenses................. 3,999,579 3,729,837
---------- ----------
Operating loss....................................... $ (233,783) $ (537,031)
Adjusted EBITDA...................................... $ 358,791 $ 236,305
ADJUSTED EBITDA--INTERACTIVE PRO FORMA
The following is a reconciliation of pro forma operating income to Adjusted
EBITDA for 2001 and 2000.
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
2001 2000
--------- ---------
Operating loss...................................... $(233,783) $(537,031)
Depreciation and amortization....................... 493,959 648,408
Amortization of cable distribution fees............. 43,975 36,322
Amortization of non-cash distribution and marketing
expense........................................... 26,384 11,665
Amortization of non-cash compensation expense....... 24,204 76,941
Disengagement expenses.............................. 4,052 --
--------- ---------
Adjusted EBITDA....................................... $ 358,791 $ 236,305
--------- ---------
- ------------------------
(a) Includes estimated revenue in 2000 generated by homes lost by HSN following
the sale of USA Broadcasting to Univision of $6.2 million.
69
(b) Expedia results derived from public filings, and represent results for the
twelve months ended December 31, 2001, adjusted for acquisitions made by
Expedia during the year.
(c) Includes impact of foreign exchange fluctuations, which reduced revenues by
$44.0 million and $36.3 million in 2001 and 2000, respectively, if the
results are translated from Euros to U.S. dollars at a constant exchange
rate, using 1999 as the base year.
(d) Represents costs incurred related to the disengagement of HSN from USA
Broadcasting stations. Amounts primarily related to payments to cable
operators and related marketing expenses in the disengaged markets.
(e) Amortization of warrants and stock issued in exchange for distribution and
marketing services.
(f) Expense related to the Company's bonus stock purchase program, restricted
stock awards and certain stock option grants.
Provided below is managements discussion and analysis related to Expedia.
The information is derived from public filings. All other business segments are
covered above.
EXPEDIA
Net revenues in calendar year 2001 increased by $140.3 million, or 89.5%, to
$296.9 million from $156.7 million in 2000, resulting from a 62% increase in
total gross bookings (to 2.9 billion from 1.8 billion--note that Expedia became
the leader in gross bookings among online travel agencies in Q4 2001), a
favorable trend in Expedia.com conversion rates, as it averaged 5.85% in 2001 as
compared to 4.68% in 2000, and a significant increase in cumulative purchasing
customers--6.3 million at the end of 2001 compared to 2.9 million in 2000. Cost
related to revenues and other costs and expenses in 2001 increased by $40.6
million, or 20.8%, to $236.1 million from $195.4 million in 2000 due primarily
due to increased sales. Note that expenses increased at a much lower rate than
revenues as the Company began to realize efficiencies of scale in 2001 due to
increased transaction volume at low incremental costs. Adjusted EBITDA in 2001
increased by $99.6 million to $60.9 million from a loss in 2000 of $38.8
million. Adjusted EBITDA excludes non-cash distribution and marketing expense of
$16.4 million and $64.2 million in 2001 and 2000, respectively.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $669.9 million for the twelve
months ended December 31, 2001 compared to $372.5 million for the twelve months
ended December 31, 2000. These cash proceeds and available cash and borrowings
were used to pay for acquisitions of $201.0 million, to make capital
expenditures of $143.5 million, and to make mandatory tax distribution payments
to the LLC partners of $17.4 million. Furthermore, during 2001 the Company
invested $105.5 million in Hot Networks, a company operating electronic
retailing operations in Europe in which the Company holds an equity stake, and
$20.0 million in National Leisure Group, a consolidator of cruise vacation
packages.
In December 2000, the Company announced that Univision Communications Inc.
("Univision") would acquire, for $1.1 billion in cash, all of the capital stock
of certain USA Broadcasting ("USAB") subsidiaries that own 13 full-power
television stations and minority interests in four additional full-power
stations. In August 2001, the Company completed the sale. The gain on the sale
of the stations was $517.8 million for the twelve months ended December 31,
2001. As of December 31, the Company has received proceeds of $510.4 million.
The remaining receivable of $589.6 million was collected in January 2002.
On February 12, 1998, USA and USANi LLC, as borrower, entered into a credit
agreement that provided for a $1.6 billion credit facility. Of that amount, $1.0
billion was permanently repaid in prior
70
years. The term of the $600.0 million revolving credit facility expires on
December 31, 2002, although it is anticipated that the facility will expire as a
result of the Vivendi Transaction. As of December 31, 2001, there was $595.4
million available for borrowing after taking into account outstanding letters of
credit.
On February 28, 2001, the Company made a mandatory tax distribution payment
to Universal and Liberty in the amount of $17.4 million. On February 29, 2000,
the Company made a mandatory tax distribution payment to Universal and Liberty
in the amount of $68.1 million. On February 28, 2002, the Company expects to
make the mandatory tax distribution payment related to 2001 in the amount of
$153.5 million.
In connection with the 2000 acquisition of Universal's domestic film
distribution and development business previously operated by PFE and PFE's
domestic video and specialty video businesses transaction, USA advanced $200.0
million to Universal in 2000 pursuant to an eight year, full recourse,
interest-bearing note in connection with a distribution agreement, under which
USA will distribute, in the United States and Canada, certain Polygram Filmed
Entertainment, Inc. theatrical films that were not acquired in the transaction.
The advance is repaid as revenues are received under the distribution agreement
and, in any event, will be repaid in full at maturity. Through December 31,
2001, approximately $180.1 million has been offset against the advance,
including $59.8 million in 2001. Interest accrued on the loan through December
31, 2001 is approximately $19.4 million, including $3.9 million in 2001.
In connection with the settlement of its interest in an international joint
venture, USA received $24.0 million from Universal during 2001.
On February 20, 2002, USA acquired 936,815 shares of Expedia common stock
for approximately $47.0 million.
In July 2000, USA announced that its Board of Directors authorized the
extension of the Company's stock repurchase program providing for the repurchase
of up to 20 million shares of USA's common stock over an indefinite period of
time, on the open market or in negotiated transactions. The amount and timing of
purchases, if any, will depend on market conditions and other factors, including
USA's overall capital structure. Funds for these purchases will come from cash
on hand or borrowings under the Company's credit facility. During the twelve
months ended December 31, 2001, the Company made no purchases of its common
stock through this program. During the twelve months ended December 31, 2000,
the Company purchased 5.7 million shares of its common stock for aggregate
consideration of $125.5 million.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment
for a 15-year period, (ii) a $750 million face value Class A preferred interest
in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled
in cash at its then face value at maturity; (iii) a $1.75 billion face value
Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a
3.6% annual cash dividend, callable and puttable after 20 years, to be settled
by Universal at its then face value with a maximum of approximately 56.6 million
USA common shares, provided that Universal may substitute cash in lieu of shares
of USA common stock (but not USA Class B common stock), at its election; (iv) a
5.44% common interest in VUE, generally callable by Universal after five years
and puttable by USA after eight years, which may be settled in either Vivendi
stock or cash, at Universal's election, and (v) a cancellation of Universal's
USANi LLC interests currently exchangeable into USA common shares including
USANi LLC interests obtained from Liberty in connection with the transaction.
As of December 31, 2001, the Company has $978.4 million of cash on hand and
$171.5 million of marketable securities. After the closing of the Vivendi
Transaction, USA expects to have $3.0 billion of
71
cash on hand. Furthermore, the Company's existing $600.0 million credit facility
is expected to expire at that time. As of December 31, 2001, $595.4 million was
available for borrowing after taking into account outstanding letters of credit.
USA anticipates that it will need to invest working capital towards the
development and expansion of its overall operations. The Company anticipates
that it will make a significant number of acquisitions, which could result in
the incurrence of debt. Furthermore, future capital expenditures may be higher
than current amounts over the next several years.
In management's opinion, available cash, internally generated funds and
available borrowings will provide sufficient capital resources to meet USA's
foreseeable needs. See Note 7 of the Notes to Consolidated Financial Statements
for a discussion of commitments and contingencies and unrecorded commitments as
of the balance sheet date.
In 2001, USA did not pay any cash dividends. In relation to the Expedia
transaction, the Company issued approximately 13.1 million of preferred shares
bearing interest at 1.99% per annum, payable quarterly in cash or stock at USA's
option. If USA elects to pay cash, the amount is approximately $13.1 million on
an annual basis. The first dividend was due for the period ending February 15,
2002. USA's wholly-owned subsidiaries have no material restrictions on their
ability to transfer amounts to fund USA's operations.
SEASONALITY
USA's businesses are subject to the effects of seasonality. Cable and
Studios revenues are influenced by advertiser demand and the seasonal nature of
programming, and generally peak in the spring and fall.
USA believes seasonality impacts its Electronic Retailing segment but not to
the same extent it impacts the retail industry in general.
Ticketing Operations revenues are occasionally impacted by fluctuation in
the availability of events for sale to the public.
Hotel reservations revenues are influenced by the seasonal nature of holiday
travel in the markets it serves, and has historically peaked in the fall. As the
business expands into new markets, the impact of seasonality is expected to
lessen.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's short-term investment portfolio and issuance
of debt. The Company does not use derivative financial instruments in its
investment portfolio. The Company has a prescribed methodology whereby it
invests its excess cash in debt instruments of government agencies and high
quality corporate issuers. The portfolio is reviewed on a periodic basis and
adjusted in the event that the credit rating of a security held in the portfolio
has deteriorated.
At December 31, 2001, the Company's outstanding debt approximated $578.7
million, substantially all of which is fixed rate obligations. If market rates
decline, the Company runs the risk that the related required payments on the
fixed rate debt will exceed those based on the current market rate.
72
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts business in certain foreign markets, primarily in the
European Union. The Company has exposure to exchange rate fluctuations of the
U.S. dollar to the Euro. However, the Company intends to reinvest profits from
international operations in order to grow the businesses.
As the Company increases its operations in international markets it becomes
increasingly exposed to potentially volatile movements in currency exchange
rates. The economic impact of currency exchange rate movements on the Company
are often linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. These changes, if material, could cause
the Company to adjust its financing and operating strategies.
As currency exchange rates change, translation of the income statements of
the Company's international businesses into U.S. dollars affects year-over-year
comparability of operating results. The Company does not hedge translation risks
because cash flows from international operations are generally reinvested
locally. Further, the Company does not enter into hedges to minimize volatility
of reported earnings because the Company does not believe it is justified by the
attendant cost.
Foreign exchange gains and losses were not material to the Company's
earnings for the years ended December 31, 2001, 2000 and 1999.
EQUITY PRICE RISK
The Company has a minimal investment in equity securities of publicly-traded
companies. This investment, as of December 31, 2001, was considered
available-for-sale, with the unrealized gain deferred as a component of
stockholders' equity. It is not customary for the Company to make significant
investments in equity securities as part of its investment strategy.
SIGNIFICANT ACCOUNTING POLICIES
In connection with the issuance of Securities and Exchange Commission FR-60,
the following disclosure is provided to supplement USA's accounting policies in
regard to significant areas of judgment. Management of the Company is required
to make certain estimates and assumptions during the preparation of consolidated
financial statements in accordance with generally accepted accounting
principles. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. They also impact the reported
amount of net earnings during any period. Actual results could differ from those
estimates. Because of the size of the financial statement elements they relate
to, some of our accounting policies and estimates have a more significant impact
on our financial statements than others:
- How we access the recoverability of the carrying value of long-lived
assets is disclosed in Footnote 2. If circumstances suggest that
long-lived assets may be impaired, and a review indicates that the
carrying value will not be recoverable, as determined based on the
projected undiscounted future cash flows, the carrying value is reduced to
its estimated fair value. The determination of cash flows is based upon
assumptions and forecasts that may not occur. As of December 31, 2001, the
balance sheet includes $7.2 billion of intangible assets, net, and $424.1
million of fixed assets, net. Although it has not completed its
assessment, the Company anticipates a write-off of $325 million to $425
million primarily related to the Citysearch and Precision Response ("PRC")
businesses upon adoption of FAS 142. Although Citysearch and PRC are
expected to generate positive cash flows in the future, due to cash flow
discounting techniques to estimate fair value as required by the new
rules, the future discounted cash flows may not support current carrying
values. The expected range for the Citysearch write-off is $75 million to
$125 million and for PRC $250 million to $300 million.
73
- Our revenue recognition for HSN is described in Footnote 2. As noted,
sales are reduced by incentive discounts and sales returns to arrive at
net sales. Home Shopping's sales policy allows merchandise to be returned
at the customer's discretion within 30 days of the date of delivery and
allowances for returned merchandise and other adjustments are provided
based upon past experience. The estimated return percentage for 2001 of
19.6% was arrived at based upon empirical evidence of actual returns, and
the percentage was applied against sales to arrive at net sales. Actual
levels of product returned may vary from these estimates.
- The estimated ultimate costs of completed television productions and
filmed entertainment 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. Estimated ultimate revenues and costs are reviewed quarterly and
revisions to amortization rates or write-downs to net realizable value are
made as required. Actual ultimate revenue and expense may differ from
estimates, as shifts in audience viewing habits, program time-slot
changes, increased competition and other factors outside the Company's
control could adversely impact actual results.
- Estimates of deferred income taxes and the significant items giving rise
to the deferred assets and liabilities are shown in Footnote 6, and
reflect management's assessment of actual future taxes to be paid on items
reflected in the financial statements, giving consideration to both timing
and the probability of realization. Actual income taxes could vary from
these estimates due to future changes in income tax law or based upon
review of our tax returns by the IRS, as well as operating results of the
Company that vary significantly from budgets.
- Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Market is
determined on the basis of net realizable value, giving consideration to
obsolescence and other factors. Net realizable value is estimated by
management based upon historical sales data, the age of inventory, the
quantity of goods on hand and the ability to return merchandise to
vendors. The actual net realizable value may vary from estimates due to
changes in customer tastes or viewing habits, or errors in judgment made
by merchandising personnel when ordering new products.
- The Company has entered into various arrangements that contain multiple
elements, such as arrangements providing for distribution and other
services to be provided by the third party to multiple USA business
segments. Multi-element arrangements require that management assess the
relative fair value of the elements based upon revenue forecasts and other
factors. The actual fair value of the various services received may differ
from these estimates.
- The Company has entered into various non-monetary transactions,
principally related to barter advertising for goods and services which are
recorded at the estimated fair value of the products or services received
or given in accordance with the provisions of the Emerging Issues Task
Force Issue No. 99-17, "Accounting for Advertising Barter Transactions."
The actual fair value of the products and services received may differ
from these estimates.
- HRN recognizes revenue for hotel rooms sold where HRN is the merchant on a
gross basis. The Company considered Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," and believes that its
income statement presentation for hotel rooms sold where HRN is the
merchant is appropriate. Factors considered include HRN's ability to
establish and change room pricing and HRN's risk of loss for unsold
contracted rooms and prepaid rooms.
74
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
USA NETWORKS, INC.
We have audited the accompanying consolidated balance sheets of USA
Networks, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
USA Networks, Inc. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on
January 1, 2001, the Company adopted AICPA Statement of Position 00-2,
"Accounting by Producers or Distributors of Films."
/s/ ERNST & YOUNG LLP
New York, New York
January 29, 2002
75
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Product sales............................................. $1,935,542 $1,799,932 $1,370,790
Service revenue........................................... 3,349,265 2,796,220 2,000,955
---------- ---------- ----------
Net revenue............................................... 5,284,807 4,596,152 3,371,745
Operating costs and expenses:
Cost of sales-product sales............................... 1,287,630 1,178,369 900,896
Cost of sales-service revenue............................. 1,194,251 894,532 464,049
Program costs............................................... 726,549 684,992 630,956
Selling and marketing....................................... 625,975 530,013 392,307
General and administrative.................................. 444,039 389,274 289,374
Other operating costs....................................... 116,702 108,277 66,418
Amortization of cable distribution fees..................... 43,975 36,322 26,680
Amortization of non-cash distribution and marketing
expense................................................... 26,384 11,665 --
Amortization of non-cash compensation expense............... 12,712 12,740 6,645
Depreciation and amortization............................... 572,765 693,642 324,506
---------- ---------- ----------
Total operating costs and expenses........................ 5,050,982 4,539,826 3,101,831
---------- ---------- ----------
Operating profit............................................ 233,825 56,326 269,914
Other income (expense):
Interest income............................................. 30,199 41,024 31,048
Interest expense............................................ (78,637) (75,242) (79,592)
Gain on sale of securities.................................. -- -- 89,721
Gain on sale of subsidiary stock............................ -- 108,343 --
Loss in unconsolidated subsidiaries and other............... (52,223) (59,046) 5,771
---------- ---------- ----------
(100,661) 15,079 46,948
---------- ---------- ----------
Earnings from continuing operations before income taxes and
minority interest......................................... 133,164 71,405 316,862
Income tax expense.......................................... (108,877) (112,869) (103,050)
Minority interest........................................... (149,339) (47,124) (197,297)
---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS.................. (125,052) (88,588) 16,515
Discontinued Operations, net of tax......................... -- (59,395) (44,146)
Gain on disposal of Broadcasting stations, net of tax....... 517,847 -- --
---------- ---------- ----------
Earnings (loss) before cumulative effect of accounting
change, net of tax........................................ 392,795 (147,983) (27,631)
Cumulative effect of accounting change, net of tax.......... (9,187) -- --
---------- ---------- ----------
NET EARNINGS (LOSS)......................................... $ 383,608 $ (147,983) $ (27,631)
---------- ---------- ----------
Earnings (Loss) per Share from Continuing Operations:
Basic earnings (loss) per common share...................... $ (.33) $ (.25) $ .05
Diluted earnings (loss) per common share.................... $ (.33) $ (.25) $ .04
Earnings (Loss) per Share, before cumulative effect of
accounting change
Basic earnings (loss) per common share...................... $ 1.05 $ (.41) $ (.08)
Diluted earnings (loss) per common share.................... $ .61 $ (.41) $ (.08)
Net Earnings (Loss) per Share:
Basic earnings (loss) per common share...................... $ 1.03 $ (.41) $ (.08)
Diluted earnings (loss) per common share.................... $ .60 $ (.41) $ (.08)
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
76
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------------
2001 2000
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
CURRENT ASSETS
Cash and cash equivalents................................... $ 978,377 $ 244,223
Restricted cash equivalents................................. 9,107 2,021
Marketable securities....................................... 171,464 126,352
Accounts and notes receivable, net of allowance of $57,456
and $61,141, respectively................................. 672,935 646,196
Receivable from sale of USAB................................ 589,625 --
Inventories, net............................................ 408,306 404,468
Investments held for sale................................... -- 750
Deferred tax assets......................................... 59,635 43,975
Other current assets, net................................... 86,783 52,631
Net current assets of discontinued operations............... -- 7,788
----------- -----------
Total current assets...................................... 2,976,232 1,528,404
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 368,475 322,140
Buildings and leasehold improvements........................ 146,162 132,874
Furniture and other equipment............................... 126,240 100,734
Land........................................................ 15,665 15,658
Projects in progress........................................ 45,781 45,084
----------- -----------
702,323 616,490
Less accumulated depreciation and amortization............ (268,208) (172,496)
----------- -----------
434,115 443,994
OTHER ASSETS
Intangible assets, net...................................... 7,236,283 7,461,862
Cable distribution fees, net................................ 158,880 159,473
Long-term investments....................................... 65,891 49,355
Notes and accounts receivable, net of current portion
($99,819 and $22,575, respectively, from related
parties).................................................. 138,644 38,301
Advance to Universal........................................ 39,265 95,220
Inventories, net............................................ 535,555 485,941
Deferred charges and other, net............................. 118,187 83,239
Net non-current assets of discontinued operations........... -- 128,081
----------- -----------
$11,703,052 $10,473,870
----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
77
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
--------------------------
2001 2000
----------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 34,016 $ 25,457
Accounts payable, trade..................................... 329,043 262,817
Accounts payable, client accounts........................... 102,011 97,687
Obligations for program rights and film costs............... 272,601 283,812
Cable distribution fees payable............................. 32,795 33,598
Deferred revenue............................................ 131,627 93,125
Income tax payable.......................................... 221,502 --
Other accrued liabilities................................... 471,701 376,751
----------- ------------
Total current liabilities................................. 1,595,296 1,173,247
LONG-TERM OBLIGATIONS (net of current maturities)........... 544,667 552,501
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 285,378 295,210
OTHER LONG-TERM LIABILITIES................................. 51,354 97,526
DEFERRED INCOME TAXES....................................... 312,487 98,378
MINORITY INTEREST........................................... 4,968,369 4,817,137
STOCKHOLDERS' EQUITY
Preferred stock--$.01 par value; authorized 15,000,000
shares; no shares issued and outstanding.................. -- --
Common stock--$.01 par value; authorized 1,600,000,000
shares; issued and outstanding, 314,704,017 and
305,436,198 shares, respectively.......................... 3,147 3,055
Class B convertible common stock--$.01 par value;
authorized, 400,000,000 shares; issued and outstanding,
63,033,452 shares......................................... 630 630
Additional paid-in capital.................................. 3,918,401 3,793,764
Retained earnings/Accumulated deficit....................... 181,267 (202,341)
Accumulated other comprehensive loss........................ (11,605) (10,825)
Treasury stock.............................................. (141,341) (139,414)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
----------- ------------
Total stockholders' equity.................................. 3,945,501 3,439,871
----------- ------------
$11,703,052 $ 10,473,870
----------- ------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
78
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS B RETAINED ACCUM.
CONVERTIBLE ADDIT. EARNINGS OTHER
COMMON COMMON PAID-IN /(ACCUM. COMP. TREASURY
TOTAL STOCK STOCK CAPITAL DEFICIT) INCOME STOCK
---------- -------- ----------- ---------- ---------- --------- ---------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998.............. $2,571,405 $2,545 $630 $2,592,456 $ (26,727) $ 8,852 --
Comprehensive income:
Net earnings for the year ended
December 31, 1999..................... (27,631) -- -- -- (27,631) -- --
Decrease in unrealized gains in
available for sale securities......... (3,956) -- -- -- -- (3,956) --
Foreign currency translation............ (123) -- -- -- -- (123) --
----------
Comprehensive loss...................... (31,710)
----------
Issuance of common stock upon exercise of
stock options........................... 47,967 111 -- 47,856 -- -- --
Income tax benefit related to stock
options exercised....................... 42,362 -- -- 42,362 -- -- --
Issuance of stock in connection with
October Films/PFE Transaction........... 23,558 12 -- 23,546 -- -- --
Issuance of stock in connection with other
acquisitions............................ 4,498 3 -- 4,495 -- -- --
Issuance of stock in connection Liberty
preemptive rights....................... 120,306 73 -- 120,233 -- -- --
Purchase of Treasury Stock in connection
with stock repurchase program........... (8,933) (4) -- -- -- -- (8,929)
Cancellation of employee equity program... (355) -- -- (442) -- -- (635)
Amortization of unearned compensation
related to stock options and equity
participation plans..................... 631 -- -- -- -- -- --
---------- ------ ---- ---------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 1999.............. 2,769,729 2,740 630 2,830,506 (54,358) 4,773 (9,564)
Comprehensive income:
Net loss for the year ended
December 31, 2000..................... (147,983) -- -- -- (147,983) -- --
Decrease in unrealized gains in
available for sale securities......... (11,958) -- -- -- -- (11,958) --
Foreign currency translation............ (3,640) -- -- -- -- (3,640) --
----------
Comprehensive loss...................... (163,581)
----------
Issuance of common stock upon exercise of
stock options........................... 37,341 46 -- 37,295 -- -- --
Income tax benefit related to stock
options exercised....................... 26,968 -- -- 26,968 -- -- --
Issuance of stock in connection with PRC
acquisition............................. 887,371 322 -- 887,049 -- -- --
Issuance of stock in connection with other
transactions............................ 11,950 4 -- 11,946 -- -- --
Purchase of Treasury Stock................ (129,907) (57) -- -- -- -- (129,850)
---------- ------ ---- ---------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 2000.............. 3,439,871 3,055 630 3,793,764 (202,341) (10,825) (139,414)
Comprehensive income:
Net Income for the year ended
December 31, 2001..................... 383,608 -- -- -- 383,608 -- --
Decrease in unrealized losses in
available for sale securities......... 5,600 -- -- -- -- 5,600 --
Foreign currency translation............ (6,380) -- -- -- -- (6,380) --
----------
Comprehensive Income.................... 382,828
----------
Issuance of common stock upon exercise of
stock options........................... 80,931 90 -- 80,841 -- -- --
Income tax benefit related to stock
options exercised....................... 38,439 -- -- 38,439 -- -- --
Issuance of stock in connection with other
transactions............................ 5,360 3 -- 5,357 -- -- --
Purchase of Treasury Stock................ (1,928) (1) -- -- -- -- (1,927)
---------- ------ ---- ---------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 2001.............. $3,945,501 $3,147 $630 $3,918,401 $ 181,267 $ (11,605) $(141,341)
---------- ------ ---- ---------- ---------- --------- ---------
NOTE
RECEIVABLE
FROM KEY
EXECUTIVE
FOR
COMMON
UNEARNED STOCK
COMPENSATION ISSUANCE
------------ ----------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998.............. $ (1,353) $ (4,998)
Comprehensive income:
Net earnings for the year ended
December 31, 1999..................... -- --
Decrease in unrealized gains in
available for sale securities......... -- --
Foreign currency translation............ -- --
Comprehensive loss......................
Issuance of common stock upon exercise of
stock options........................... -- --
Income tax benefit related to stock
options exercised....................... -- --
Issuance of stock in connection with
October Films/PFE Transaction........... -- --
Issuance of stock in connection with other
acquisitions............................ -- --
Issuance of stock in connection Liberty
preemptive rights....................... -- --
Purchase of Treasury Stock in connection
with stock repurchase program........... -- --
Cancellation of employee equity program... 722 --
Amortization of unearned compensation
related to stock options and equity
participation plans..................... 631 --
-------- --------
BALANCE AT DECEMBER 31, 1999.............. -- (4,998)
Comprehensive income:
Net loss for the year ended
December 31, 2000..................... -- --
Decrease in unrealized gains in
available for sale securities......... -- --
Foreign currency translation............ -- --
Comprehensive loss......................
Issuance of common stock upon exercise of
stock options........................... -- --
Income tax benefit related to stock
options exercised....................... -- --
Issuance of stock in connection with PRC
acquisition............................. -- --
Issuance of stock in connection with other
transactions............................ -- --
Purchase of Treasury Stock................ -- --
-------- --------
BALANCE AT DECEMBER 31, 2000.............. -- (4,998)
Comprehensive income:
Net Income for the year ended
December 31, 2001..................... -- --
Decrease in unrealized losses in
available for sale securities......... -- --
Foreign currency translation............ -- --
Comprehensive Income....................
Issuance of common stock upon exercise of
stock options........................... -- --
Income tax benefit related to stock
options exercised....................... -- --
Issuance of stock in connection with other
transactions............................ -- --
Purchase of Treasury Stock................ -- --
-------- --------
BALANCE AT DECEMBER 31, 2001.............. $ -- $ (4,998)
-------- --------
Accumulated other comprehensive income is comprised of unrealized (losses)
gains on available for sale securities of $39, $(5,561) and $6,397 at
December 31, 2001, 2000 and 1999, respectively and foreign currency translation
adjustments of $(11,644), $(5,264) and $(1,624) at December 31, 2001, 2000 and
1999, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
79
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Earnings (loss) from continuing operations:............... $ (125,052) $ (88,588) $ 16,515
Adjustments to reconcile net earnings (loss) from
continuing operations to net cash provided by operating
activities:
Depreciation and amortization........................... 572,765 693,642 324,506
Amortization of cable distribution fees................. 43,975 36,322 26,680
Amortization of program rights and film costs........... 719,010 651,145 569,089
Amortization of deferred financing costs................ 1,491 3,778 5,035
Non-cash distribution and marketing..................... 26,384 11,665 --
Deferred income taxes................................... 22,840 50,606 9,458
Equity in (earnings) losses of unconsolidated affiliates
and other............................................. 48,977 58,333 (1,356)
Gain on sale of subsidiary stock........................ -- (108,343) --
Gain on sale of securities.............................. -- -- (89,721)
Non-cash interest income................................ (3,729) (8,735) (298)
Non-cash stock compensation............................. 12,712 12,740 6,645
Minority interest....................................... 149,339 47,124 197,297
Changes in current assets and liabilities:
Accounts receivable..................................... (18,081) (58,429) (44,519)
Inventories............................................. 31,128 (45,767) (24,939)
Accounts payable........................................ 27,981 (464) 12,782
Accrued liabilities and deferred revenue................ 78,025 42,408 61,648
Payment for program rights and film costs............... (835,541) (847,148) (611,702)
Increase in cable distribution fees..................... (47,393) (64,876) (42,887)
Other, net.............................................. (34,899) (12,906) (12,656)
---------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 669,932 372,507 401,577
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (201,024) (227,768) (195,504)
Capital expenditures...................................... (143,511) (176,884) (108,916)
Advance to Universal...................................... -- -- (200,000)
Recoupment of advance to Universal........................ 59,821 77,330 42,951
Increase in long-term investments and notes receivable.... (123,573) (34,969) (69,646)
Purchase of marketable securities......................... (51,977) (132,845) --
Proceeds from sale of securities.......................... -- -- 107,231
Proceeds from sale of broadcast stations.................. 510,374 -- --
Payment of merger and financing costs..................... -- (18,758) (4,765)
Other, net................................................ 1,825 (10,662) 14,681
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....... 51,935 (524,556) (413,968)
Cash flows from financing activities:
Borrowings................................................ 23,086 65,022 --
Principal payments on long-term obligations............... (22,331) (99,684) (339,349)
Purchase of treasury stock................................ (1,928) (129,907) (8,933)
Payment of mandatory tax distribution to LLC partners..... (17,369) (68,065) (28,830)
Proceeds from sale of subsidiary stock.................... 12,234 93,189 4,268
Proceeds from issuance of common stock and LLC shares..... 80,932 210,642 422,544
Other, net................................................ (10,616) (12,851) 6,248
---------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. 64,008 58,346 55,948
NET CASH USED BY DISCONTINUED OPERATIONS.................... (48,058) (82,563) (66,260)
Effect of exchange rate changes on cash and cash
equivalents............................................. (3,663) (2,687) (123)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 734,154 (178,953) (22,826)
Cash and cash equivalents at beginning of period............ 244,223 423,176 446,002
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 978,377 $ 244,223 $ 423,176
---------- ---------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
80
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
GENERAL
USA Networks, Inc. ("USA" or the "Company") (Nasdaq: USAI) is organized into
two groups, the USA Interactive Group and the USA Entertainment Group. The USA
Interactive Group consists of Home Shopping Network (including HSN International
and HSN.com); Ticketmaster (Nasdaq: TMCS), which operates Ticketmaster,
Ticketmaster.com, Citysearch and Match.com; Hotel Reservations Network (Nasdaq:
ROOM); Electronic Commerce Solutions; Styleclick (OTC: IBUY); Precision Response
Corporation; and Expedia, Inc. (as of February 4, 2002) (Nasdaq: EXPE). The USA
Entertainment Group consists of USA Cable, including USA Network and Sci Fi
Channel and Emerging Networks TRIO, Newsworld International and Crime; Studios
USA, which produces and distributes television programming; and USA Films, which
produces and distributes films.
On February 4, 2002, USA completed its acquisition of a controlling interest
in Expedia, Inc. ("Expedia") through a merger of one of its subsidiaries with
and into Expedia. See below for further discussion under "Subsequent Events".
On December 17, 2001, USA and Vivendi Universal, S.A. ("Vivendi") announced
a transaction (the "Vivendi Transaction") in which USA's Entertainment Group,
consisting of USA Cable, Studios USA, and USA Films, would be contributed to
Vivendi Universal Entertainment, a new joint venture controlled by Vivendi. See
below for further discussion under "Subsequent Events".
On January 31, 2001, Ticketmaster Online-Citysearch, Inc. and Ticketmaster
Corporation, both of which are subsidiaries of USA, completed a transaction
which combined the two companies. The combined company has been renamed
"Ticketmaster." Under the terms of the transaction, USA contributed Ticketmaster
Corporation to Ticketmaster Online-Citysearch and received 52 million
Ticketmaster Online-Citysearch Class B Shares. The Ticketmaster Class B common
stock is quoted on the Nasdaq Stock Market.
In August 2001, the Company completed its previously announced sale of all
of the capital stock of certain USA Broadcasting ("USAB") subsidiaries that own
13 full-power television stations and minority interests in four additional
full-power stations to Univision Communications Inc. ("Univision"). Total cash
proceeds were $1.1 billion, of which $510.4 million was collected in fiscal year
2001 and $589.6 million in January 2002. The gain on the sale of the stations
was $517.8 million, net of tax of $377.4 million. The majority of the stations
sold are located in the largest markets in the country and aired HSN on a
24-hour basis.
A number of USA's businesses are currently held by two non-wholly owned
subsidiaries, Home Shopping Network, Inc. ("Holdco") and USANi LLC. USA
maintains control and management of Holdco and USANi LLC, and manages the
businesses held by USANi LLC, in substantially the same manner as they would be
if USA held them directly through wholly owned subsidiaries. The other principal
owners of these subsidiaries are Liberty Media Corporation ("Liberty") and
Vivendi, through Universal Studios, Inc ("Universal") and other subsidiaries.
USA has the contractual right to require the exchange of the Holdco shares held
by Liberty for shares of USA. Following such exchange and after giving effect to
the Vivendi Transaction, Holdco and USANi LLC will become wholly owned, thereby
simplifying USA's corporate and capital structure.
81
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION (CONTINUED)
SUBSEQUENT EVENTS (UNAUDITED)
EXPEDIA TRANSACTION
On February 4, 2002, USA completed its acquisition of a controlling interest
in Expedia through a merger of one of its subsidiaries with and into Expedia.
Immediately following the merger, USA owned all of the outstanding shares of
Expedia Class B common stock, representing approximately 64.2% of Expedia's then
outstanding shares, and 94.9% of the voting interest in Expedia. On February 20,
2002, USA acquired 936,815 shares of Expedia common stock, increasing USA's
ownership to 64.6% of Expedia's the then outstanding shares, with USA's voting
percentage remaining at 94.9%. In the merger, USA issued to former holders of
Expedia common stock who elected to receive USA securities an aggregate of 20.6
million shares of USA common stock, 13.1 million shares of $50 face value 1.99%
cumulative convertible preferred stock of USA and 14.6 million USA warrants.
Expedia will continue to be traded on Nasdaq under the symbol "EXPE," the USA
cumulative preferred stock trades on OTC under the symbol "USAIP" and the USA
warrants trade on Nasdaq under the symbol "USAIW."
Pursuant to the terms of the USA/Expedia transaction documents, Microsoft
Corporation, which beneficially owned 33,722,710 shares of Expedia common stock,
elected to exchange all of its Expedia common stock for USA securities in the
merger. Expedia shareholders who did not receive USA securities in the
transaction retained their Expedia shares and received for each Expedia share
held 0.1920 of a new Expedia warrant.
CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE
On December 17, 2001, USA announced it had entered into an agreement with
Vivendi pursuant to which USA would contribute USA's Entertainment Group to a
limited liability entity (Vivendi Universal Entertainment, "VUE") to be
controlled by Vivendi, to which Vivendi would contribute the film, television
and theme park businesses of Universal Studios, Inc. ("Universal"). Upon
consummation of the Vivendi transaction, the joint venture will be controlled by
Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi,
5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment
for a 15-year period, (ii) a $750 million face value Class A preferred interest
in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled
in cash at its then face value at maturity; (iii) a $1.75 billion face value
Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a
3.6% annual cash dividend, callable and puttable after 20 years, to be settled
by Universal at its then face value with a maximum of approximately 56.6 million
USA common shares, provided that Universal may substitute cash in lieu of shares
of USA common stock (but not USA Class B common stock), at its election; (iv) a
5.44% common interest in VUE, generally callable by Universal after five years
and puttable by USA after eight years, which may be settled in either Vivendi
stock or cash, at Universal's election, and (v) a cancellation of Universal's
USANi LLC interests currently exchangeable into USA common shares including
USANi LLC interests obtained from Liberty in connection with a related
transaction (see immediately below).
Related to the transaction, Liberty will exchange 7,079,726 shares of USANi
LLC for shares of USA common stock, and subsequently transfer to Universal
25,000,000 shares of USA common stock,
82
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION (CONTINUED)
its remaining 38,694,982 shares of USANi LLC, as well as the assets and
liabilities of Liberty Programming France (which consist primarily of 4,921,250
shares of multiThematiques S.A., a French entity), in exchange for 37,386,436
Vivendi ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share. Barry Diller, USA's chairman and chief executive officer, will receive a
common interest in VUE with a 1.5% profit sharing percentage, with a minimum
value of $275.0 million, in return for his agreeing to specified non-competition
provisions and agreeing to serve as chairman and chief executive officer of VUE.
USA and Mr. Diller have agreed that they will not compete with Vivendi's
television and filmed entertainment businesses (including VUE) for a minimum of
18 months.
In February 2002, Mr. Diller assigned to three executive officers of USA,
the right to receive beneficial interests in a portion of the common interests
in VUE that Mr. Diller will receive upon closing of the transactions.
The Vivendi Transaction is subject to USA shareholder vote, including the
approval of 66 2/3% of the outstanding USA common stock and USA preferred stock,
voting together as a single class, and excluding shares held by Vivendi,
Liberty, Mr. Diller and their respective affiliates, as well as other customary
regulatory approvals, and there can be no assurance that the transaction will be
completed.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and voting-controlled subsidiaries. The Company
consolidates USANi LLC based upon a Governance Agreement and related agreements
allowing the Company to control 100% of the voting interest. USANi LLC was
formed in connection with the acquisition of USA Networks as well as the
domestic television production and distribution businesses of Universal Studios
(the "Universal Transaction"). The documents related to this transaction are
constructed with the intent that the businesses held by USANi LLC would be
operated in substantially the same manner as they would be if the Company held
them directly through wholly owned subsidiaries. The Company consolidates
HSN--Germany based upon a Pooling Agreement allowing for the Company to elect a
majority of the Board of Directors and to control the operations of
HSN--Germany. Significant intercompany transactions and accounts have been
eliminated.
Investments in which the Company owns a 20%, but not in excess of 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. In addition,
partnership interests are recorded 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.
83
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES
CABLE AND STUDIOS
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
are recognized as revenues on the commencement date of the license agreement,
provided the program is available for exhibition.
USA Cable advertising revenue is recognized in the period in which the
advertising commercials are aired on the cable networks. Certain contracts with
advertisers contain minimum commitments with respect to advertising viewership.
In the event that such minimum commitments are not met, the contracts require
additional subsequent airings of the advertisement. As a result, provisions are
recorded against advertising revenues for audience under deliveries
("makegoods") until such subsequent airings are conducted. Affiliate fees are
recognized in the period during which the programming is provided.
ELECTRONIC RETAILING
Revenues from Home Shopping primarily consist of merchandise sales and are
reduced by incentive discounts and sales returns to arrive at net sales.
Revenues for domestic sales are recorded for credit card sales upon transaction
authorization, which occurs only if the goods are in stock, and for check sales
upon receipt of customer payment, which does not vary significantly from the
time goods are shipped. Revenues for international sales are recorded upon
shipment. Home Shopping's sales policy allows merchandise to be returned at the
customer's discretion within 30 days of the date of delivery. Allowances for
returned merchandise and other adjustments are provided based upon past
experience.
TICKETING
Revenue from Ticketmaster and Ticketmaster.com primarily consists of revenue
from ticketing operations which is recognized as tickets are sold, as the
Company acts as agent in these transactions.
HOTEL RESERVATIONS
Charges for hotel accommodations are billed to customers in advance. The
related payments are included in deferred revenue and recognized as income at
the conclusion of the customer's stay at the hotel, as the Company acts as
merchant in these transactions.
The Company offers rooms that are contracted for in advance or are prepaid.
Unsold contracted rooms may be returned by the Company based on a cancellation
period, which generally expires before the date the customer may cancel the
hotel reservation. Customers are subject to a penalty for all
84
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cancellations or changes to the reservation. The Company bears the risk of loss
for all prepaid rooms and rooms cancelled by a customer subsequent to the period
in which the Company can return the unsold rooms. To date, the Company has not
incurred significant losses under the room contracts with hotels.
OTHER
Revenues from all other sources are recognized either upon delivery or when
the service is provided.
FILM COSTS
Film costs consist of direct production costs and production overhead, less
accumulated amortization. Prior to the adoption of SOP 00-2 on January 1, 2001
(see below for further information), development roster (and related costs),
abandoned story and development costs were 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 film costs 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, are classified as non-current 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.
ADVERTISING BARTER TRANSACTIONS
Barter transactions represent the exchange of commercial air-time for
programming, merchandise or services. The transactions are recorded at the
estimated fair market value of the asset or services received or given in
accordance with Emerging Issues Task Force Issue No. 99-17, "Accounting for
Advertising Barter Transactions." Barter revenue for the year ended December 31,
2001 was $42.2 million. Barter revenues for the year ended December 31, 2000 and
1999 are not material to USA's statement of operations.
85
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehouse costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Merchandise inventories are presented net of an inventory
carrying adjustment of $47.4 million and $40.5 million at December 31, 2001 and
2000, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments.
Short-term investments consist primarily of U.S. Treasury Securities, U.S.
Government agencies and certificates of deposit with original maturities of less
than 91 days.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
ASSET CATEGORY DEPRECIATION/AMORTIZATION PERIOD
- -------------- --------------------------------
Computer and broadcast equipment.......................... 3 to 13 Years
Buildings................................................. 30 to 40 Years
Leasehold improvements.................................... 4 to 20 Years
Furniture and other equipment............................. 3 to 10 Years
Depreciation and amortization expense on property, plant and equipment was
$151.9 million, $115.6 million and $61.2 million for the years ended December
31, 2001, 2000 and 1999, respectively.
LONG-LIVED ASSETS INCLUDING INTANGIBLES
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of long-lived assets, including goodwill
and other intangibles and property, plant and equipment, is to review the
carrying value of the assets if the facts and circumstances suggest that they
may be impaired. If this review indicates that the carrying value will not be
recoverable, as determined based on the projected undiscounted future cash
flows, the carrying value is reduced to its estimated fair value. See below
under "New Accounting Pronouncements" for further information related to
goodwill and other intangible assets. The Company amortizes goodwill and other
intangible assets over their estimated useful lives, which range from 3 to 40
years for goodwill and 1 to 5 years for intangibles.
CABLE DISTRIBUTION FEES
Cable distribution fees relate to upfront fees paid in connection with
multi-year cable contracts for carriage of Home Shopping's programming. These
fees are amortized to expense on a straight line basis over the terms of the
respective contracts.
86
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are primarily expensed in the period incurred. Advertising
expense for the years ended December 31, 2001, 2000 and 1999 were $195.8
million, $176.5 million and $119.2 million, respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method, and
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled.
EARNINGS (LOSS) 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
then shares in the earnings of the Company.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees." In cases
where exercise prices are less than fair value as of the grant date,
compensation is recognized over the vesting period. For stock-based compensation
issued to non-employees, the Company accounts for the grants in accordance with
FASB Statement No. 123, "Accounting for Stock Based Compensation."
MINORITY INTEREST
Minority interest primarily represents Universal's and Liberty's ownership
interest in USANi LLC, Liberty's ownership interest in Holdco, the public's
ownership in TMCS until January 31, 2001, the public's ownership in Ticketmaster
from January 31, 2001, the public's ownership interest in HRN since February 25,
2000, the public's ownership interest in Styleclick since July 27, 2000 and the
partners ownership interest in HSN-Germany since its consolidation as of January
1, 2000.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of all foreign operations are
consolidated using the local currency as the functional currency. Local currency
assets and liabilities are translated at the rates of exchange on the balance
sheet date, and local currency revenues and expenses are translated at average
rates of exchange during the period. Resulting translation gains or losses,
which have not been material, are included as a component of accumulated other
comprehensive income (loss) in accumulated deficit.
ISSUANCES OF SUBSIDIARY STOCK
The Company accounts for issuances of stock by a subsidiary via income
statement recognition, recording income or losses as non-operating income/
(expense). During the year ended December 31, 2000, the Company recorded a gain
of $108.3 million related to the issuance of subsidiary stock. See Note 3 for
further discussion.
87
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net earnings
during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include the inventory carrying adjustment, program rights and film
cost amortization, sales return and other revenue allowances, allowance for
doubtful accounts, recoverability of intangibles and other long-lived assets,
estimates of film revenue ultimates and various other operating allowances and
accruals.
NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, all calendar year companies will be required to
adopt Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Other Intangible Assets." The new rules eliminate amortization of
goodwill and other intangible assets with indefinite lives and establish new
measurement criterion for these assets. Although it has not completed its
assessment, the Company anticipates a write-off of $325 million to $425 million
primarily related to the Citysearch and Precision Response ("PRC") businesses.
Although Citysearch and PRC are expected to generate positive cash flows in the
future, due to cash flow discounting techniques to estimate fair value as
required by the new rules, the future discounted cash flows may not support
current carrying values. The expected range for the Citysearch write-off is $75
million to $125 million and for PRC $250 million to $300 million. The rules are
expected to reduce USA's annual amortization by approximately $350 million.
FILM ACCOUNTING
The Company adopted SOP 00-2, "Accounting by Producers or Distributors of
Films" ("SOP 00-2") during the twelve months ended December 31, 2001. SOP 00-2
established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. This compares to the Company's previous
policy of first capitalizing these costs and then expensing them over the
related revenue streams. In addition, SOP 00-2 requires development costs for
abandoned projects and certain indirect overhead costs to be charged directly to
expense, instead of those costs being capitalized to film costs, which was
required under the previous accounting rules. SOP 00-2 also requires all film
costs to be classified in the balance sheet as non-current assets. Provisions of
SOP 00-2 in other areas, such as revenue recognition, generally are consistent
with the Company's existing accounting policies.
SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a
one-time, non-cash expense of $9.2 million. The expense is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
88
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the 2001 presentation.
NOTE 3--BUSINESS ACQUISITIONS
The Company has made numerous acquisitions during the reporting periods.
Below is a discussion of each significant acquisition.
STYLECLICK TRANSACTION
On July 27, 2000, USA and Styleclick.com Inc., an enabler of e-commerce for
manufacturers and retailers, completed the merger of Internet Shopping Network,
a subsidiary of USA, and Styleclick.com (the "Styleclick Transaction"). The
entities were merged with a new company, Styleclick, Inc., which owns and
operates the combined properties of Styleclick.com and ISN. Styleclick, Inc. is
traded on the OTC under the symbol "IBUY". In accordance with the terms of the
agreement, USA invested $40 million in cash and agreed to contribute $10 million
in dedicated media, and received warrants to purchase additional shares of the
new company. At closing, Styleclick.com repaid $10 million of borrowings
outstanding under a bridge loan provided by USA.
The aggregate purchase price, including transaction costs, of $211.9 million
was determined as follows:
(IN THOUSANDS)
--------------
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USAi.......... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs..................................... $211,914
--------
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In conjunction with the transaction, the Company
recorded a pre-tax gain of $104.6 million in accordance with Staff Accounting
Bulletin No. 51, "Accounting for Sales of Stock by a Subsidiary", based upon the
25% of ISN's net book value exchanged for 75% of Styleclick.com's fair value,
determined based upon the fair value of Styleclick.com common stock received in
the merger. The Styleclick transaction has been accounted for under the purchase
method of accounting. The purchase price has been allocated to the assets
acquired and liabilities assumed based on their respective fair values at the
date of purchase. The unallocated excess of acquisition costs over net assets
acquired of $170.2 million has been allocated to goodwill, which originally was
being amortized over 3 years.
In March 2001, Styleclick announced a new company organization designed to
advance its offering of scaleable commerce services. The announcement included
Styleclick's acquisition of the MVP.com
89
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
technology platform. Also in March 2001, the Styleclick Board elected two
executives of ECS to top management positions at Styleclick, and certain senior
executives of Styleclick left the Company. As of December 31, 2000, as a result
of the historical and anticipated operating losses of Styleclick, and the
continuing evaluation of the operations and technology, Styleclick determined
the goodwill recorded in conjunction with the Styleclick Merger was impaired and
recorded a write-down of $145.6 million as goodwill amortization in fiscal 2000.
In 2001, Styleclick began to focus on e-commerce services and technology while
eliminating its online retail business. During this transition, Styleclick
continued to incur significant net losses from operations that raise substantial
doubt about Styleclick's ability to continue as a going concern. Styleclick is
considering its options with respect to the situation. As of December 31, 2001,
Styleclick has net liabilities of $2.1 million.
PRC TRANSACTION
On April 5, 2000, USAi acquired PRC in a tax-free merger by issuing
approximately 24.3 million shares of USAi common stock for all of the
outstanding stock of PRC for a total value of approximately $711.7 million (the
"PRC Transaction"). In connection with the acquisition, the Company repaid
approximately $32.3 million of outstanding borrowings under PRC's existing
revolving credit facility. The PRC Transaction has been accounted for under the
purchase method of accounting. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their respective fair values at
the date of purchase. The unallocated excess of acquisition costs over net
assets acquired of $658.0 million has been allocated to goodwill, which is being
amortized over 20 years.
As noted above, although it has not completed its assessment, the Company
anticipates a write-off of $250 million to $300 million primarily related to the
PRC goodwill. Although PRC is expected to generate positive cash flows in the
future, due to cash flow discounting techniques to estimate fair value required
by the new rules, the future cash flows may not support current carrying values.
OCTOBER FILMS/PFE TRANSACTION
On May 28, 1999, the Company acquired October Films, Inc. ("October Films"),
in which Universal owned a majority interest, and the domestic film distribution
and development business of Universal previously operated by Polygram Filmed
Entertainment, Inc. ("PFE") (the "October Films/ PFE Transaction"). In
connection with the acquisition of October Films, Inc., as of May 28, 1999, the
Company issued 600,000 shares of Common Stock to Universal and paid cash
consideration of approximately $12.0 million to October Films shareholders
(other than Universal) for total consideration of $23.6 million. To fund the
cash consideration portion of the transaction, Universal purchased from USA
600,000 additional shares of Common Stock at $20.00 per share. In addition, the
Company assumed $83.2 million of outstanding debt under October Films' credit
agreement which was repaid from cash on hand on August 20, 1999.
Also on May 28, 1999, USAi acquired from Universal the domestic film
distribution and development business previously operated by PFE and PFE's
domestic video and specialty video businesses. In connection with the
transaction, USAi agreed to assume certain liabilities related to the PFE
businesses acquired. In addition, USA advanced $200.0 million to Universal
pursuant to an eight year, full recourse, interest-bearing note in connection
with a distribution agreement pursuant to which USAi will distribute, in the
U.S. and Canada, certain Polygram theatrical films which were not acquired
90
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
in the transaction. The advance is repaid as revenues are received under the
distribution agreement and, in any event, will be repaid in full at maturity.
Through December 31, 2001, approximately $180.1 million had been offset against
the advance and $19.4 million of interest had accrued.
The October Films/PFE Transaction has been accounted for under the purchase
method of accounting. The purchase price has been allocated to the assets
acquired and liabilities assumed based on their respective fair values at the
date of purchase. The unallocated excess of acquisition costs over net assets
acquired of $184.5 million has been allocated to goodwill, which is being
amortized over 20 years.
HOTEL RESERVATIONS NETWORK TRANSACTION
On May 10, 1999, the Company completed its acquisition of substantially all
of the assets and the assumption of substantially all of the liabilities of two
entities which operate Hotel Reservations Network, a leading consolidator of
hotel rooms for resale in the consumer market in the United States (the "Hotel
Reservations Network Transaction"). The assets acquired and liabilities assumed
comprise Hotel Reservations Network, Inc. ("HRN"). The total purchase price was
$405.8 million, resulting in goodwill of approximately $406.3 million which is
being amortized over a ten year life.
On March 1, 2000, HRN completed an initial public offering for approximately
6.2 million shares of its class A common stock, resulting in net cash proceeds
of approximately $90.0 million. At the completion of the offering, USA owned
approximately 70.6% of the outstanding shares of HRN. USA recorded a gain
related to the initial public offering of approximately $3.7 million in the year
ended December 31, 2000 in accordance with Staff Accounting Bulletin No. 51,
"Accounting for Sales of Stock by a Subsidiary."
BUSINESS ACQUISITION PRO FORMA RESULTS
The following unaudited pro forma condensed consolidated financial
information for the years ended December 31, 2001 and 2000, is presented to show
the results of the Company, as if the Styleclick Transaction and the PRC
Transaction, as well as the merger of Ticketmaster and Ticketmaster Online
Citysearch had occurred at the beginning of the periods presented. The pro forma
results include certain adjustments, including increased amortization related to
goodwill and other intangibles and an increase in interest expense, and are not
necessarily indicative of what the results would have been had the transactions
actually occurred on the aforementioned dates. Note that the amounts exclude
USAB, which is presented as a discontinued operation for 2000 (see Note 22).
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net revenues................................................ $5,284,807 $4,667,690
Loss from continuing operations............................. (126,588) (131,170)
Basic and diluted loss per common share, continuing
operations................................................ $ (.34) $ (.36)
---------- ----------
The following unaudited pro forma condensed consolidated financial
information for the year ended December 31, 1999, is presented to show the
results of the Company as if the Styleclick Transaction, the PRC Transaction,
the Hotel Reservations Network Transaction and the October Films/
91
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
PFE Transaction had occurred at the beginning of the period presented. The pro
forma results include certain adjustments, including increased amortization
related to goodwill and other intangibles and changes in film costs
amortization, and are not necessarily indicative of what the results would have
been had the transactions actually occurred on the aforementioned dates. Note
that the amounts exclude USAB, which is presented as a discontinued operation
(see Note 22).
YEAR ENDED
DECEMBER 31, 1999
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
Net revenues................................................ $3,648,827
Loss from continuing operations............................. (20,515)
Basic and diluted loss per common share, continuing
operations................................................ $ (.06)
----------
NOTE 4--INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method and include
the following:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Intangible Assets, net:
Goodwill.................................................... $7,015,952 $7,181,196
Other....................................................... 220,331 280,666
---------- ----------
$7,236,283 $7,461,862
---------- ----------
NOTE 5--LONG-TERM OBLIGATIONS
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Unsecured Senior Credit Facility ("New Facility"); with a
$40,000,000 sub-limit for letters of credit, entered into
February 12, 1998, which matures on December 31, 2002. At
the Company's option, the interest rate on borrowings is
tied to the London Interbank Offered Rate ("LIBOR") or the
Alternate Base Rate ("ABR"), plus an applicable margin.
Interest rate at December 31, 2001 was 2.9%............... $ -- $ --
$500,000,000 6 3/4% Senior Notes (the "Senior Notes") due
November 15, 2005; interest payable May 15 and November 15
commencing May 15, 1999. Interest rate at December 31,
2001 was 6.75%............................................ 498,515 498,213
Unsecured $37,782,000 7% Convertible Subordinated Debentures
("Savoy Debentures") due July 1, 2003 convertible into
USAi Common Stock at a conversion price of $33.22 per
share..................................................... 36,118 35,163
Other long-term obligations maturing through 2007........... 44,050 44,582
-------- --------
Total long-term obligations................................. 578,683 577,958
Less current maturities..................................... (34,016) (25,457)
-------- --------
Long-term obligations, net of current maturities............ $544,667 $552,501
-------- --------
92
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM OBLIGATIONS (CONTINUED)
On February 12, 1998, USA and USANi LLC, as borrower, entered into a $1.6
billion credit facility. The credit facility was used to finance the acquisition
on February 12, 1998 of USA Networks and the domestic television production and
distribution businesses of Universal Studios from Universal and to refinance
USA's then-existing $275.0 million revolving credit facility. The credit
facility consists of (1) a $600.0 million revolving credit facility with a $40.0
million sub-limit for letters of credit, (2) a $750.0 million Tranche A Term
Loan and, (3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and
the Tranche B Term Loan have been permanently repaid as described below.
The existing credit facility is guaranteed by certain of USA's subsidiaries.
The interest rate on borrowings under the existing credit facility is tied to an
alternate base rate or the London InterBank Rate, in each case, plus an
applicable margin, and $595.4 million was available for borrowing as of December
31, 2001 after taking into account outstanding letters of credit. The credit
facility includes covenants requiring, among other things, maintenance of
specific operating and financial ratios and places restrictions on payment of
certain dividends, incurrence of indebtedness and investments. The Company pays
a commitment fee of .1875% on the unused portion of the credit facility. Note
that with the closing of the Vivendi Transaction, the Company expects that the
existing credit facility will expire.
The Savoy Debentures are redeemable at the option of the Company at varying
percentages of the principal amount each year, ranging from 105.25% to 100.75%,
plus applicable interest. In connection with the Savoy Merger, USA became a
joint and several obligor with respect to the Savoy Debentures.
Aggregate contractual maturities of long-term obligations are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 34,016
2003........................................................ 37,736
2004........................................................ 1,073
2005........................................................ 493,529
2006........................................................ 921
Thereafter.................................................. 11,408
--------
$578,683
--------
93
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
A reconciliation of total income tax expense to the amounts computed by
applying the statutory federal income tax rate to earnings from continuing
operations before income taxes and minority interest is shown as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Income tax expense at the federal statutory rate of
35%................................................. $ 46,607 $ 24,992 $110,902
Amortization of goodwill and other intangibles........ 84,818 81,797 21,448
TMCS and foreign losses not consolidated into group... 12,975 84,838 43,912
State income taxes, net of effect of federal tax
benefit............................................. 11,796 11,205 11,941
Increase (decrease) in valuation allowance for
deferred tax assets................................. -- 10,219 --
Impact of minority interest........................... (69,786) (96,485) (85,419)
Barter media time..................................... 17,743 -- --
Other, net............................................ 4,724 (3,697) 266
-------- -------- --------
Income tax expense.................................... $108,877 $112,869 $103,050
-------- -------- --------
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Current income tax expense:
Federal............................................. $ 69,853 $ 43,864 $ 72,342
State............................................... 13,874 8,846 18,993
Foreign............................................. 2,310 9,553 2,257
-------- -------- --------
Current income tax expense............................ 86,037 62,263 93,592
Deferred income tax expense:
Federal............................................. 17,583 42,213 7,238
State............................................... 4,274 8,393 1,888
Foreign............................................. 983 -- 332
-------- -------- --------
Deferred income tax expense......................... 22,840 50,606 9,458
-------- -------- --------
Total income tax expense............................ $108,877 $112,869 $103,050
-------- -------- --------
94
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
2001 and 2000 are presented below. The valuation allowance represents items for
which it is more likely than not that the tax benefit will not be realized.
DECEMBER 31,
----------------------
2001 2000
---------- ---------
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Inventory costing......................................... $ 14,781 $ 17,269
Provision for accrued expenses............................ 14,954 9,750
Investments in affiliates................................. -- 3,932
Deferred revenue.......................................... (48,933) (36,919)
Film amortization......................................... 31,290 23,280
Other..................................................... 64,429 43,549
---------- ---------
Total current deferred tax assets......................... 76,521 60,861
Less valuation allowance.................................. (16,886) (16,886)
---------- ---------
Net current deferred tax assets........................... $ 59,635 $ 43,975
---------- ---------
Non-current deferred tax assets (liabilities):
Broadcast and cable fee contracts......................... $ 1,693 $ 1,693
Depreciation for tax in excess of financial statements.... (3,362) (10,118)
Amortization of FCC licenses and broadcast related
intangibles............................................. (478) (478)
Amortization of tax deductible goodwill................... (101,072) (67,108)
Programming costs......................................... 23,860 37,833
Investment in subsidiaries................................ 27,165 15,866
Gain on sale of subsidiary stock.......................... (215,001) (46,415)
Net federal operating loss carryforward................... 99,432 40,350
Deferred revenue.......................................... (9,112) (8,955)
Warrant Amortization...................................... (10,835) --
Other..................................................... (24,309) (16,545)
---------- ---------
Total non-current deferred tax liabilities:............... (212,019) (53,877)
---------- ---------
Less valuation allowance.................................. (100,468) (44,501)
---------- ---------
Net non-current deferred tax liabilities.................. $ (312,487) $ (98,378)
---------- ---------
Total deferred tax liabilities.............................. $ (252,852) $ (54,403)
---------- ---------
The Company recognized income tax deductions related to the issuance of
common stock pursuant to the exercise of stock options for which no compensation
expense was recorded for accounting purposes. The related income tax benefits of
$38.4 million, $27.0 million, and $42.4 million for the years ended December 31,
2001, 2000 and 1999, respectively, were recorded as increases to additional
paid-in capital.
At December 31, 2001 and 2000, the Company has net operating loss
carryforwards ("NOL") for federal income tax purposes of $275.7 and $139.5
million, respectively, which are available to offset future federal taxable
income, if any, through 2020. Such NOL's were acquired through acquisitions or
are losses of consolidated subsidiaries in separate tax groups, which are
subject to certain tax loss limitations. Accordingly, the Company has
established a valuation allowance for these losses that are substantially
limited. Amounts recognized, if any, of these tax benefits in future periods
will be applied as a reduction of goodwill associated with the acquisition. The
Company has Federal income tax returns under examination by the Internal Revenue
Service. The Company has received proposed adjustments related to certain
examinations. Management believes that the resolution of the proposed
adjustments will not have a material adverse effect on the Company's
consolidated financial statements.
95
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space, as well as broadcast and production facilities, equipment and services
used in connection with its operations under various operating leases and
contracts, many of which contain escalation clauses.
Future minimum payments under non-cancelable agreements are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 65,008
2003........................................................ 40,069
2004........................................................ 34,198
2005........................................................ 22,523
2006........................................................ 16,611
Thereafter.................................................. 110,970
--------
$289,379
--------
Expenses charged to operations under these agreements were $89.8 million,
$80.0 million and $61.6 million for the years ended December 31, 2001, 2000 and
1999, respectively.
HRN has non-cancelable commitments for hotel rooms totaling $23.1 million,
which relate to the period January 1, 2002 to December 31, 2002. HRN also has,
as of December 31, 2001, $6.7 million of outstanding letters of credit that
expire between March 2002 and March 2003. The outstanding letters of credit are
collateralized by $7.6 million of restricted cash equivalents at December 31,
2001.
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 December 31, 2001, the unrecorded commitments amounted to $968.0 million.
Annual commitments are $153.8 million in 2002, $173.5 million in 2003,
$189.1 million in 2004, $155.0 million in 2005, $112.4 million in 2006 and
$184.2 million in 2007 and thereafter.
The Company is required to provide funding, from time to time, for the
operations of its investments in joint ventures accounted for under the equity
method. To date, HSN has funded $125.3 million to Hot Networks, a company
operating electronic retailing operations in Europe in which the Company holds
an equity stake.
NOTE 8--INVENTORIES
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
(IN THOUSANDS)
Film costs:
Released, net of amortization.................... $ -- $229,129 $ -- $227,635
In process and unreleased........................ -- 57,483 -- 79,460
Programming costs, net of amortization............. $209,798 248,943 $172,499 178,846
Sales merchandise, net............................. 197,145 -- 230,343 --
Other.............................................. 1,363 -- 1,626 --
-------- -------- -------- --------
Total.............................................. $408,306 $535,555 $404,468 $485,941
-------- -------- -------- --------
96
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INVENTORIES (CONTINUED)
The Company estimates that approximately 90% of unamortized film costs at
December 31, 2001 will be amortized within the next three years.
NOTE 9--STOCKHOLDERS' EQUITY
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USA's common stock and Class B common stock, payable in the form of a
dividend to stockholders of record as of the close of business on February 10,
2000. The 100% stock dividend was paid on February 24, 2000. All share data give
effect to such stock split, applied retroactively as if the split occurred on
January 1, 1999.
DESCRIPTION OF COMMON STOCK AND CLASS B CONVERTIBLE COMMON STOCK
Holders of USA Common Stock have the right to elect 25% of the entire Board
of Directors, rounded upward to the nearest whole number of directors. As to the
election of the remaining directors, the holders of USA Class B Common Stock are
entitled to 10 votes for each USA Class B Common Stock share, and the holders of
the USA Common Stock are entitled to one vote per share. There are no cumulative
voting rights.
The holders of both classes of the Company's common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. The
Company's existing credit facility places restrictions on payment of certain
dividends. In the event of the liquidation, dissolution or winding up of the
Company, the holders of both classes of common stock are entitled to share
ratably in all assets of the Company remaining after provision for payment of
liabilities. USA Class B Common Stock is convertible at the option of the holder
into USA Common Stock on a share-for-share basis. Upon conversion, the USA
Class B Common Stock will be retired and not subject to reissue.
NOTE RECEIVABLE FROM KEY EXECUTIVE FOR COMMON STOCK ISSUANCE
In connection with Mr. Diller's employment in August 1995, the Company
agreed to sell Mr. Diller 1,767,952 shares of USA Common Stock ("Diller Shares")
at $5.6565 per share for cash and a non-recourse promissory note in the amount
of $5.0 million, secured by approximately 1,060,000 shares of USA Common Stock.
The promissory note is due on the earlier of (i) the termination of
Mr. Diller's employment, or (ii) September 5, 2007.
STOCKHOLDERS' AGREEMENT
Mr. Diller, Chairman of the Board and Chief Executive Officer of the
Company, through BDTV, INC., BDTV II, INC., BDTV III, INC., BDTV IV, INC., his
own holdings and pursuant to the Stockholders Agreement with Universal, Liberty,
the Company and Vivendi (the "Stockholders Agreement"), has the right to vote
approximately 14.4% (45,291,540 shares) of USA's outstanding common stock, and
100% (63,033,452 shares) of USA's outstanding Class B Common Stock. Each share
of Class B Common Stock is entitled to ten votes per share with respect to
matters on which Common and Class B stockholders vote as a single class. As a
result, Mr. Diller controls 71.5% of the outstanding total voting power of the
Company. Mr. Diller, subject to the Stockholders Agreement, is effectively able
to control the outcome of nearly all matters submitted to a vote of the
Company's
97
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
stockholders. Liberty HSN holds substantially all of the economic interest in,
and Mr. Diller holds all of the voting power in, the shares of USAi stock held
by the BDTV entities listed above.
RESERVED COMMON SHARES
In connection with option plans, convertible debt securities, pending
acquisitions and other matters 533,792,416 shares of Common Stock were reserved.
After the closing of the Expedia and Vivendi Transactions, 339,940,844 shares of
Common Stock will be reserved, which includes 7,079,726 shares of USANi LLC
which will be exchanged for USA common shares by Liberty in relation to the
Vivendi Transaction, 59,457,479 shares issuable in relation to preferred stock
and warrants issued in the Expedia transaction, and 60,467,735 shares issuable
in relation to warrants to be issued to Vivendi in the pending Vivendi
Transaction. 320,856,512 of USANi LLC shares that are currently exchangeable
into Common Stock reserved will be retired in the Vivendi Transaction.
STOCK-BASED WARRANTS
In January 2000, HRN entered into an exclusive affiliate distribution and
marketing agreement and issued a performance warrant upon the completion of the
public offering, which, if fully vested, would have permitted the affiliate to
acquire 2,447,955 shares of class A common stock at the initial public offering
price of $16.00. On March 3, 2001, HRN restructured the affiliate distribution
and marketing agreement whereby the term of the agreement was extended through
July 2005 in exchange for waiver of all performance vesting requirements and all
exercise restrictions on 60% of the performance warrants (1,468,773 shares)
originally issued to such affiliate. The remaining 40% of the performance
warrant (979,182 shares) will become vested based upon achieving certain
performance targets during the term of the agreement. As a result of the
restructured agreement, HRN deferred additional warrant cost of $26.3 million
related to the 1,468,773 shares. HRN amortized $5.0 million of such costs during
the twelve months ended December 31, 2001. The remainder will be amortized over
the amended term of the agreement. During the years 2001 and 2000, 15.6% and
9.1%, respectively, of the HRN's sales originitated from customers of the
affiliate. HRN expects the proportion of sales generated through the affiliate
to stabilize or decline during the remaining term of the agreement.
The fair value of the warrants (979,182 shares) with performance features
will be measured quarterly, and will be charged to expense as non-cash
distribution and marketing expense as they are earned. For the twelve months
ended December 31, 2001, HRN recorded an expense of approximately $6.4 million
related to the performance warrants earned.
Additionally, in November 2000 and March 2001, HRN entered into additional
affiliate distribution and marketing agreements and agreed to issue warrants
based upon the affiliates achieving certain performance targets. If the targets
are met in full, HRN will be required to issue warrants to acquire an aggregate
of 2.8 million shares of class A common stock at an average price calculated at
the end of each performance measurement period. No warrants were required to be
issued under these agreements during the years ending December 31, 2001 and
2000.
In February 2000, HRN entered into other exclusive affiliate distribution
and marketing agreements and issued 1,428,365 warrants to purchase class A
common stock at the initial public offering price of $16.00. Additionally, in
November 2000, HRN entered into another affiliate distribution and marketing
agreement and issued 95,358 warrants to purchase class A common stock at an
exercise price of $31.46. These 1,523,723 warrants are non-forfeitable, fully
vested and exercisable
98
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
and are not subject to any performance targets. HRN has deferred the cost of
$17.7 million for these warrants, and is amortizing the cost over the term of
the affiliate agreements, which range from two to five years. During the twelve
months ended December 31, 2001 and 2000, HRN amortized $5.0 million and
$4.3 million of the warrant costs, respectively.
EXPEDIA TRANSACTION
As noted in Footnote 1, on February 4, 2002 the Company completed its
acquisition of a controlling interest in Expedia. In the merger, USA issued to
former holders of Expedia common stock who elected to receive USA securities an
aggregate of 20.6 million shares of USA common stock, 13.1 million shares of $50
face value 1.99% cumulative convertible preferred stock of USA and warrants to
acquire 14.6 million shares of USA common stock at an exercise price of $35.10.
The holders of the USA Series A Cumulative Convertible Preferred Stock are
entitled to 2 votes for each share of USA Series A Cumulative Convertible
Preferred Stock held on all matters presented to such shareholders. Each share
of USA Series A Cumulative Convertible Preferred Stock is convertible, at the
option of the holder at any time, into that number of shares of USA common stock
equal to the quotient obtained by dividing $50 by the conversion price per share
of USA common stock. The initial conversion price is equal to $33.75 per share
of USA common stock. The conversion price will be adjusted downward if the share
price of USA common stock exceeds $35.10 at the time of conversion. Each USA
warrant gives the holder the right to acquire one share of USA common stock at
an exercise price of $35.10 through February 4, 2009. The USA cumulative
preferred stock trades on OTC under the symbol "USAIP" and the USA warrants
trade on Nasdaq under the symbol "USAIW."
VIVENDI TRANSACTION
As noted in Footnote 1, on December 17, 2001, USA announced it had entered
into an agreement with Vivendi pursuant to which USA would contribute USA's
Entertainment Group to a joint venture with Vivendi, which joint venture would
also hold the film, television and theme park businesses of Universal In
relation to the transaction, USA will issue shares of common stock and warrants
to acquire shares of USA common stock, and USA will cancel shares of USANi LLC
that are exchangeable into shares of USA common stock. Pro forma for the Vivendi
Transaction and after giving effect to the exchange of all of Liberty's Holdco
shares, Liberty, through companies owned by Liberty and Mr. Diller, would own
approximately 10.2% of USA's outstanding common stock and 79.3% of USA's
outstanding Class B common stock, Vivendi (through subsidiaries), would own
approximately 11.4% of USA's outstanding common stock and 20.7% of USA's
outstanding Class B common stock and the public shareholders, including
Mr. Diller and other USA officers and directors, will own approximately 78.4% of
USA's common stock. Vivendi's ownership, however, will be in the form of
43.2 million shares of USA common stock and 13.4 million shares of Class B
common stock (for a total of 56.6 million USA shares), which shares Vivendi is
committed to hold to back a portion of the preferred interest that USA will
receive in connection with the Vivendi Transaction described below. The
preferred is to be settled by Universal at its then face value with a maximum of
approximately 56.6 million USA common shares, provided that Universal may
substitute cash in lieu of shares of USA common stock (but not USA Class B
common stock), at its election. If USA's share price exceeds $40.82 per share at
the time of settlement, fewer than 56.6 million shares would be cancelled.
99
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma for the Vivendi Transaction and after giving effect to the
exchange of all of Liberty's Holdco shares, Mr. Diller will control 69.6% of the
outstanding total voting power of USA. Upon closing of the Vivendi Transaction,
Vivendi's limited veto rights will be eliminated and Liberty will have limited
veto rights will be limited to fundamental changes in the event USA's total debt
ratio (as defined in the Amended and Restated Governance Agreement, among USA,
Vivendi, Universal, Liberty and Mr. Diller, to become effective at the closing
of the Vivendi Transaction) equals or exceeds 4:1 over a twelve-month period.
Also in connection with the transaction, Liberty will exchange 7,079,726
shares of USANi LLC for shares of USA common stock, and subsequently transfer to
Universal 25,000,000 shares of USA common stock, its remaining 38,694,982 shares
of USANi LLC, as well as the assets and liabilities of Liberty Programming
France (which consist primarily of 4,921,250 shares of multiThematiques S.A., a
French entity), in exchange for 37,386,436 Vivendi ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share.
NOTE 10--LITIGATION
In the ordinary course of business, the Company is engaged in various
lawsuits, including a certain class action lawsuit initiated in connection with
the Vivendi Transaction. In the opinion of management, the ultimate outcome of
the various lawsuits should not have a material impact on the liquidity, results
of operations or financial condition of the Company.
NOTE 11--BENEFIT PLANS
The Company offers various plans pursuant to Section 401(k) of the Internal
Revenue Code covering substantially all full-time employees who are not party to
collective bargaining agreements. The Company's share of the Match.coming
employer contributions is set at the discretion of the Board of Directors or the
applicable committee thereof.
NOTE 12--STOCK OPTION PLANS
The following describes the stock option plans. Share numbers, prices and
earnings per share reflect the Company's two-for-one stock split which became
effective for holders of record as of the close of business on February 10,
2000.
The Company has outstanding options to employees of the Company under
several plans (the "Plans") which provide for the grant of options to purchase
the Company's common stock at not less than fair market value on the date of the
grant. The options under the Plans vest ratably, generally over a range of three
to five years from the date of grant and generally expire not more than 10 years
from the date of grant. Five of the Plans have options available for future
grants.
The Company also has outstanding options to outside directors under one plan
(the "Directors Plan") which provides for the grant of options to purchase the
Company's common stock at not less than fair market value on the date of the
grant. The options under the Directors Plan vest ratably, generally over three
years from the date of grant and expire not more than 10 years from the date of
100
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTION PLANS (CONTINUED)
grant. A summary of changes in outstanding options under the stock option plans
following the Company's two-for-one stock split, is as follows:
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
PRICE PRICE PRICE
SHARES RANGE SHARES RANGE SHARES RANGE
-------- -------- -------- -------- -------- --------
(SHARES IN THOUSANDS)
Outstanding at beginning of period...... 88,755 $ 1-$28 75,955 $ 1-$37 78,428 $ 1-$37
Granted or issued in connection with $19-$28 $ 4-$28 $16-$28
mergers............................... 7,503 19,526 10,007
Exercised............................... (9,116) $ 1-$28 (4,277) $ 1-$20 (11,155) $ 1-$13
Cancelled............................... (2,716) $ 3-$28 (2,449) $ 6-$37 (1,325) $ 6-$18
------ -------- ------ -------- ------- --------
Outstanding at end of period............ 84,426 $ 1-$28 88,755 $ 1-$28 75,955 $ 1-$37
------ -------- ------ -------- ------- --------
Options exercisable..................... 63,023 $ 1-$37 56,968 $ 1-$28 47,987 $ 1-$37
------ -------- ------ -------- ------- --------
Available for grant..................... 10,379 33,628 27,225
------ ------ -------
The weighted average exercise prices during the year ended December 31,
2001, were $23.02, $8.88 and $20.47 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.69.
The weighted average exercise prices during the year ended December 31,
2000, were $21.05, $7.92 and $19.93 for options granted, options exercised and
options cancelled, respectively. The weighted average fair value of options
granted during the year was $8.10.
The weighted average exercise prices during the year ended December 31,
1999, were $23.77, $6.05 and $11.56 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.52.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICE DECEMBER 31, 2001 LIFE PRICE DECEMBER 31, 2000 PRICE
- ----------------------- ------------------ ----------- -------- ------------------ --------
(IN THOUSANDS)
$ 0.01 to $ 5.00................ 18,418 3.9 $ 4.72 18,224 $ 4.72
$ 5.01 to $10.00................ 32,301 5.0 8.30 32,137 8.31
$10.01 to $15.00................ 4,959 6.5 12.43 3,470 12.40
$15.01 to $20.00................ 9,613 7.2 18.76 4,151 18.75
$20.01 to $25.00................ 14,348 8.4 22.75 2,947 22.42
$25.01 to $27.91................ 4,787 8.1 27.67 2,094 27.86
------ ------
84,426 5.7 12.51 63,023 9.49
------ ------
Pro forma information regarding net income and earnings per share is
required by SFAS 123. The information is determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair market value method. The fair value for these options
101
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTION PLANS (CONTINUED)
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 2001, 2000 and 1999:
risk-free interest rates of 5.0%; a dividend yield of zero; a volatility factor
of .72, .62, and .44, respectively, based on the expected market price of USAi
Common Stock based on historical trends; and a weighted-average expected life of
the options of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair market value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair market value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
-------- --------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Pro forma net income (loss).................. $303,277 $(209,183) $(68,858)
Pro forma basic earnings (loss).............. $ 0.81 $ (0.58) $ (.21)
Pro forma diluted earnings (loss)............ $ 0.75 $ (0.58) $ (.21)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
NOTE 13--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 2001:
For the year ended December 31, 2001, interest accrued on the $200.0 million
advance to Universal amounted to $3.9 million.
For the twelve months ended December 31, 2001, the Company incurred non-cash
distribution and marketing expense of $26.4 million and non-cash compensation
expense of $12.7 million, including $4.9 million related to an agreement with an
executive.
In 2001 the Company realized pre-tax losses of $30.7 million on equity
losses in unconsolidated subsidiaries, resulting primarily from HOT Networks,
which operates electronic retailing operations in Europe. In 2001 the Company
realized pre-tax losses of $18.7 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
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USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 2000:
As of January 1, 2000, the Company presents the operations of HOT Germany,
an electronic retailer operating principally in Germany, on a consolidated
basis, whereas its investment in HOT Germany was previously accounted for under
the equity method of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USA common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
On January 31, 2000, TMCS completed its acquisition of 2b Technology, Inc.
("2b"), by issuing approximately 458,005 shares of TMCS Class B Common Stock for
all the outstanding stock of 2b, for a total value of approximately
$17.1 million.
On April 5, 2000, USA completed its acquisition of PRC by issuing
approximately 24.3 million shares of USAi common stock for all of the
outstanding stock of PRC, for a total value of approximately $711.7 million.
On May 26, 2000, TMCS completed its acquisition of Ticketweb, Inc.
("Ticketweb"), by issuing approximately 1.8 million shares of TMCS Class B
Common Stock for all the outstanding stock of Ticketweb, for a total value of
approximately $35.3 million.
For the year ended December 31, 2000, interest accrued on the $200.0 million
advance to Universal amounted to $8.7 million.
For the year ended December 31, 2000, the Company recorded a pre-tax gain of
$104.6 million related to the Styleclick transaction, and $3.7 million related
to the HRN IPO (see Note 3).
For the year ended December 31, 2000, the Company incurred non-cash
distribution and marketing expense of $11.7 million and non-cash compensation
expense of $12.7 million, including $3.8 million related to an agreement with an
executive.
In 2000 the Company realized pre-tax losses of $7.9 million on equity losses
in unconsolidated subsidiaries resulting primarily from HOT Networks, which
operates electronic retailing operations in Europe. In 2000 the Company also
realized pre-tax losses of $46.1 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 1999:
On March 29, 1999, TMCS completed its acquisition of City Auction, Inc.
("City Auction"), a person-to-person online auction community, by issuing
approximately 800,000 shares of TMCS Class B Common Stock for all the
outstanding stock of City Auction, for a total value of $27.2 million.
On May 28, 1999, in connection with the October Films/PFE Transaction, the
Company issued 600,000 shares of Common Stock, with a value of approximately
$12.0 million.
On June 14, 1999, TMCS completed the acquisition of Match.com.com, Inc
("Match.com.com"), an Internet personals company. In connection with the
acquisition, TMCS issued approximately
103
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STATEMENTS OF CASH FLOWS (CONTINUED)
1.9 million shares of TMCS Class B Common Stock to the former owners of
Match.com.com representing a total purchase price of approximately
$43.3 million.
On September 13, 1999, TMCS purchased all the outstanding limited liability
company units ("Units") of Web Media Ventures, L.L.C., an Internet personals
company distributing its services through a network of affiliated Internet
sites. In connection with the acquisition, TMCS issued 1.2 million shares of
TMCS Class B Common Stock in exchange for all of the Web Media Units. In
addition, TMCS is obligated to issue additional contingent shares related to
certain revenue targets. The total purchase price recorded at September 13,
1999, without considering the contingent shares, was $36.6 million.
On September 18, 1999, TMCS acquired certain assets associated with the
entertainment city guide portion of the Sidewalk.com web site ("Sidewalk") from
Microsoft Corporation ("Microsoft"). The Company also entered into a four year
distribution agreement with Microsoft pursuant to which the Company became the
exclusive provider of local city guide content on the Microsoft Network ("MSN")
and the Company's internet personals Web sites became the premier provider of
personals content to MSN. In addition, the Company and Microsoft entered into
additional cross-promotional arrangements. TMCS issued Microsoft 7.0 million
shares of TMCS Class B Common Stock. The fair value of the consideration
provided in exchange for the Sidewalk assets and distribution agreement amounted
to $338.0 million.
For the period May 28 to December 31, 1999, interest accrued on the
$200.0 million advance to Universal amounted to $6.7 million.
In 1999, the Company acquired post-production and other equipment through
capital leases totaling $2.5 million.
In 1999, TMCS issued shares with a value of $10.5 million in exchange for an
equity investment.
In 1999, the Company leased an airplane which was accounted for as a capital
lease in the amount of $20.8 million. See Note 14.
For the year ended December 31, 2000, the Company incurred non-cash
compensation expense of $6.6 million.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
CASH PAID DURING THE PERIOD FOR:
Interest....................................... $39,285 $38,946 $51,368
Income tax payments............................ 36,083 22,343 35,556
Income tax refund.............................. 1,053 1,662 632
104
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS
As of December 31, 2001, the Company was involved in several agreements with
related parties as follows:
The Company has a secured, non-recourse note receivable of $5.0 million from
its Chairman and Chief Executive Officer. See Note 9.
Universal provides certain support services to the Company under a
Transition Services agreement entered into in connection with the Universal
Transaction. For these services, which include use of pre-production, production
and post-production facilities, information technology services, physical
distribution, contract administration, legal services and office space,
Universal charged the Company $7.1 million, $8.2 million and $12.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively, of which $5.7
million, $4.7 million and $8.0 million was capitalized to production costs,
respectively.
Universal and the Company entered into an International Television
Distribution Agreement under which the Company pays to Universal a distribution
fee of 10% on all programming owned or controlled by the Company distributed
outside of the United States. For the years ended December 31, 2001, 2000 and
1999, the fee totaled $13.6 million, $14.0 million and $9.0 million,
respectively.
In addition, the Company and Universal entered into a Domestic Television
Distribution Agreement under which the Company distributes in the United States
certain of Universal's television programming. For the years ended December 31,
2001, 2000 and 1999, Universal paid the Company $4.1 million, $1.5 million and
$1.5 million, respectively.
Under the USANi LLC Operating Agreement, USANi LLC is obligated to make a
distribution to each of the LLC members in an amount equal to each member's
share of USANi LLC's taxable income at a specified tax rate. The estimated
amount for 2001 is $153.5 million and is expected to be paid on February 28,
2002. In March 2000, the Company made a mandatory tax distribution payment to
Universal and Liberty in the amount of $68.1 million related to the year ended
December 31, 1999. The amount for the year ended December 31, 1998 was $28.8
million and it was paid in March 1999.
Pursuant to the October Films/PFE Transaction, the company entered into a
series of agreements on behalf of its filmed entertainment division ("Films")
with entities owned by Universal, to provide distribution services, video
fulfillment and other interim and transitional services. These agreements are
described below.
Under a distribution agreement covering approximately fifty films owned by
Universal, Films earns a distribution fee and remits the balance of revenues to
a Universal entity. For the twelve month periods ending December 31, 2001 and
2000, Films earned distribution fees of approximately $5.7 million and $10.7
million, respectively, from the distribution of these films. Films is
responsible for collecting the full amount of the sale and remitting the net
amount after its fee to Universal, except for amounts applied against the
Universal Advance (see Note 3).
105
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS (CONTINUED)
In addition, Films acquired home video distribution rights to a number of
"specialty video" properties. Universal holds a profit participation in certain
of these titles. No amounts were earned by Universal under this agreement to
date.
Films is party to a "Videogram Fulfillment Agreement" with a Universal
entity pursuant to which such entity provides certain fulfillment services for
the United States and Canadian home video markets. In the period ending December
31, 2001 and 2000, Films incurred fees to Universal of approximately $5.6
million and $3.5 million, respectively, for such services.
Films has entered into other agreements with Universal pursuant to which
Universal administers certain music publishing rights controlled by Films and
has licensed to Universal certain foreign territorial distribution rights in
specified films from which it received $0.0 million and $5.8 million in revenue
during the period ending December 31, 2001 and 2000, respectively.
In connection with the settlement of its interest in an international joint
venture, the Company received $24.0 million from Universal during 2001.
106
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--QUARTERLY RESULTS (UNAUDITED)
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001
Net revenues................................. $1,346,475 $1,255,818 $1,369,711 $1,312,803
Operating profit............................. 46,116 37,722 76,780 73,207
Loss from continuing operations(a)........... (56,948) (40,443) (10,278) (17,383)
Earnings (loss) before cumulative effect of
accounting change(a)(b).................... (56,948) 427,575 39,551 (17,383)
Net earnings (loss)(a)(b)(c)................. (56,948) 427,575 39,551 (26,570)
EARNINGS PER SHARE--CONTINUING OPERATIONS
Basic and diluted loss per common share(d)... (.15) (.11) (.03) (.05)
EARNINGS PER SHARE--BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE
Basic earnings (loss) per common share(d).... (.15) 1.14 .11 (.05)
Diluted net earnings (loss) per common
share(d)................................... (.15) .59 .09 (.05)
EARNINGS PER SHARE
Basic net earnings (loss) per common
share(d)................................... (.15) 1.14 .11 (.07)
Diluted net earnings (loss) per common
share(d)................................... (.15) .59 .09 (.07)
YEAR ENDED DECEMBER 31, 2000
Net revenues................................. $1,313,216 $1,107,270 $1,134,328 $1,041,338
Operating profit............................. (105,801) 22,027 58,083 82,017
Loss from continuing operations(e)(f)........ (62,297) (6,688) (12,503) (7,100)
Net loss(e)(f)(g)............................ (80,285) (21,063) (27,738) (18,897)
EARNINGS PER SHARE--CONTINUING OPERATIONS
Basic and diluted loss per common
share(d)(h)................................ (.17) (.02) (.04) (.02)
EARNINGS PER SHARE
Basic and diluted net loss per common
share(d)(h)................................ (.22) (.06) (.08) (.06)
- ------------------------
(a) The Company recorded losses of $11.6 million, $6.7 million and $0.4 million
during the fourth, third and second quarters of 2001, respectively, related
to the write-down of equity investments to fair value. The Company recorded
losses of $15.6 million and $30.5 million during the fourth and third
quarters of 2000, respectively, related to the write-down of equity
investments to fair value.
(b) During the third and second quarters of 2001, the Company recorded pre-tax
gains of $468.0 million and $49.8 million, respectively, related to the sale
of the USAB stations.
(c) During the first quarter of 2001, the Company adopted Statement of Position
00-2, "Accounting By Producers or Distributors of Films." The Company
recorded expense of $9.2 million related to the cumulative effect of
adoption.
(d) Per common share amounts for the quarters may not add to the annual amount
because of differences in the average common shares outstanding during each
period.
107
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
(e) The quarterly results include the operations of Styleclick.com since its
acquisition on July 27, 2000, and PRC since its acquisition on April 5,
2000. During the third quarter of 2000, the Company recorded a pre-tax gain
of $104.6 million related to the Styleclick Transaction. During the fourth
quarter of 2000, the Company recorded a pre-tax charge of $145.6 million
related to the impairment of Styleclick goodwill.
(f) During the first quarter of 2000, the Company recorded a pre-tax gain of
$3.7 million related to the initial public offering of HRN.
(g) USAB is presented as a discontinued operation for 2000. For the fourth,
third, second and first quarters of 2000, the after tax results of USAB were
$18.0 million, $14.4 million, $15.2 million and $11.8 million, respectively.
(h) Earnings (loss) per common share data and shares outstanding retroactively
reflect the impact of the two-for-one stock split of USA's common stock and
Class B common stock paid on February 24, 2000. All share numbers give
effect to such stock split.
NOTE 16--INDUSTRY SEGMENTS
USA Networks, Inc. ("USA") (Nasdaq: USAI) is organized into two groups, the
Interactive Group and the Entertainment Group. The USA Interactive Group
consists of Home Shopping Network (including HSN International and HSN.com);
Ticketmaster (Nasdaq: TMCS), which operates Ticketmaster, Ticketmaster.com,
Citysearch and Match.com; Hotel Reservations Network (Nasdaq: ROOM); Electronic
Commerce Solutions; Styleclick (OTC: IBUY); and Precision Response Corporation.
The USA Entertainment Group consists of USA Cable, including USA Network and Sci
Fi Channel and Emerging Networks TRIO, Newsworld International and Crime;
Studios USA, which produces and distributes television programming; and USA
Films, which produces and distributes films.
Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") is defined as operating profit plus (1)
depreciation and amortization, (2) amortization of cable distribution fees of
$44.0 million, $36.3 million and $26.7 million in fiscal years 2001, 2000 and
1999, respectively (3) amortization of non-cash distribution and marketing
expense and (4) disengagement expenses (described below) of $4.1 million in
2001. Adjusted EBITDA is presented here as a tool and as a valuation methodology
used by management in evaluating the business. Adjusted EBITDA does not purport
to represent cash provided by operating activities. Adjusted EBITDA should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. Adjusted
EBITDA may not be comparable to calculations of similarly titled measures
presented by other companies.
108
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
The following is a reconciliation of Operating Income to Adjusted EBITDA for
2001, 2000 and 1999.
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Operating income............................................ $233,825 $ 56,326 $269,914
Depreciation and amortization............................... 572,765 693,642 324,506
Amortization of cable distribution fees..................... 43,975 36,322 26,680
Amortization of non-cash distribution and marketing......... 26,384 11,665 --
Amortization of non cash compensation expense............... 12,712 12,740 6,645
Disengagement expenses...................................... 4,052 -- --
-------- -------- --------
Adjusted EBITDA............................................. $893,713 $810,695 $627,745
-------- -------- --------
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
REVENUES
Cable and studios..................................... $ 1,633,130 $ 1,525,124 $ 1,304,683
HSN--U.S.(a).......................................... 1,658,904 1,533,271 1,332,911
Ticketing............................................. 579,679 518,565 442,742
Hotel Reservations Network............................ 536,497 327,977 124,113
Precision Response.................................... 298,678 212,471 --
Match.com............................................. 49,249 29,122 9,000
Citysearch and related................................ 46,108 50,888 27,329
Electronic Commerce Solutions/Styleclick.............. 34,229 46,603 49,202
HSN--International and other(b)....................... 272,569 245,715 8,917
USA Films............................................. 167,038 86,084 64,766
Trio, NWI, Crime, other emerging media................ 24,086 20,332 1,188
Other................................................. -- -- 6,894
Intersegment Elimination.............................. (15,360) -- --
----------- ----------- -----------
TOTAL............................................. $ 5,284,807 $ 4,596,152 $ 3,371,745
----------- ----------- -----------
109
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
OPERATING PROFIT
Cable and studios..................................... $ 486,667 $ 435,116 $ 320,878
HSN--U.S.(a),(c) 103,866 130,442 137,670
Ticketing............................................. 25,351 25,453 32,503
Hotel Reservations Network............................ 15,811 9,166 5,654
Precision Response.................................... (40,857) (7,282) --
Match.com............................................. (3,004) (12,484) (7,451)
Citysearch and related................................ (171,351) (207,004) (119,521)
Electronic Commerce Solutions/Styleclick.............. (73,145) (240,085) (51,701)
HSN--International and other(b)....................... (34,907) 4,641 (4,517)
USA Films............................................. (7,979) (15,800) 868
Trio, NWI, Crime, other emerging media................ (20,133) (13,244) (2,989)
Corporate & other..................................... (46,494) (52,593) (41,480)
----------- ----------- -----------
TOTAL............................................. $ 233,825 $ 56,326 $ 269,914
----------- ----------- -----------
ADJUSTED EBITDA
Cable and studios..................................... $ 613,587 $ 547,684 $ 434,084
HSN--U.S.(a).......................................... 230,280 236,752 214,893
Ticketing............................................. 106,248 99,375 93,432
Hotel Reservations Network............................ 81,449 52,641 18,891
Precision Response.................................... 26,044 35,165 --
Match.com............................................. 16,512 6,241 (400)
Citysearch and related................................ (44,417) (66,356) (60,444)
Electronic Commerce Solutions/Styleclick.............. (58,364) (60,227) (41,652)
HSN--International and other(b)....................... (25,306) 10,740 (4,505)
USA Films............................................. 1,973 (6,592) 6,497
Trio, NWI, Crime, other emerging media................ (11,467) (7,120) (2,989)
Intersegment Elimination.............................. (8,307) -- --
Corporate & other..................................... (34,519) (37,608) (30,062)
----------- ----------- -----------
TOTAL............................................. $ 893,713 $ 810,695 $ 627,745
----------- ----------- -----------
110
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cable and studios..................................... $ 4,847,480 $ 4,818,352 $ 4,821,905
HSN--U.S.............................................. 1,704,335 1,729,266 1,601,470
Ticketing............................................. 1,109,661 1,089,965 1,004,277
Hotel Reservations Network............................ 643,835 555,613 202,666
Precision Response.................................... 850,485 795,531 --
Match.com............................................. 83,032 73,293 77,316
Citysearch and related................................ 209,212 364,631 573,632
Electronic Commerce Solutions/Styleclick.............. 33,111 61,025 28,623
HSN--International and other.......................... 212,549 133,654 37,840
USA Films............................................. 229,876 252,899 214,582
Trio, NWI, Crime, other emerging media................ 96,619 113,134 200
Corporate & other..................................... 1,682,857 486,507 670,716
----------- ----------- -----------
TOTAL............................................. $11,703,052 $10,473,870 $ 9,233,227
----------- ----------- -----------
DEPRECIATION AND AMORTIZATION OF INTANGIBLES AND CABLE
DISTRIBUTION FEES
Cable and studios..................................... $ 122,008 $ 112,568 $ 113,034
HSN--U.S.............................................. 122,115 106,059 83,796
Ticketing............................................. 80,897 73,922 60,846
Hotel Reservations Network............................ 48,662 39,215 13,237
Precision Response.................................... 66,901 42,447 --
Match.com............................................. 19,516 18,725 7,051
Citysearch and related................................ 106,700 130,207 59,077
Electronic Commerce Solutions/Styleclick.............. 14,589 179,854 3,251
HSN--International and other.......................... 9,601 6,099 12
USA Films............................................. 9,952 9,208 5,629
Trio, NWI, Crime, other emerging media................ 8,666 6,124 --
Corporate & other..................................... 7,133 5,536 5,253
----------- ----------- -----------
TOTAL............................................. $ 616,740 $ 729,964 $ 351,186
----------- ----------- -----------
111
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
CAPITAL EXPENDITURES
Cable and studios..................................... $ 12,907 $ 15,229 $ 6,771
HSN--U.S.............................................. 42,615 34,122 33,412
Ticketing............................................. 24,465 23,282 23,789
Hotel Reservations Network............................ 16,022 2,859 1,092
Precision Response.................................... 25,775 43,505 --
Match.com............................................. 3,268 2,485 --
Citysearch and related................................ 5,017 9,262 11,328
Electronic Commerce Solutions/Styleclick.............. 2,292 5,047 13,657
HSN--International and other.......................... 6,031 18,105 13,746
USA Films............................................. 7 632 448
Trio, NWI, Crime, other emerging media................ 61 600 --
Corporate & other..................................... 5,051 21,756 4,673
----------- ----------- -----------
TOTAL............................................. $ 143,511 $ 176,884 $ 108,916
----------- ----------- -----------
- ------------------------
(a) Includes estimated revenue in 2000 generated by homes lost by HSN following
the sale of USA Broadcasting to Univision, which is estimated to be $6.2
million. Adjusted EBITDA for these homes is estimated at $0.9 million.
(b) Includes impact of foreign exchange fluctuations, which reduced revenue by
$44.0 million and $36.3 million in 2001 and 2000, respectively, if the
results are translated from Euros to U.S. dollars at a constant exchange
rate, using 1999 as the base year.
(c) 2001 includes $4.1 million of costs incurred related to the disengagement of
HSN from USA Broadcasting stations. Amounts primarily related to payments to
cable operators and related marketing expenses in the disengaged markets.
NOTE 17--FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies when available. The carrying
values of all financial instruments approximates their respective fair values.
DECEMBER 31, 2001 DECEMBER 31, 2000
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
Cash and cash equivalents....................... $ 978,377 $ 978,377 $ 244,223 $ 244,223
Long-term investments........................... 65,891 65,891 49,355 49,355
Long-term obligations........................... (578,683) (578,683) (577,958) (577,958)
112
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--MARKETABLE SECURITIES AND INVESTMENTS HELD FOR SALE
At December 31, 2001, marketable securities available-for-sale were as
follows (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
U.S. Government and agencies........................ $147,106 $230 $(217) $147,119
Non-US government securities and other fixed Term
obligations....................................... 22,350 -- -- 22,350
Corporate debt securities........................... 1,970 25 -- 1,995
-------- ---- ----- --------
Total marketable securities......................... 171,426 255 (217) 171,464
Investment held for sale............................ -- -- -- --
-------- ---- ----- --------
Total............................................... $171,426 $255 $(217) $171,464
-------- ---- ----- --------
Income tax expense of $15 were recorded on these securities for the year
ended December 31, 2001.
The contractual maturities of debt securities classified as
available-for-sale as of December 31, 2001 are as follows (in thousands):
AMORTIZED ESTIMATED
COST FAIR VALUES
--------- -----------
Due in one year or less................................. $ 65,922 $ 66,035
Due after one year through two years.................... 7,461 7,398
Due after two through five years........................ 22,977 22,956
Due over five years..................................... 75,066 75,075
-------- --------
Total................................................... $171,426 $171,464
-------- --------
At December 31, 2000, marketable securities available-for-sale were as
follows (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
Corporate debt securities........................... $ 81,066 $ 9 $ (14) $ 81,061
U.S. Government and agencies........................ 26,928 118 (12) 27,034
Certificate of deposit.............................. 10,175 20 -- 10,195
Treasury Bill....................................... 8,048 14 -- 8,062
-------- ---- ------- --------
Total marketable securities......................... 126,217 161 (26) 126,352
Investment held for sale............................ 10,041 -- (9,291) 750
-------- ---- ------- --------
Total............................................... $136,258 $161 $(9,317) $127,102
-------- ---- ------- --------
Income tax benefit of $3.6 million was recorded on these securities for the
year ended December 31, 2000.
113
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--MARKETABLE SECURITIES AND INVESTMENTS HELD FOR SALE (CONTINUED)
The contractual maturities of debt securities classified as
available-for-sale as of December 31, 2000 are as follows (in thousands):
AMORTIZED ESTIMATED
COST FAIR VALUES
--------- -----------
Due in one year or less................................. $113,865 $113,976
Due after one year through two years.................... 997 1,012
Due after two through five years........................ 2,002 2,019
Due over five years..................................... 9,353 9,345
-------- --------
Total................................................... $126,217 $126,352
-------- --------
NOTE 19--EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 2001, USA beneficially owned 46.7% of the outstanding common
stock of Hot Networks AG, a German stock corporation, the subsidiaries of which
operate electronic retailing operations in Europe. This investment is accounted
for using the equity method. Due to the significance of the results of Hot
Networks, AG, in relation to USA's results, summary financial information for
Hot Networks AG is presented below. There were no significant operations in
1999.
AS OF AND FOR THE
YEARS ENDED
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Current assets......................................... $ 17,597 $ 6,943
Noncurrent assets...................................... 157,274 42,784
Current liabilities.................................... 46,085 37,531
Noncurrent liabilities................................. 194,249 23,668
Net sales.............................................. 8,215 6,242
Gross profit........................................... 277 1,301
Net loss............................................... (51,453) (20,254)
To date, the Company has contributed approximately $125.3 million, including
$105.5 million in 2001, and recorded equity losses in unconsolidated
subsidiaries of $30.5 million, including $27.6 million in 2001.
NOTE 20--SAVOY SUMMARIZED HISTORICAL FINANCIAL INFORMATION
The Company has not prepared separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy Debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
114
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--SAVOY SUMMARIZED HISTORICAL FINANCIAL INFORMATION (CONTINUED)
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Net sales........................................... $3,591 $6,678 $7,890
Operating expenses.................................. 118 3,236 3,431
Operating income.................................... 3,473 3,442 4,459
Net income.......................................... 5,681 6,354 7,143
SUMMARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Current assets........................................... $10,709 $ --
Non-current assets....................................... 53,563 158,561
Current liabilities...................................... 4,861 17,021
Non-current liabilities.................................. 44,530 38,902
NOTE 21--PROGRAM RIGHTS AND FILM COSTS
As of December 31, 2001, the liability for program rights, representing
future payments to be made under program contract agreements amounted to $510.1
million. Annual payments required are $259.3 million in 2002, $156.6 million in
2003, $70.8 million in 2004, $17.0 million in 2005, $3.9 million in 2006 and
$2.5 million in 2007 and thereafter. Amounts representing interest are $48.1
million and the present value of future payments is $462.0 million.
As of December 31, 2001, the liability for film costs amounted to $95.9
million. Annual payments are $51.6 million in 2002, $42.4 million in 2003 and
$1.9 million in 2004.
NOTE 22--SALE OF USA BROADCASTING
In August 2001, the Company completed its previously announced sale of all
of the capital stock of certain USA Broadcasting ("USAB") subsidiaries that own
13 full-power television stations and minority interests in four additional
full-power stations to Univision Communications Inc. ("Univision"). Total cash
proceeds were $1.1 billion, of which $510.4 million was collected in fiscal year
2001 and $589.6 million in January 2002. The gain on the sale of the stations of
$517.8 million, net of tax of $377.4 million USAB is presented as a discontinued
operation for all periods presented. The revenues for USAB were $19.7 million
and $8.6 million in the years ended 2000 and 1999, respectively. The loss for
USAB was $59.4 million (net of tax benefit of $21.3 million) and $44.1 million
(net of tax benefit of $12.1 million) in the years ended 2000 and 1999,
respectively.
NOTE 23--EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of Basic and Diluted earnings
per share. All share numbers have been adjusted to retroactively reflect the
impact of the two-for-one stock split of USA's
115
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--EARNINGS (LOSS) PER SHARE (CONTINUED)
common stock and Class B common stock paid on February 24, 2000. All share
numbers give effect to such stock split.
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
------------ ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONTINUING OPERATIONS:
NUMERATOR:
Earnings (loss)............................................. $ (125,052) $ (88,588) $16,515
DENOMINATOR:
Denominator for basic earnings per share--weighted
average shares............................................ 374,101 359,688 327,816
Effect of dilutive securities:
Stock options............................................. -- -- 40,111
LLC shares exchangeable into Common Stock................. -- -- --
---------- --------- -------
Diluted weighted average shares............................. 374,101 359,688 367,927
Basic earnings (loss) per share............................. $ (.33) $ (.25) $ .05
Diluted earnings (loss) per share........................... $ (.33) $ (.25) $ .04
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX:
NUMERATOR:
Net earnings (loss)......................................... $392,795 $(147,983) $(27,631)
Elimination of minority interest............................ 74,066 -- --
-------- --------- --------
Numerator for diluted earnings (loss) per share............. $466,861 $(147,983) $(27,631)
DENOMINATOR:
Denominator for basic earnings per share--weighted
average shares............................................ 374,101 359,688 327,816
Effect of dilutive securities:
Stock options............................................. 30,089 -- --
LLC shares exchangeable into Common Stock................. 361,153 -- --
-------- --------- --------
Diluted weighted average shares............................. 765,343 359,688 327,816
Basic earnings (loss) per share............................. $ 1.05 $ (.41) $ (.08)
Diluted earnings (loss) per share........................... .61 $ (.41) $ (.08)
116
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--EARNINGS (LOSS) PER SHARE (CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET EARNINGS (LOSS):
NUMERATOR:
Net earnings (loss)......................................... $383,608 $ (147,983) $ (27,631)
Elimination of minority interest............................ 74,066 -- --
-------- ---------- ---------
Numerator for diluted earnings (loss) per share............. $457,674 $ (147,983) $ (27,631)
DENOMINATOR:
Denominator for basic earnings per share--weighted
average shares............................................ 374,101 359,688 327,816
Effect of dilutive securities:
Stock options............................................. 30,089 -- --
LLC shares exchangeable into Common Stock................. 361,153 -- --
-------- ---------- ---------
Diluted weighted average shares............................. 765,343 359,688 327,816
Basic earnings (loss) per share............................. $ 1.03 $ (.41) $ (.08)
Diluted earnings (loss) per share........................... .60 $ (.41) $ (.08)
NOTE 24-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
On November 23, 1998, the Company and USANi LLC as co-issuers completed an
offering of $500.0 million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In
May 1999, the Old Notes were exchanged in full for $500.0 million of new 6 3/4%
Senior Notes due 2005 (the "Notes") that have terms that are substantially
identical to the Old Notes. Interest is payable on the Notes on May 15 and
November 15 of each year, commencing May 15, 1999. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of the
Company, including Holdco, a non-wholly owned, direct subsidiary of the Company,
and all of the subsidiaries of USANi LLC (other than subsidiaries that are,
individually and in the aggregate, inconsequential to USANi LLC on a
consolidated basis) (collectively, the "Subsidiary Guarantors"). All of the
Subsidiary Guarantors (other than Holdco) (the "Wholly Owned Subsidiary
Guarantors") are wholly owned, directly or indirectly, by the Company or USANi
LLC, as the case may be.
The following tables present condensed consolidating financial information
for the years ended December 31, 2000, 1999 and 1998 for: (1) the Company on a
stand-alone basis, (2) Holdco on a stand-alone basis, (3) USANi LLC on a
stand-alone basis, (4) the combined Wholly Owned Subsidiary Guarantors
(including Wholly Owned Subsidiary Guarantors that are wholly owned subsidiaries
of USANi LLC), (5) the combined non-guarantor subsidiaries of the Company
(including the non-guarantor subsidiaries of USANi LLC (collectively, the
"Non-Guarantor Subsidiaries")), and (6) the Company on a consolidated basis.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because the
Company's management has determined that the information contained in such
documents would not be material to investors.
117
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
As of and for the Year Ended December 31, 2001
WHOLLY
OWNED NON-
USANI SUBSIDIARY GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ----------- ------------- ------------ ------------
Current assets................. $ 585,212 $ -- $ 749,559 $ 932,651 $ 708,810 $ -- $ 2,976,232
Property and equipment net..... -- -- 24,755 198,971 210,389 -- 434,115
Goodwill and other intangible
assets, net.................. 71,598 -- 2,260 4,751,722 2,410,703 -- 7,236,283
Investment in subsidiaries..... 3,919,150 1,319,505 7,159,969 101,680 -- (12,500,304) --
Other assets................... 92,111 -- 2,262 708,490 960,170 (706,611) 1,056,422
---------- ---------- ---------- ----------- ----------- ------------ -----------
Total assets................... $4,668,071 $1,319,505 $7,938,805 $6,693,514 $ 4,290,072 $(13,206,915) $11,703,052
---------- ---------- ---------- ----------- ----------- ------------ -----------
Current liabilities............ $ 238,934 $ -- $ (15,540) $ 836,754 $ 535,148 $ -- $ 1,595,296
Long-term debt, less current
portion...................... -- -- 498,515 606 45,546 -- 544,667
Other liabilities.............. 483,636 -- 1,057,543 426,245 604,437 (1,922,642) 649,219
Minority interest.............. -- -- (141,390) (108,769) 442,450 4,776,078 4,968,369
Interdivisional equity......... -- -- -- 5,538,678 2,662,491 (8,201,169) --
Stockholder's equity........... 3,945,501 1,319,505 6,539,677 -- -- (7,859,182) 3,945,501
---------- ---------- ---------- ----------- ----------- ------------ -----------
Total liabilities and
shareholders' equity......... $4,668,071 $1,319,505 $7,938,805 $6,693,514 $ 4,290,072 $(13,206,915) $11,703,052
---------- ---------- ---------- ----------- ----------- ------------ -----------
Revenue........................ $ -- $ -- $ -- $3,288,286 $ 2,013,601 $ (17,080) $ 5,284,807
Operating expenses............. (10,725) -- (34,154) (2,745,705) (2,277,478) 17,080 (5,050,982)
Interest expense, net.......... (21,757) -- 4,650 (33,297) 1,966 -- (48,438)
Other income (expense), net.... (92,570) 64,557 367,373 (4,399) (38,284) (348,900) (52,223)
Provision for income taxes..... -- -- -- (95,560) (13,317) -- (108,877)
Minority interest.............. -- -- -- (211,471) 62,132 -- (149,339)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Net (loss) income from
continuing operations........ $ (125,052) $ 64,557 $ 337,869 $ 197,854 $ (251,380) $ (348,900) $ (125,052)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Gain on disposal of
Broadcasting Stations........ 517,847 -- -- -- -- -- 517,847
Net income (loss) from
cumulative effect of
accounting change............ (9,187) 1,901 6,470 2,438 (11,625) 816 (9,187)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Net income (loss).............. $ 383,608 $ 66,458 $ 344,339 $ 200,292 $ (263,005) $ (348,084) $ 383,608
---------- ---------- ---------- ----------- ----------- ------------ -----------
Cash flows from operations..... $ (36,116) $ -- $ (25,770) $ 590,779 $ 141,039 $ -- $ 669,932
Cash flows used in investing
activities................... 31,993 -- (7,774) (65,279) 92,995 -- 51,935
Cash flows from financing
activities................... 4,123 -- 745,346 (458,247) (227,214) -- 64,008
Net Cash used by discontinued
operations................... -- -- -- (48,058) -- -- (48,058)
Effect of exchange rate........ -- -- (417) 269 (3,515) -- (3,663)
Cash at the beginning of the
period....................... -- -- 78,079 (28,949) 195,093 -- 244,223
---------- ---------- ---------- ----------- ----------- ------------ -----------
Cash at the end of the
period....................... $ -- $ -- $ 789,464 $ (9,485) $ 198,398 $ -- $ 978,377
---------- ---------- ---------- ----------- ----------- ------------ -----------
118
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
As of and for the Year Ended December 31, 2000
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ----------- -------------- ------------ ------------
Current assets....... $ 356,726 $ -- $ 14,159 $ 899,892 $ 606,565 $ (356,726) $ 1,520,616
Property and
equipment net...... -- -- 24,203 205,895 213,896 -- 443,994
Goodwill and other
intangible assets,
net................ 73,693 -- -- 5,004,332 2,383,837 -- 7,461,862
Investment in
subsidiaries....... 3,210,513 1,284,166 6,888,058 -- -- (11,382,737) --
Other assets......... 167,447 -- 15,229 797,320 136,032 (204,499) 911,529
Net current assets of
discontinued
operations......... -- -- -- 3,766 4,022 -- 7,788
Net non current
assets on
discontinued
operations......... -- -- -- (240,346) 54,091 314,336 128,081
---------- ---------- ---------- ----------- ----------- ------------ -----------
Total assets......... $3,808,379 $1,284,166 $6,941,649 $6,670,859 $ 3,398,443 $(11,629,626) $10,473,870
---------- ---------- ---------- ----------- ----------- ------------ -----------
Current
liabilities........ $ 12,406 $ -- $ -- $ 884,874 $ 427,365 $ (151,398) $ 1,173,247
Long-term debt, less
current portion.... -- -- 498,212 4,645 49,644 -- 552,501
Other liabilities.... 356,102 -- 243,333 270,824 487,301 (866,446) 491,114
Minority interest.... -- -- 60,373 177,184 439,699 4,139,881 4,817,137
Interdivisional
equity............. -- -- -- 5,302,098 2,134,252 (7,436,350) --
Stockholders'
equity............. 3,439,871 1,284,166 6,139,731 31,234 (139,818) (7,315,313) 3,439,871
---------- ---------- ---------- ----------- ----------- ------------ -----------
Total liabilities and
shareholders'
equity............. $3,808,379 $1,284,166 $6,941,649 $6,670,859 $ 3,398,443 $(11,629,626) $10,473,870
---------- ---------- ---------- ----------- ----------- ------------ -----------
Revenue.............. $ -- $ -- $ -- $3,108,099 $ 1,489,123 $ (1,070) $ 4,596,152
Operating expenses... (15,184) -- (37,369) (2,614,506) (1,873,837) 1,070 (4,539,826)
Interest expense,
net................ (26,195) -- 22,208 (28,263) (1,970) 2 (34,218)
Other income
(expense), net..... (48,551) 65,026 372,389 (112,323) (20,831) (206,413) 49,297
Provision for income
taxes.............. 1,342 -- (27,351) (27,761) (59,099) -- (112,869)
Minority interest.... -- -- -- 6,992 154,459 (208,575) (47,124)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Net (loss) income
from continuing
operations......... $ (88,588) $ 65,026 $ 329,877 $ 332,238 $ (312,155) $ (414,986) $ (88,588)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Net (loss) income
from discontinued
operations......... (59,395) -- -- (59,334) (61) 59,395 (59,395)
---------- ---------- ---------- ----------- ----------- ------------ -----------
Cash flows from
operations......... $ (34,654) $ -- $ (9,403) $ 402,056 $ 14,508 $ -- $ 372,507
Cash flows used in
investing
activities......... $ 18,711 $ -- $ (63,754) $ (207,548) $ (271,965) $ -- $ (524,556)
Cash flows from
financing
activities......... $ 15,943 $ -- $ (125,442) $ (112,456) $ 280,301 $ -- $ 58,346
Net Cash used by
discontinued
operations......... -- -- -- (84,771) 2,208 -- (82,563)
Effect of exchange
rate............... -- -- -- 3,352 (6,039) -- (2,687)
Cash at the beginning
of the period...... -- -- 276,678 (27,067) 173,565 -- 423,176
---------- ---------- ---------- ----------- ----------- ------------ -----------
Cash at the end of
the period......... $ -- $ -- $ 78,079 $ (26,434) $ 192,578 $ -- $ 244,223
---------- ---------- ---------- ----------- ----------- ------------ -----------
119
USA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24-- NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
As of and for the Year Ended December 31, 1999
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR USAI
USAI HOLDCO LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------- -------- ------------ -------------- ------------ ------------
Revenue................. $ -- $ -- $ -- $ 2,668,239 $ 703,506 $ -- $ 3,371,745
Operating expenses...... (10,074) -- (27,171) (2,266,186) (798,400) -- (3,101,831)
Interest expense, net... (10,713) -- (11,837) (22,157) (3,837) -- (48,544)
Gain on sale of
subsidiary stock...... -- -- -- 89,721 -- -- 89,721
Other income (expense),
net................... 29,437 85,199 433,996 49,599 21,026 (613,486) 5,771
Provision for income
taxes................. 7,865 -- -- (81,882) (29,033) -- (103,050)
Minority interest....... -- -- -- 91 56,650 (254,038) (197,297)
--------- ------- -------- ------------ --------- ---------- -----------
Net (loss) income from
continuing
operations............ $ 16,515 $85,199 $394,988 $ 437,425 $ (50,088) $ (867,524) $ 16,515
--------- ------- -------- ------------ --------- ---------- -----------
Net (loss) income from
discontinued
operations............ $ (44,146) $ -- $ -- $ (44,968) $ 822 $ 44,146
--------- ------- -------- ------------ --------- ---------- -----------
Cash flows from
operations............ $ (33,127) $ -- $(31,200) $ 476,263 $ (10,359) $ -- $ 401,577
Cash flows used in
investing
activities............ $(401,082) $ -- $(53,645) $ 34,754 $ 6,005 $ -- $ (413,968)
Cash flows from
financing
activities............ $ 434,209 $ -- $212,973 $ (570,075) $ (21,159) $ -- $ 55,948
Net cash used by
discontinued
operations............ -- -- -- (49,317) (16,943) -- (66,260)
Effect of exchange
rate.................. -- -- -- -- (123) -- (123)
Cash at the beginning of
the period............ -- -- 151,160 102,954 191,888 -- 446,002
--------- ------- -------- ------------ --------- ---------- -----------
Cash at the end of the
period................ $ -- $ -- $279,288 $ (5,421) $ 149,309 $ -- $ 423,176
========= ======= ======== ============ ========= ========== ===========
120
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
Not applicable.
PART III
The information required by Part III (Items 10, 11, 12 and 13) has been
incorporated herein by reference to USA's definitive Proxy Statement to be used
in connection with the 2002 Annual Meeting of Stockholders (the "2002 Proxy
Statement") as set forth below, in accordance with General Instruction G(3) of
Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors and executive officers of USA is set forth
in the section entitled "Item 1--Election of Directors and Management
Information" in the 2002 Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of officers and directors of USA is set
forth in the section entitled "Executive Compensation" in the 2002 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of USA's common stock, Class B common stock
and preferred stock is set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 2002 Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information regarding certain relationships and related transactions with
USA is set forth in the section entitled "Certain Relationships and Related
Party Transactions" in the 2002 Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) -- Consolidated Financial Statements
Report of Independent Auditors: Ernst & Young LLP.
Consolidated Statement of Operations for the Years Ended
December 31,
2001, 2000 and 1999.
Consolidated Balance Sheets as of December 31, 2001 and
2000.
Consolidated Statement of Stockholders' Equity for the Years
Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for Years Ended
December 31, 2001,
2000 and 1999.
Notes to Consolidated Financial Statements.
(2) -- Consolidated Financial Statement Schedules
121
SCHEDULE PAGE
NUMBER NUMBER
-------- --------
II -- Valuation and Qualifying Accounts........................... 132
(3)-- Home Shopping Network, Inc. and Subsidiaries Financial
Statements
Report of Independent Auditors: Ernst & Young LLP......... 133
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.......................... 134
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... 135
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999.............. 136
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.......................... 137
Notes to Consolidated Financial Statements.................. 138
(4)-- USANi LLC and Subsidiaries Financial Statements
Report of Independent Auditors: Ernst & Young LLP........... 160
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.......................... 161
Consolidated Balance Sheets as of December 31, 2001 and
200....................................................... 162
Consolidated Statements of Members' Equity for the Years
Ended December 31, 2001, 2000 and 1999.................... 163
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.......................... 164
Notes to Consolidated Financial Statements.................. 165
All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the notes thereto, or is not applicable or required.
(5)--Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
2.1 Agreement and Plan of Exchange and Merger, dated as of
August 25, 1996, by and among Silver King Communications,
Inc., HouseAcquisition Corp., Home Shopping Network, Inc.
and Liberty HSN, Inc., filed as Appendix B to USA's
Definitive Proxy Statement, dated November 20, 1996, is
incorporated herein by reference.
2.2 Agreement and Plan of Merger by and among Silver King
Communications, Inc., Thames Acquisition Corporation and
Savoy Pictures Entertainment, Inc., as amended and restated
as of August 13, 1996, filed as Appendix A to USA's
Definitive Proxy Statement, dated November 20, 1996, is
incorporated herein by reference.
122
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
2.3 Investment Agreement, dated as of October 19, 1997, among
Universal Studios, Inc., HSN, Inc., Home Shopping Network,
Inc. and Liberty Media Corporation, as amended and restated
as of December 18, 1997, filed as Appendix A to USA's
Definitive Proxy Statement, dated January 12, 1998, is
incorporated herein by reference.
2.4 Amended and Restated Agreement and Plan of Reorganization,
dated as of August 12, 1998, among CitySearch, Inc.,
Tiberius, Inc., USA Networks, Inc., Ticketmaster Group,
Inc., Ticketmaster Corporation and Ticketmaster Multimedia
Holdings, Inc., filed as Exhibit 10 to USA's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, is incorporated herein by reference.
2.5 Agreement and Plan of Merger, dated as of March 20, 1998, by
and among USA, Brick Acquisition Corp. and Ticketmaster
Group, Inc., filed as Exhibit 10.61 to USA's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, is
incorporated herein by reference.
2.6 Agreement and Plan of Merger, dated as of January 12, 2000,
by and among Precision Response Corporation, USA and P
Acquisition Corp., filed as Exhibit 1 to USA's Schedule 13D
filed on January 19, 2000, is incorporated herein by
reference.
2.7 Amended and Restated Agreement and Plan of Recapitalization
and Merger, dated as of July 15, 2001, by and among USA
Networks, Inc., Expedia, Inc., Taipei, Inc., Microsoft
Corporation and Microsoft E-Holdings, Inc., filed as Annex A
to USA's Registration Statement on Form S-4 (No. 333-68120),
is incorporated herein by reference.
2.8 Transaction Agreement, dated as of December 16, 2001, among
Vivendi Universal, S.A., Universal Studios, Inc., USA
Networks, Inc., USANi LLC and Liberty Media Corporation,
filed as Appendix A to USA's Definitive Proxy Statement,
dated March 25, 2002, is incorporated herein by reference.
3.1 Restated Certificate of Incorporation of USA filed as
Exhibit 3.1 to USA's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2000, is incorporated herein
by reference.
3.2 Amendment to Restated Certificate of Incorporation of USA,
filed as Exhibit A the USA's Definitive Information
Statemet, filed on November 19, 2001, is incorporated herein
by reference.
3.3+ Amendment to By-Laws of USA, dated January 31, 2002. 188
3.4+ Amended and Restated By-Laws of USA. 189
4.1 Indenture, dated as of November 23, 1998, among USA, USANi
LLC, the Guarantors party thereto, and The Chase Manhattan
Bank, as Trustee, filed as Exhibit 4.1 to USA's Registration
Statement on Form S-4 (No. 333-71305) (the "USA S-4"), is
incorporated herein by reference.
4.2 Form of 6 3/4% Senior Notes due 2005 (included as Exhibit B
to Exhibit 4.1 to the USA S-4).
123
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
4.3+ Certificate of Designations of Series A Cumulative
Convertible Preferred Stock of USA. 208
4.4 Indenture, dated as of June 25, 1993, for the Savoy 7%
Convertible Subordinated Debentures due July 1, 2003, filed
as Exhibit 4(d) to Savoy's S-1 Registration Statement No.
33-63192, is incorporated herein by reference.
4.5 First Supplemental Indenture, dated as of October 24, 1993,
for the Savoy 7% Convertible Debentures due July 1, 2003,
filed as Exhibit 4(e) to Savoy's S-1 Registration Statement
No. 33-70160, is incorporated herein by reference.
4.6 Second Supplemental Indenture, dated as of December 17,
1993, for the Savoy 7% Convertible Debentures due July 1,
2003, filed as Exhibit 4(e) to Savoy's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, is
incorporated herein by reference.
4.7 Third Supplemental Indenture, dated as of December 19, 1996,
for the Savoy 7% Convertible Debentures due July 1, 2003
filed as Exhibit 4.1 to Savoy's Form 8-K, dated December 19,
1996, is incorporated herein by reference.
4.8+ Equity Warrant Agreement, dated as of February 4, 2002,
between USA and The Bank of New York, as equity warrant
agent. 226
10.1 Form of Affiliation Agreements between USA and Home
Shopping, filed as Exhibit 10.2 to USA's Registration
Statement on Form 10, as amended, is incorporated herein by
reference.
10.2* Form of 1992 Stock Option and Restricted Stock Plan between
USA and Home Shopping, filed as Exhibit 10.6 to USA's
Registration Statement on Form 8, as amended, is
incorporated herein by reference.
10.3 Form of Indemnification Agreement, filed as Exhibit 10.10 to
USA's Registration Statement on Form 10, as amended, is
incorporated herein by reference.
10.4 Form of Loan Agreement, as amended, by and between Silver
King Capital Corporation, Inc. and Roberts Broadcasting
Company of Denver, filed as Exhibit 10.17 to USA's Annual
Report on Form 10-K for the fiscal year ended August 31,
1994, is incorporated herein by reference.
10.5 Form of Shareholder Agreement by and among Silver King
Capital Corporation, Inc., Roberts Broadcasting Company of
Denver, Michael V. Roberts and Steven C. Roberts, filed as
Exhibit 10.18 to USA's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994, is incorporated herein by
reference.
10.6 Limited Liability Company Agreement, Funding Agreement and
Form of First Amendment to LLC, Registration Rights
Agreement and associated documents between USA, the Class A
Shareholders of Blackstar Communications, Inc. and Fox
Television Stations, Inc., dated as of June 27, 1995 and
August 18, 1995, filed as Exhibit 10.23 to USA's Annual
Report on Form 10-K for the fiscal year ended August 31,
1995, are incorporated herein by reference.
124
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
10.7* 1986 Stock Option Plan for Employees, dated as of August 1,
1986, filed as Exhibit 10.33 to Home Shopping's Form S-1
Registration Statement No. 33-8560, is incorporated herein
by reference.
10.8* First, Second, Third and Fourth Amendments to the 1986 Stock
Option Plan for Employees, filed as Exhibit 10.31 to Home
Shopping's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, are incorporated herein by
reference.
10.9* Form of 1990 Executive Stock Award Program, dated as of
October 17, 1990, as amended, filed as Exhibit 10.23 to Home
Shopping's Annual Report on Form 10-K for the fiscal year
ended August 31, 1991, is incorporated herein by reference.
10.10* Home Shopping Network, Inc. Employee Stock Purchase Plan and
Part-Time Employee Stock Purchase Plan, filed as Exhibit
10.30 to Home Shopping's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, is incorporated herein
by reference.
10.11* Home Shopping Network, Inc. 1996 Stock Option Plan for
Employees, filed as Exhibit A to the Home Shopping
Definitive Proxy Statement, dated March 28, 1996, is
incorporated herein by reference.
10.12 Exchange Agreement, dated as of December 20, 1996, by and
between the Registrant and Liberty HSN, Inc. filed as
Exhibit 10.25 to USA's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, is incorporated herein
by reference.
10.13* Equity and Bonus Compensation Agreement, dated as of August
24, 1995, between Barry Diller and the Registrant filed as
Exhibit 10.26 to USA's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, is incorporated herein
by reference.
10.14* Silver King Communications, Inc. 1995 Stock Incentive Plan
filed as Appendix G to USA's Definitive Proxy Statement,
dated November 20, 1996, is incorporated herein by
reference.
10.15* Silver King Communications, Inc. Directors' Stock Option
Plan filed as Appendix H to USA's Definitive Proxy
Statement, dated November 20, 1996, is incorporated herein
by reference.
10.16 Shareholders Agreement, dated December 12, 1996, relating to
Jupiter Shop Channel Co. Ltd. among Jupiter Programming Co.
Ltd., Home Shopping Network, Inc. and Jupiter Shop Channel
Co. Ltd. filed as Exhibit 10.35 to USA's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, is
incorporated herein by reference.
10.17 Services and Trademark License Agreement, dated as of
December 12, 1996, between Home Shopping Network, Inc. and
Jupiter Shop Channel Co. Ltd., filed as Exhibit 10.36 to
USA's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is incorporated herein by reference.
125
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
10.18 Purchase and Sale Agreement among Home Shopping Network
GmbH, Home Shopping Network, Inc., Quelle Schickedanz AG &
Co., Mr. Thomas Kirch and Dr. Georg Kofler, dated as of
January 16, 1997, filed as Exhibit 10.37 to USA's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, is incorporated herein by reference.
10.19 Joint Venture Agreement between Quelle Schickedanz AG & Co.,
Home Shopping Network, Inc., Home Shopping Network GmbH, Mr.
Thomas Kirch and Dr. Georg Kofler, filed as Exhibit 5.3 to
the Purchase and Sale Agreement, filed as Exhibit 10.38 to
USA's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is incorporated herein by reference.
10.20 License Agreement, dated as of January 1, 1996, between
Ronald A. Katz Technology Licensing, L.P. and Home Shopping
Network, Inc., filed as Exhibit 10.39 to USA's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, is
incorporated herein by reference.
10.21 Shareholder Agreement, dated as of April 26, 1996, by and
among Channel 66 of Vallejo, California, Inc., Whitehead
Media of California, Inc. and Silver King Capital
Corporation, Inc., filed as Exhibit 10.40 to USA's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, is incorporated herein by reference.
10.22 Loan Agreement, dated as of April 26, 1996, by and between
SKC Investments, Inc. and Channel 66 of Vallejo, California,
Inc., filed as Exhibit 10.41 to USA's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, is
incorporated herein by reference.
10.23 Joint Venture and License Agreement, dated as of June 12,
1992, between Savoy Pictures Entertainment, Inc. and Home
Box Office, Inc. (confidential treatment for portions
thereof granted), filed as Exhibit 10(a) to Savoy's S-1
Registration Statement No. 33-57956, is incorporated herein
by reference.
10.24 License Agreement, dated as of June 12, 1992, among Savoy
Pictures Entertainment, Inc. and Home Box Office, Inc.
(confidential treatment of portions thereof granted), filed
as Exhibit 10(b) to Savoy's S-1 Registration Statement No.
33-57956, is incorporated herein by reference.
10.25 Warrant Agreement, dated as of March 2, 1992, between Savoy
Pictures Entertainment, Inc. and Allen & Company
Incorporated, filed as Exhibit 10(f) to Savoy's S-1
Registration Statement No. 33-57956, is incorporated herein
by reference.
10.26 Warrant Agreement, dated as of March 2, 1992, between Savoy
Pictures Entertainment, Inc. and GKH Partners, L.P., filed
as Exhibit 10(g) to Savoy's S-1 Registration Statement No.
33-57956, is incorporated herein by reference.
10.27 Warrant Agreement, dated as of April 20, 1994, between Savoy
and GKH Partners, L.P., filed as Exhibit 10.2 to Savoy's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1994, is incorporated herein by reference.
126
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
10.28 $1,600,000,000 Credit Agreement, dated February 12, 1998,
among USA, 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 USA's
Annual Report on Form 10- K for the fiscal year ended
December 31, 1997, is incorporated herein by reference.
10.29 First Amendment and Consent, dated as of June 24, 1998, to
the Credit Agreement, dated February 12, 1998, among USA,
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 10.39 to the S-4,
is incorporated herein by reference.
10.30 Second Amendment, dated as of October 9, 1998, to the Credit
Agreement, dated February 12, 1998, among USA, 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 10.40 to the USA S-4, is
incorporated herein by reference.
10.31 Third Amendment, dated as of April 29, 1999, to the Credit
Agreement, dated February 12, 1998, among USA, 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 10.39 to USA's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, is
incorporated herein by reference.
10.32 Fourth Amendment, dated as of January 31, 2000, to the
Credit Agreement, dated February 12, 1998, among USA, 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 10.40 to USA's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, is
incorporated herein by reference.
10.33 Fifth Amendment, dated as of January 31, 2001, to the Credit
Agreement, dated February 12, 1998, among USA, 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 10.41 to USA's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, is
incorporated herein by reference.
10.34+ Sixth Amendment, dated as of December 7, 2001, to the Credit
Agreement, dated February 12, 1998, among USA, 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. 253
127
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
10.35 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 USA's
Definitive Proxy Statement, dated January 12, 1998, is
incorporated herein by reference.
10.36 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 USA's Definitive Proxy Statement, dated
January 12, 1998, is incorporated herein by reference.
10.37 Form of Spinoff Agreement between Liberty Media Corporation
and Universal Studios, Inc. dated as of October 19, 1997,
filed as Appendix D to USA's Definitive Proxy Statement,
dated January 12, 1998, is incorporated herein by reference.
10.38 Form of Amended and Restated Governance Agreement, among
USA, Vivendi Universal, S.A., Universal Studios, Inc.,
Liberty Media Corporation and Barry Diller, dated as of
December 16, 2001, filed as Appendix C to USA's Definitive
Proxy Statement, dated March 25, 2002, is incorporated
herein by reference.
10.39 Form of Amended and Restated Stockholders Agreement among
Universal Studios, Inc., Liberty Media Corporation, Barry
Diller and Vivendi Universal, S.A., dated as of December 16,
2001, filed as Appendix D to USA's Definitive Proxy
Statement, dated March 25, 2002, is incorporated herein by
reference.
10.40* HSN, Inc. 1997 Stock and Annual Incentive Plan, filed as
Exhibit F to USA's Definitive Proxy Statement, dated January
12, 1998, is incorporated herein by reference.
10.41* Employment Agreement between Michael Sileck and USA, dated
October 12, 1999, filed as Exhibit 10.47 to USA's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999, is incorporated herein by reference.
10.42* Employment Agreement between Dara Khosrowshahi and USA,
dated September 21, 2000, filed as Exhibit 10.1 to USA's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, is incorporated herein by reference.
10.43+* Employment Agreement between Julius Genachowski and USA,
dated August 9, 2000. 266
10.44 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 USA's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, is incorporated herein
by reference.
10.45* USA Networks, Inc. 2000 Stock and Annual Incentive Plan,
filed as Exhibit 10.1 to USA's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000, is incorporated herein
by reference.
10.46* USA Networks, Inc. Deferred Compensation Plan For
Non-Employee Directors, filed as Exhibit 10.2 to USA's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, is incorporated herein by reference.
128
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------------------- ----------- --------
21.1+ Subsidiaries of USA 275
23.1+ Consent of Ernst & Young LLP 279
- ------------------------
* Reflects management contracts and compensatory plans.
+ Filed herewith.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:
On October 2, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, attaching investor presentation materials.
On October 24, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, attaching a press release announcing its results
for the quarter ended September 30, 2001 and forward-looking financial
information.
On October 30, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, providing supplemental information.
On October 31, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, attaching investor presentation materials.
On November 9, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, attaching investor presentation materials.
On November 9, 2001, USA filed a report on Form 8-K reporting under Item 5,
Other Events and Regulation FD Disclosure, attaching a press release announcing
its results for the quarter ended September 30, 2001.
On December 5, 2001, USA furnished a report on Form 8-K reporting under Item
9, Regulation FD Disclosure, attaching investor presentation materials.
On December 17, 2001, USA filed a report on Form 8-K reporting under Item 5,
Other Events and Regulation FD Disclosure, attaching a press release announcing
an agreement for USA to contribute its Entertainment Group to a joint venture
with Vivendi Universal, supplemental financial information and presentation
materials.
On December 18, 2001, USA filed a report on Form 8-K reporting under Item 5,
Other Events and Regulation FD Disclosure, attaching the Transaction Agreement
dated December 16, 2001, among Vivendi Universal, S.A., Universal
Studios, Inc., USA Networks, Inc., USANi LLC and Liberty Media Corporation along
with the other principal agreements contemplated thereby.
129
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 1, 2002
USA NETWORKS, INC.
By: /s/ BARRY DILLER
-----------------------------------------
Barry Diller
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 1, 2002.
SIGNATURE TITLE
--------- -----
/s/ BARRY DILLER
------------------------------------------- Chairman of the Board, Chief Executive Officer
Barry Diller and Director
/s/ VICTOR A. KAUFMAN
------------------------------------------- Director and Vice Chairman
Victor A. Kaufman
/s/ WILLIAM J. SEVERANCE
------------------------------------------- Vice President and Controller (Chief
William J. Severance Accounting Officer)
/s/ DARA KHOSROWSHAHI
------------------------------------------- Executive Vice President and Chief Financial
Dara Khosrowshahi Officer (Principal Financial Officer)
/s/ PAUL G. ALLEN
------------------------------------------- Director
Paul G. Allen
/s/ ROBERT R. BENNETT
------------------------------------------- Director
Robert R. Bennett
130
SIGNATURE TITLE
--------- -----
/s/ EDGAR BRONFMAN, JR.
------------------------------------------- Director
Edgar Bronfman, Jr.
/s/ ANNE M. BUSQUET
------------------------------------------- Director
Anne M. Busquet
/s/ PHILIPPE GERMOND
------------------------------------------- Director
Philippe Germond
/s/ DONALD R. KEOUGH
------------------------------------------- Director
Donald R. Keough
/s/ MARIE-JOSEE KRAVIS
------------------------------------------- Director
Marie-Josee Kravis
/s/ PIERRE LESCURE
------------------------------------------- Director
Pierre Lescure
/s/ JOHN C. MALONE
------------------------------------------- Director
John C. Malone
/s/ JEAN-MARIE MESSIER
------------------------------------------- Director
Jean-Marie Messier
/s/ WILLIAM D. SAVOY
------------------------------------------- Director
William D. Savoy
/s/ H. NORMAN SCHWARZKOPF
------------------------------------------- Director
H. Norman Schwarzkopf
/s/ DIANE VON FURSTENBERG
------------------------------------------- Director
Diane Von Furstenberg
131
USA NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE
BEGINNING CHARGES TO CHARGES TO DEDUCTIONS- AT END
OF PERIOD EARNINGS OTHER ACCOUNTS(2) DESCRIBE(1) OF PERIOD
---------- ---------- ----------------- ----------- ----------
(IN THOUSANDS)
Allowance for doubtful
accounts:
Year ended December 31, 2001... $61,141 $66,054 $ 640 $(70,379) $57,456
Year ended December 31, 2000... $41,511 $28,525 $2,957 $(11,852) $61,141
Year ended December 31, 1999... $20,581 $23,208 $5,813 $ (8,091) $41,511
- ------------------------
(1) Write-off fully reserved accounts receivable.
(2) Amounts relate to the acquisition of October Films as part of the October
Films/PFE Transaction in 1999 and acquisition of Precision Corporation and
merger with Styleclick.com in 2000.
132
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
HOME SHOPPING NETWORK, INC.
We have audited the accompanying consolidated balance sheets of Home
Shopping Network, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Home Shopping Network, Inc. and subsidiaries at December 31, 2001 and 2000, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, on January
1, 2001, the Company adopted AICPA Statement of Position 00-2, "Accounting by
Producers or Distributors of Films."
/s/ ERNST & YOUNG LLP
New York, New York
January 29, 2002
133
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Product sales.......................................... $1,935,542 $1,799,932 $1,370,790
Service revenue........................................ 1,687,376 1,554,860 1,315,689
---------- ---------- ----------
Net revenues........................................... 3,622,918 3,354,792 2,686,479
Operating costs and expenses:
Cost of sales-product sales............................ 1,287,630 1,178,369 900,896
Cost of sales-service revenue.......................... 16,823 6,360 4,446
Program costs.......................................... 726,549 684,992 630,956
Selling and marketing.................................. 421,259 383,722 277,257
General and administrative............................. 336,140 284,800 231,003
Other operating costs.................................. 132,801 129,458 89,793
Amortization of cable distribution fees................ 43,975 36,322 26,680
Amortization of non-cash compensation.................. 9,799 9,704 6,314
Depreciation and amortization.......................... 236,819 376,791 175,539
---------- ---------- ----------
Total operating costs and expenses..................... 3,211,795 3,090,518 2,342,884
---------- ---------- ----------
Operating profit......................................... 411,123 264,274 343,595
Other income (expense):
Interest income........................................ 43,675 61,336 37,573
Interest expense....................................... (73,183) (69,659) (73,106)
Gain on sale of securities............................. -- -- 89,721
Gain on sale of subsidiary stock....................... -- 104,625 --
Other, net............................................. (40,395) (45,859) 2,103
---------- ---------- ----------
(69,903) 50,443 56,291
Earnings before income taxes, minority interest and
cumulative effect of accounting change................. 341,220 314,717 399,886
Income tax expense....................................... (87,738) (89,424) (73,318)
Minority interest........................................ (188,925) (160,267) (241,369)
---------- ---------- ----------
Earnings before cumulative effect of accounting change... 64,557 65,026 85,199
Cumulative effect of accounting change................... 1,901 -- --
---------- ---------- ----------
NET EARNINGS............................................. $ 66,458 $ 65,026 $ 85,199
---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
134
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 779,592 $ 71,816
Accounts and notes receivable, net of allowance of $30,586
and $50,646, respectively................................. 533,869 519,365
Inventories, net............................................ 404,155 396,523
Investments held for sale................................... -- 750
Deferred income taxes....................................... 11,084 17,448
Other current assets, net................................... 26,120 18,024
---------- ----------
Total current assets...................................... 1,754,820 1,023,926
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 132,712 143,559
Buildings and leasehold improvements........................ 79,043 71,979
Furniture and other equipment............................... 96,941 76,623
Land........................................................ 10,386 10,281
Projects in progress........................................ 40,032 32,747
---------- ----------
359,114 335,189
Less accumulated depreciation and amortization............ (120,468) (83,549)
---------- ----------
238,646 251,640
OTHER ASSETS
Intangible assets, net...................................... 4,888,545 5,023,735
Cable distribution fees, net................................ 158,880 159,473
Long-term investments....................................... 39,485 29,187
Notes and accounts receivable, net ($99,819 and $22,575,
respectively, from related parties)....................... 130,368 33,571
Inventories, net............................................ 484,679 430,215
Advances to USA and subsidiaries............................ 70,477 547,292
Deferred charges and other, net............................. 58,475 44,011
---------- ----------
$7,824,375 $7,543,050
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 32,911 $ 20,053
Accounts payable, trade..................................... 233,063 201,484
Obligations for program rights and film costs............... 272,601 283,812
Cable distribution fees..................................... 32,795 33,598
Deferred revenue............................................ 58,949 41,335
Other accrued liabilities................................... 416,212 351,331
---------- ----------
Total current liabilities................................... 1,046,531 931,613
LONG-TERM OBLIGATIONS (net of current maturities)........... 499,513 504,063
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, net of
current................................................... 285,378 295,210
OTHER LONG-TERM LIABILITIES................................. 40,247 81,925
DEFERRED INCOME TAXES....................................... 69,397 25,821
MINORITY INTEREST........................................... 4,563,804 4,420,252
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Common Stock................................................ 1,221,408 1,221,408
Additional paid-in capital.................................. 70,312 70,312
Retained earnings........................................... 33,398 (2,320)
Accumulated other comprehensive income...................... (5,613) (5,234)
---------- ----------
Total stockholder's equity................................ 1,319,505 1,284,166
---------- ----------
$7,824,375 $7,543,050
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
135
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL RETAINED OTHER
COMMON PAID-IN EARNINGS UNEARNED COMPREHENSIVE
TOTAL STOCK CAPITAL (DEFICIT) COMPENSATION INCOME
---------- ---------- ---------- --------- ------------- --------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998....... $1,320,172 $1,221,408 $70,755 $ 18,379 $(723) $ 10,353
Comprehensive Income:
Net earnings for the year ended
December 31, 1999............ 85,199 -- -- 85,199 -- --
Decrease in unrealized gains in
available for sale
securities................... (10,353) -- -- -- -- (10,353)
----------
Comprehensive income........... 74,846
----------
Mandatory tax distribution to LLC
partners....................... (52,755) -- -- (52,755) -- --
Amortization of unearned
compensation related to stock
options and equity
participation plans............ 280 -- (443) -- 723 --
---------- ---------- ------- --------- ----- ---------
BALANCE AT DECEMBER 31, 1999....... 1,342,543 1,221,408 70,312 50,823 -- --
Comprehensive Income:
Net earnings for the year ended
December 31, 2000............ 65,026 -- -- 65,026 -- --
Decrease in unrealized loss in
available for sale
securities................... (5,647) -- -- -- -- (5,647)
Foreign currency translation... 413 -- -- -- -- 413
----------
Comprehensive income........... 59,792 -- -- -- -- --
----------
Mandatory tax distribution to LLC
partners....................... (118,169) -- -- (118,169) -- --
---------- ---------- ------- --------- ----- ---------
BALANCE AT DECEMBER 31, 2000....... 1,284,166 1,221,408 70,312 (2,320) -- (5,234)
Comprehensive Income:
Net earnings for the year ended
December 31, 2001............ 66,458 -- -- 66,458 -- --
Decrease in unrealized loss in
available for sale
securities................... 5,647 -- -- -- -- 5,647
Foreign currency translation... (6,026) -- -- -- -- (6,026)
----------
Comprehensive income........... 66,079 -- -- -- -- --
----------
Mandatory tax distribution to LLC
partners....................... (30,740) -- -- (30,740) -- --
---------- ---------- ------- --------- ----- ---------
BALANCE AT DECEMBER 31, 2001....... $1,319,505 $1,221,408 $70,312 $ 33,398 $ -- $ (5,613)
---------- ---------- ------- --------- ----- ---------
Accumulated other comprehensive income is comprised of unrealized (losses)
gains on available for sale securities of $0 and $(5,647) for December 31, 2001
and 2000, respectively and foreign currency translation adjustments of $(5,613)
and $413 for December 31, 2001 and 2000 respectively. There were no foreign
currency translation for December 31, 1999.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
136
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 66,458 $ 65,026 $ 85,199
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 236,819 376,791 175,539
Amortization of cable distribution fees................... 43,975 36,322 26,680
Amortization of program rights and film costs............. 658,328 597,659 532,900
Gain on sale of subsidiary stock.......................... -- (104,625) --
Cumulative effect of accounting change.................... (1,901) -- --
Non-cash compensation..................................... 9,799 9,704 6,314
Amortization of deferred financing costs.................. -- 2,457 5,035
Deferred income taxes..................................... -- 30,186 13,298
Equity in (earnings) losses of unconsolidated
affiliates.............................................. 38,155 46,025 (1,866)
Minority interest......................................... 188,925 160,267 241,369
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable....................................... (40,545) (105,835) (33,879)
Inventories............................................... 30,210 (44,687) (16,805)
Accounts payable.......................................... 25,118 34,425 (11,233)
Accrued liabilities and deferred revenue.................. 76,135 73,007 28,738
Payment for program rights and film costs................. (764,625) (739,066) (555,383)
Increase in cable distribution fees....................... (47,393) (64,876) (42,887)
Other, net................................................ (17,319) (12,541) (25,321)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 502,139 360,239 427,698
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (35,845) (110,780) (7,500)
Capital expenditures...................................... (68,496) (94,826) (70,681)
Increase in long-term investments and notes receivable.... (110,871) (40,220) (54,478)
Proceeds from sale of securities.......................... -- 2,194 107,231
Payment of merger and financing costs..................... -- -- --
Other, net................................................ 21,627 (2,168) 8,654
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES..................... (193,585) (245,800) (16,774)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 22,494 64,611 --
Payment of mandatory tax distribution to LLC partners..... (30,740) (118,169) (52,755)
Principal payments on long-term obligations............... (14,842) (60,981) (253,224)
Repurchase of LLC shares.................................. -- (129,907) (8,934)
Proceeds from issuance of LLC shares...................... -- 210,455 410,545
Advances from (to) USA and subsidiaries................... 430,242 (246,775) (493,985)
Other..................................................... (5,821) (10,531) --
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES....... 401,333 (291,297) (398,353)
Effect of exchange rate changes on cash and cash
equivalents............................................... (2,111) 1,200 --
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 707,776 (175,658) 12,571
Cash and cash equivalents at beginning of period............ 71,816 247,474 234,903
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 779,592 $ 71,816 $ 247,474
--------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
137
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
GENERAL
Home Shopping Network, Inc. (the "Company" or "Home Shopping"), is a holding
company, whose subsidiary USANi LLC is engaged in diversified media and
electronic commerce businesses. In December 1996, the Company consummated a
merger with USA Networks, Inc. ("USA"), formerly known as HSN, Inc., and became
a subsidiary of USA (the "Home Shopping Merger").
On February 12, 1998, the Company acquired USA Cable, a New York general
partnership, consisting of cable television networks, USA Network and Sci Fi
Channel ("USA Cable"), as well as the domestic television production and
distribution businesses of Universal Studios ("Studios USA") from Universal
Studios, Inc. ("Universal"), an entity controlled by The Seagram Company Ltd.
("Seagram") (the "Universal Transaction"). In connection with the Universal
Transaction, the Company formed a new subsidiary, USANi LLC, and contributed the
operating assets of the Home Shopping Network services ("HSN") to USANi LLC.
Furthermore, USA contributed USA Cable and Studios USA to USANi LLC on
February 12, 1998.
The Company is organized into two groups, the Interactive Group and the
Entertainment Group. The Interactive Group consists of Home Shopping Network
(including HSN International and HSN.com; Electronic Commerce Solutions; and
Styleclick (OTC: IBUY). The Entertainment Group consists of USA Cable, including
USA Network and Sci Fi Channel and Emerging networks TRIO, Newsworld
International, and Crime; and Studios USA, which produces and distributes
television programming.
On December 17, 2001, USA and Vivendi Universal, S.A. ("Vivendi") announced
a transaction (the "Vivendi Transaction") in which USA's Entertainment Group,
consisting of USA Cable, Studios USA, and USA Films, would be contributed to
Vivendi Universal Entertainment, a new joint venture controlled by Vivendi. See
below for further discussion under "Subsequent Events".
SUBSEQUENT EVENTS (UNAUDITED)
CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE
On December 17, 2001, USA announced it had entered into an agreement with
Vivendi pursuant to which USA would contribute USA's Entertainment Group to a
limited liability entity (Vivendi Universal Entertainment, "VUE") to be
controlled by Vivendi, to which Vivendi would contribute the film, television
and theme park businesses of Universal Studios, Inc. ("Universal"). Upon
consummation of the Vivendi transaction, the joint venture will be controlled by
Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi,
5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment
for a 15-year period, (ii) a $750 million face value Class A preferred interest
in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled
in cash at its then face value at maturity; (iii) a $1.75 billion face value
Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a
3.6% annual cash dividend, callable and puttable after 20 years, to be settled
by Universal at its then face value with a maximum of approximately
56.6 million USA common shares, provided that Universal may substitute cash in
lieu of shares of USA common stock (but not USA Class B common stock), at its
election; (iv) a 5.44% common interest in VUE, generally callable by
138
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION (CONTINUED)
Universal after five years and puttable by USA after eight years, which may be
settled in either Vivendi stock or cash, at Universal's election, and (v) a
cancellation of Universal's USANi LLC interests currently exchangeable into USA
common shares including USANi LLC interests obtained from Liberty in connection
with a related transaction (see immediately below).
Related to the transaction, Liberty will exchange 7,079,726 shares of USANi
LLC for shares of USA common stock, and subsequently transfer to Universal
25,000,000 shares of USA common stock, its remaining 38,694,982 shares of USANi
LLC, as well as the assets and liabilities of Liberty Programming France (which
consist primarily of 4,921,250 shares of multiThematiques S.A., a French
entity), in exchange for 37,386,436 Vivendi ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share. Barry Diller, USA's chairman and chief executive officer, will receive a
common interest in VUE with a 1.5% profit sharing percentage, with a minimum
value of $275.0 million, in return for his agreeing to specified non-competition
provisions and agreeing to serve as chairman and chief executive officer of VUE.
USA and Mr. Diller have agreed that they will not compete with Vivendi's
television and filmed entertainment businesses (including VUE) for a minimum of
18 months.
In February 2002, Mr. Diller assigned to three executive officers of USA,
the right to receive economic interests in a portion of the common interests in
VUE that Mr. Diller will receive upon closing of the transactions.
The Vivendi Transaction is subject to USA shareholder vote, including the
approval of 66 2/3% of the outstanding USA common stock and USA preferred stock,
voting together as a single class, and excluding shares held by Vivendi,
Liberty, Mr. Diller and their respective affiliates, as well as other customary
regulatory approvals, and there can be no assurance that the transaction will be
completed.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and voting-controlled subsidiaries. The Company
consolidates HSN--Germany based upon a Pooling Agreement allowing for the
Company to elect a majority of the Board of Directors and to control the
operations of HSN--Germany. Significant intercompany transactions and accounts
have been eliminated.
Investments in which the Company owns a 20%, but not in excess of 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. In addition,
partnership interests are recorded 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.
139
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES
CABLE AND STUDIOS
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
are recognized as revenues on the commencement date of the license agreement,
provided the program is available for exhibition.
USA Cable advertising revenue is recognized in the period in which the
advertising commercials are aired on the cable networks. Certain contracts with
advertisers contain minimum commitments with respect to advertising viewership.
In the event that such minimum commitments are not met, the contracts require
additional subsequent airings of the advertisement. As a result, provisions are
recorded against advertising revenues for audience under deliveries
("makegoods") until such subsequent airings are conducted. Affiliate fees are
recognized in the period during which the programming is provided.
ELECTRONIC RETAILING
Revenues from Home Shopping primarily consist of merchandise sales and are
reduced by incentive discounts and sales returns to arrive at net sales.
Revenues for domestic sales are recorded for credit card sales upon transaction
authorization, which occurs only if the goods are in stock, and for check sales
upon receipt of customer payment, which does not vary significantly from the
time goods are shipped. Revenues for international sales are recorded upon
shipment. Home Shopping's sales policy allows merchandise to be returned at the
customer's discretion within 30 days of the date of delivery. Allowances for
returned merchandise and other adjustments are provided based upon past
experience.
OTHER
Revenues from all other sources are recognized either upon delivery or when
the service is provided.
FILM COSTS
Film costs consist of direct production costs and production overhead, less
accumulated amortization. Prior to the adoption of SOP 00-2 on January 1, 2001
(see below for further information), development roster (and related costs),
abandoned story and development costs were 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.
140
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, the estimated ultimate costs of completed film costs 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, are classified as non-current 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.
ADVERTISING BARTER TRANSACTIONS
Barter transactions represent the exchange of commercial air-time for
programming, merchandise or services. The transactions are recorded at the
estimated fair market value of the asset or services received or given in
accordance with Emerging Issues Task Force Issue No. 99-17, "Accounting for
Advertising Barter Transactions." Barter revenue for the year ended
December 31, 2001 was $42.2 million. Barter revenues for the year ended
December 31, 2000 and 1999 are not material to the Company's statement of
operations.
MERCHANDISE INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehouse costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Merchandise inventories are presented net of an inventory
carrying adjustment of $40.4 million and $37.9 million at December 31, 2001 and
2000, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments.
Short-term investments consist primarily of U.S. Treasury Securities, U.S.
Government agencies and certificates of deposit with original maturities of less
than 91 days.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
141
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
DEPRECIATION/AMORTIZATION
ASSET CATEGORY PERIOD
- -------------- -------------------------
Computer and broadcast equipment.................. 3 to 13 Years
Buildings......................................... 30 to 40 Years
Leasehold improvements............................ 4 to 20 Years
Furniture and other equipment..................... 3 to 10 Years
Depreciation and amortization expense on property, plant and equipment was
$83.6 million, $65.2 million and $41.0 million for the years ended December 31,
2001, 2000 and 1999, respectively.
LONG-LIVED ASSETS INCLUDING INTANGIBLES
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of long-lived assets, including goodwill
and other intangibles and property, plant and equipment, is to review the
carrying value of the assets if the facts and circumstances suggest that they
may be impaired. If this review indicates that the carrying value will not be
recoverable, as determined based on the projected undiscounted future cash
flows, the carrying value is reduced to its estimated fair value. See below
under "New Accounting Pronouncements" for further information related to
goodwill and other intangible assets. The Company amortizes goodwill and other
intangible assets over their estimated useful lives, which range from 3 to 40
years for goodwill and 1 to 5 years for intangibles.
CABLE DISTRIBUTION FEES
Cable distribution fees relate to upfront fees paid in connection with
multi-year cable contracts for carriage of Home Shopping's programming. These
fees are amortized to expense on a straight line basis over the terms of the
respective contracts.
ADVERTISING
Advertising costs are primarily expensed in the period incurred. Advertising
expense for the years ended December 31, 2001, 2000 and 1999 were
$137.3 million, $127.5 million and $95.5 million, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees." In cases
where exercise prices are less than fair value as of the grant date,
compensation is recognized over the vesting period. For stock-based compensation
issued to non-employees, the Company accounts for the grants in accordance with
FASB Statement No. 123, "Accounting for Stock Based Compensation."
MINORITY INTEREST
Minority interest represents the ownership interests of third parties in the
net assets and results of operations of certain consolidated subsidiaries.
Minority interest primarily represents the public's
142
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ownership interest in Styleclick since July 27, 2000 and the public's ownership
interest in HSN--Germany since its consolidation as of January 1, 2000. Upon
completion of the Vivendi Transaction, Holdco and USA will own 100% of the
member's interest in USANi LLC.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of all foreign operations are
consolidated using the local currency as the functional currency. Local currency
assets and liabilities are translated at the rates of exchange on the balance
sheet date, and local currency revenues and expenses are translated at average
rates of exchange during the period. Resulting translation gains or losses,
which have not been material, are included as a component of accumulated other
comprehensive income (loss) in accumulated deficit.
ISSUANCES OF SUBSIDIARY STOCK
The Company accounts for issuances of stock by a subsidiary via income
statement recognition, recording income or losses as non-operating income/
(expense). During the year ended December 31, 2000, the Company recorded a gain
of $104.6 million related to the issuance of subsidiary stock. See Note 3 for
further discussion.
ACCOUNTING ESTIMATES
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net earnings
during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include the inventory carrying adjustment, program rights and film
cost amortization, sales return and other revenue allowances, allowance for
doubtful accounts, recoverability of intangibles and other long-lived assets,
estimates of film revenue ultimates and various other operating allowances and
accruals.
NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, all calendar year companies will be required to
adopt Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Other Intangible Assets." The new rules eliminate amortization of
goodwill and other intangible assets with indefinite lives and establish new
measurement criterion for these assets. Although it has not completed its
assessment, the Company does not anticipate a write-off upon adoption. The rules
are expected to reduce USA's annual amortization by approximately
$145.4 million.
FILM ACCOUNTING
The Company adopted SOP 00-2, "Accounting by Producers or Distributors of
Films" ("SOP 00-2") during the twelve months ended December 31, 2001. SOP 00-2
established new film accounting
143
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards, including changes in revenue recognition and accounting for
advertising, development and overhead costs. Specifically, SOP 00-2 requires
advertising costs for theatrical and television product to be expensed as
incurred. This compares to the Company's previous policy of first capitalizing
these costs and then expensing them over the related revenue streams. In
addition, SOP 00-2 requires development costs for abandoned projects and certain
indirect overhead costs to be charged directly to expense, instead of those
costs being capitalized to film costs, which was required under the previous
accounting rules. SOP 00-2 also requires all film costs to be classified in the
balance sheet as non-current assets. Provisions of SOP 00-2 in other areas, such
as revenue recognition, generally are consistent with the Company's existing
accounting policies.
SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a
one-time, non-cash benefit of $1.9 million. The benefit is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the 2001 presentation.
NOTE 3--BUSINESS ACQUISITIONS
STYLECLICK TRANSACTION
On July 27, 2000, USA and Styleclick.com Inc., an enabler of e-commerce for
manufacturers and retailers, completed the merger of Internet Shopping Network,
a subsidiary of USA, and Styleclick.com (the "Styleclick Transaction"). The
entities were merged with a new company, Styleclick, Inc., which owns and
operates the combined properties of Styleclick.com and ISN. Styleclick, Inc. is
traded on the OTC under the symbol "IBUY". In accordance with the terms of the
agreement, USA invested $40 million in cash and agreed to contribute
$10 million in dedicated media, and received warrants to purchase additional
shares of the new company. At closing, Styleclick.com repaid $10 million of
borrowings outstanding under a bridge loan provided by USA.
The aggregate purchase price, including transaction costs, of $211.9 million
was determined as follows:
(IN THOUSANDS)
--------------
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USA........... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs..................................... $211,914
--------
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In
144
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
conjunction with the transaction, the Company recorded a pre-tax gain of
$104.6 million in accordance with Staff Accounting Bulletin No. 51, "Accounting
for Sales of Stock by a Subsidiary", based upon the 25% of ISN's net book value
exchanged for 75% of Styleclick.com's fair value, determined based upon the fair
value of Styleclick.com common stock received in the merger.
The Styleclick transaction has been accounted for under the purchase method
of accounting. The purchase price has been allocated to the assets acquired and
liabilities assumed based on their respective fair values at the date of
purchase. The unallocated excess of acquisition costs over net assets acquired
of $170.2 million has been allocated to goodwill, which originally was being
amortized over 3 years.
In March 2001, Styleclick announced a new company organization designed to
advance its offering of scaleable commerce services. The announcement included
Styleclick's acquisition of the MVP.com technology platform. Also in
March 2001, the Styleclick Board elected two executives of ECS to top management
positions at Styleclick, and certain senior executives of Styleclick left the
Company. As of December 31, 2000, as a result of the historical and anticipated
operating losses of Styleclick, and the continuing evaluation of the operations
and technology, Styleclick determined the goodwill recorded in conjunction with
the Styleclick Merger was impaired and recorded a write-down of $145.6 million
as goodwill amortization in fiscal 2000. Since the second quarter of 2001,
Styleclick has focused on e-commerce services and technology while eliminating
its online retail business. During this transition, Styleclick continued to
incur significant net losses from operations that raise substantial doubt about
Styleclick's ability to continue as a going concern. Styleclick is considering
its options with respect to the situation.
BUSINESS ACQUISITION PRO FORMA RESULTS
The following unaudited pro forma condensed consolidated financial
information for the twelve months ended December 31, 2000 and 1999 is presented
to show the results of the Company as if the Styleclick Transaction had occurred
on January 1, 2000. The pro forma results reflect certain adjustments, including
increased amortization related to goodwill and other intangibles, and are not
necessarily indicative of what the results would have been had the transactions
actually occurred on January 1, 1999.
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Net revenues......................................... $3,356,681 $2,692,653
Net income........................................... 61,413 73,021
NOTE 4--INTANGIBLE ASSETS
Intangible assets represents goodwill which is amortized using the
straight-line method over periods ranging from 3 to 40 years.
Goodwill primarily relates to various transactions, and represents the
excess of purchase price over the fair value of assets acquired and is net of
accumulated amortization of $573.1 million and $453.6 million at December 31,
2001 and 2000, respectively.
145
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM OBLIGATIONS
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Unsecured Senior Credit Facility ("New Facility"); with a
$40,000,000 sub-limit for letters of credit, entered into
February 12, 1998, which matures on December 31, 2002. At
the Company's option, the interest rate on borrowings is
tied to the London Interbank Offered Rate ("LIBOR") or the
Alternate Base Rate ("ABR"), plus an applicable margin.
Interest rate at December 31, 2000 was 2.9%............... $ -- $ --
$500,000,000 6 3/4% Senior Notes (the "Senior Notes") due
November 15, 2005; interest payable May 15 and
November 15 commencing May 15, 1999. Interest rate at
December 31, 2001 was 6.75%............................... 498,515 498,213
Other long-term obligations maturing through 2005........... 33,909 25,903
-------- --------
Total long-term obligations................................. 532,424 524,116
Less current maturities..................................... (32,911) (20,053)
-------- --------
Long-term obligations, net of current maturities............ $499,513 $504,063
-------- --------
On February 12, 1998, USA and USANi LLC, as borrower, entered into a credit
agreement which provides for a $1.6 billion credit facility. The credit facility
was used to finance the Universal Transaction and to refinance USA's
then-existing $275.0 million revolving credit facility. The credit facility
consists of (1) a $600.0 million revolving credit facility with a $40.0 million
sub-limit for letters of credit, (2) a $750.0 million Tranche A Term Loan and,
(3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and the
Tranche B Term Loan have been permanently repaid as of December 31, 1999, as
described below.
The existing credit facility is guaranteed by certain of USA's subsidiaries.
The interest rate on borrowings under the existing credit facility is tied to an
alternate base rate or the London InterBank Rate, in each case, plus an
applicable margin, and $595.4 million was available for borrowing as of
December 31, 2001 after taking into account outstanding letters of credit. The
credit facility includes covenants requiring, among other things, maintenance of
specific operating and financial ratios and places restrictions on payment of
certain dividends, incurrence of indebtedness and investments. The Company pays
a commitment fee of .1875% on the unused portion of the credit facility. Note
that with the closing of the Vivendi Transaction, the Company expects that the
existing credit facility will expire.
Aggregate contractual maturities of long-term obligations are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 32,911
2003........................................................ 748
2004........................................................ 50
2005........................................................ 498,715
2006........................................................ --
Thereafter.................................................. --
--------
$532,424
--------
146
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
Federal income tax expense represents an allocation of income tax expense
from USA, calculated as if Home Shopping was a separate filer for federal tax
purposes.
A reconciliation of total income tax expense to the amounts computed by
applying the statutory federal income tax rate to earnings before income taxes
is shown as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Income tax expense at the federal statutory
rate of 35%................................. $119,427 $155,017 $140,064
Amortization of goodwill and other
intangibles................................. 11,688 14,494 11,618
State income taxes, net of effect of federal
tax benefit................................. 9,450 9,158 10,128
Impact of minority interest................... (76,827) (98,606) (87,246)
Other, net.................................... 24,000 9,361 (1,246)
-------- -------- --------
Income tax expense............................ $ 87,738 $ 89,424 $ 73,318
-------- -------- --------
The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
CURRENT INCOME TAX EXPENSE:
Federal........................................ $55,971 $45,750 $47,265
State.......................................... 11,117 9,087 12,755
Foreign........................................ -- 4,401 --
------- ------- -------
Current income tax expense:.................... $67,088 $59,238 $60,020
DEFERRED INCOME TAX EXPENSE:
Federal........................................ $17,228 $25,184 $10,472
State.......................................... 3,422 5,002 2,826
------- ------- -------
Deferred income tax expense:................... $20,650 $30,186 $13,298
------- ------- -------
Total income tax expense....................... $87,738 $89,424 $73,318
------- ------- -------
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000, are presented below.
147
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
The valuation allowance represents items for which it is more likely than not
that the tax benefit will not be realized.
DECEMBER 31, DECEMBER 31,
2001 2000
------------- -------------
(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Inventory costing......................................... $ 8,400 $ 10,888
Provision for accrued expenses............................ 8,246 3,980
Investment in affiliates.................................. -- --
Deferred Revenue.......................................... (55,093) (43,385)
Bad debts................................................. 3,505 2,573
Program rights amortization............................... 8,472 8,472
Other..................................................... 37,554 34,920
-------- --------
Total current deferred tax assets......................... $ 11,084 $ 17,448
Less valuation allowance.................................. -- --
-------- --------
Net current deferred tax assets........................... $ 11,084 $ 17,448
NON-CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Broadcast and cable fee contracts......................... 1,783 1,783
Depreciation for tax in excess of financial statements.... (6,710) (7,769)
Amortization of tax deductible goodwill................... (79,962) (44,369)
Amortization of FCC licenses and broadcast related
intangibles............................................. (15,879) (15,879)
Program rights amortization............................... 1,804 1,804
Investment in subsidiaries................................ 10,369 10,369
Programming............................................... 22,370 36,343
Deferred revenue.......................................... (5,062) (5,062)
Net federal operating loss carryforward................... 21,334 --
Other..................................................... 15,705 10,775
-------- --------
Total non-current deferred tax liabilities................ $(34,248) $(12,005)
Less Valuation allowance.................................. (35,149) (13,816)
-------- --------
Net non-current deferred tax liabilities.................. $(69,397) $(25,821)
-------- --------
TOTAL DEFERRED TAX LIABILITIES.............................. $(58,313) $ (8,373)
-------- --------
The Company has Federal income tax returns under examination by the Internal
Revenue Service. The Company has received proposed adjustments related to
certain examinations. Management believes that the resolution of the proposed
adjustments will not have a material adverse effect on the Company's
consolidated financial statements.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space, as well as broadcast and production facilities, equipment and services
used in connection with its operations under various operating leases and
contracts, many of which contain escalation clauses.
148
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments under non-cancelable agreements are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 42,608
2003........................................................ 23,089
2004........................................................ 20,088
2005........................................................ 10,480
2006........................................................ 7,029
Thereafter.................................................. 41,384
--------
$144,678
--------
Expenses charged to operations under these agreements were $61.8 million,
$56.4 million and $46.1 million for the years ended December 31, 2001, 2000 and
1999, respectively.
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 December 31, 2001, the unrecorded commitments amounted to $968.0 million.
Annual commitments are $153.8 million in 2002, $173.5 million in 2003,
$189.1 million in 2004, $155.0 million in 2005, $112.4 million in 2006 and
$184.2 million in 2007 and thereafter.
The Company is required to provide funding, from time to time, for the
operations of its investments in joint ventures accounted for under the equity
method. To date, HSN has funded $125.3 million to Hot Networks, a company
operating electronic retailing operations in Europe in which the Company holds
an equity stake.
NOTE 8--INVENTORIES
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
(IN THOUSANDS)
Film costs:
Released, net of amortization...................... $ -- $210,325 $ -- $216,656
In process and unreleased.......................... -- 25,411 -- 34,713
Programming costs, net of amortization............. 209,798 248,943 172,493 178,846
Sales merchandise, net............................. 194,357 -- 224,030 --
-------- -------- -------- --------
Total.............................................. $404,155 $484,679 $396,523 $430,215
-------- -------- -------- --------
The Company estimates that approximately 90% of unamortized film costs at
December 31, 2001 will be amortized within the next three years.
NOTE 9--LITIGATION
In the ordinary course of business, the Company is engaged in various
lawsuits, including a certain class action lawsuit in connection with the
Vivendi Transaction. In the opinion of management, the ultimate outcome of the
various lawsuits should not have a material impact on the liquidity, results of
operations or financial condition of the Company.
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--BENEFIT PLANS
The Company offers various plans pursuant to Section 401(k) of the Internal
Revenue Code covering substantially all full-time employees who are not party to
collective bargaining agreements. The Company's share of the matching employer
contributions is set at the discretion of the Board of Directors or the
applicable committee thereof.
NOTE 11--STOCK OPTION PLANS
The following describes the stock option plans. Share numbers, prices and
earnings per share reflect USA's two-for-one stock split to holders of record at
the close of business on February 10, 2000.
USA has outstanding options to employees of the Company under several plans
(the "Plans") which provide for the grant of options to purchase USA's common
stock at not less than fair market value on the date of the grant. The options
under the Plans vest ratably, generally over a range of three to five years from
the date of grant and generally expire not more than 10 years from the date of
grant. Five of the Plans have options available for future grants.
USA also has outstanding options to outside directors under one plan (the
"Directors Plan") which provides for the grant of options to purchase USA's
common stock at not less than fair market value on the date of the grant. The
options under the Directors Plan vest ratably, generally over three years from
the date of grant and expire not more than 10 years from the date of grant. A
summary of changes in outstanding options under the stock option plans following
the Company's two-for-one stock split, is as follows:
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
PRICE PRICE PRICE
SHARES RANGE SHARES RANGE SHARES RANGE
-------- -------- -------- -------- -------- --------
(SHARES IN THOUSANDS)
Outstanding at beginning of period........ 78,053 $ 1-$37 68,330 $ 1-$37 68,916 $ 2-37
Granted or issued in connection with
mergers................................. 5,676 $19-$28 13,445 $17-$28 8,093 $16-28
Exercised................................. (7,016) $ 3-$28 (1,915) $ 3-$17 (7,881) $ 1-13
Cancelled................................. (1,060) $ 5-$28 (1,807) $ 6-$37 (798) $ 6-18
------ ------ ------
Outstanding at end of period.............. 75,653 $ 1-$28 78,053 $ 1-$28 68,330 $ 1-37
------ ------- ------ ------- ------ ------
Options exercisable....................... 58,591 $ 1-$28 52,082 $ 1-$37 44,697 $ 1-37
------ ------ ------
The weighted average exercise prices during the year ended December 31,
2001, were $22.87, $8.93 and $20.62 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.69.
The weighted average exercise prices during the year ended December 31,
2000, were $20.92, $9.69 and $20.13 for options granted, options exercised and
options cancelled, respectively. The weighted average fair value of options
granted during the year was $8.10.
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS (CONTINUED)
The weighted average exercise prices during the year ended December 31,
1999, were $23.77, $6.05 and $11.56 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.52.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICE DECEMBER 31, 2000 LIFE PRICE DECEMBER 31, 2000 PRICE
- ----------------------- ------------------ ----------- -------- ------------------ --------
(IN THOUSANDS)
$0.01 to $5.00.................. 18,043 3.9 $ 4.72 18,043 $ 4.72
$5.01 to $10.00................. 30,088 5.0 8.43 30,085 8.43
$10.01 to $15.00................ 4,008 6.5 12.46 2,795 12.42
$15.01 to $20.00................ 8,422 7.2 18.74 3,748 18.71
$20.01 to $25.00................ 11,462 8.4 22.81 2,294 22.50
$25.01 to $27.91................ 3,630 8.1 27.71 1,626 27.90
------ ------
75,653 5.7 10.27 58,591 7.53
------ ------
Pro forma information regarding net income and earnings per share is
required SFAS 123. The information is determined as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair market value method. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rates
of 5.0%; a dividend yield of zero; a volatility factor of .72, .62, and .44,
respectively, based on the expected market price of USA Common Stock based on
historical trends; and a weighted-average expected life of the options of five
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair market value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair market value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Pro forma net income (loss)...................... $(13,873) $3,826 $48,111
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
151
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 2001:
For the twelve months ended December 31, 2001, the Company incurred non-cash
compensation expense of $9.8 million, including $4.9 million related to an
agreement with and executive.
In 2001 the Company realized pre-tax losses of $30.7 million on equity
losses in unconsolidated subsidiaries, resulting primarily from HOT Networks,
which operates electronic retailing operations in Europe. In 2001 the Company
realized pre-tax losses of $7.9 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 2000:
As of January 1, 2000 the Company began to consolidate the accounts of HOT
Germany, an electronic retailer operating principally in Germany, whereas its
investment in HOT Germany was previously accounted for under the equity method
of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USA common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
For the twelve months ended December 31, 2000, the Company incurred non-cash
compensation expense of $9.7 million, including $3.8 million related to a
consulting agreement with an executive.
In 2000 the Company realized pre-tax losses of $7.9 million on equity losses
in unconsolidated subsidiaries resulting primarily from HOT Networks, which
operates electronic retailing operations in Europe. In d 2000 the Company also
realized pre-tax losses of $35.9 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED
DECEMBER 31, 1999:
For the twelve months ended December 31, 1999, the Company incurred non-cash
compensation expense of $6.5 million.
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STATEMENTS OF CASH FLOWS (CONTINUED)
In 1999, the Company acquired post-production equipment through a capital
lease totaling $2.5 million Supplemental disclosure of cash flow information:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash paid during the period for:
Interest....................................... $35,856 $35,688 $47,112
Income tax payments............................ 12,499 5,680 3,935
Income tax refund.............................. 1,053 1,250 --
NOTE 13--RELATED PARTY TRANSACTIONS
As of December 31, 2001, the Company was involved in several agreements with
related parties as follows:
Universal provides certain support services to the Company under a
Transition Services agreement entered into in connection with the Universal
Transaction. For these services, which include use of pre-production, production
and post-production facilities, information technology services, physical
distribution, contract administration, legal services and office space,
Universal charged the Company $7.1 million, $8.2 million and $12.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively, of which $5.7
million, $4.7 million and $8.0 million was capitalized to production costs,
respectively.
Universal and the Company entered into an International Television
Distribution Agreement under which the Company pays to Universal a distribution
fee of 10% on all programming owned or controlled by the Company distributed
outside of the United States. For the years ended December 31, 2001, 2000 and
1999, the fee totaled $13.6 million, $14.0 million and $9.0 million,
respectively.
In addition, the Company and Universal entered into a Domestic Television
Distribution Agreement under which the Company distributes in the United States
certain of Universal's television programming. For the years ended December 31,
2001, 2000 and 1999, Universal paid the Company $4.1 million, $1.5 million and
$1.5 million, respectively.
Home Shopping has affiliation agreements with USA Broadcasting ("USAB"), a
wholly owned subsidiary of USA which provides for the USAB's broadcast of Home
Shopping's electronic retailing programming on a full-time basis. Expense
related to these affiliation agreements with USAB for the years ended
December 31, 2001, 2000 and 1999 was $17.1 million, $35.0 million and
$38.1 million, respectively.
Under the USANi LLC Operating Agreement, USANi LLC is obligated to make a
distribution to each of the LLC members in an amount equal to each member's
share of USANi LLC's taxable income at a specified tax rate. The estimated
amount for 2001 is $153.5 and is expected to be paid on February 28, 2002. In
March 2000, the Company made a mandatory tax distribution payment to the
partners in the amount of $118.1 million related to the year ended December 31,
1999, of which $50.1 was paid to USA. In March 1999, the Company paid $52.8
million, of which $24.0 million was paid to USA.
153
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the settlement of its interest in an international joint
venture, the Company received $24.0 million from Universal during 2001.
NOTE 14--TRANSACTIONS WITH USA AND SUBSIDIARIES
Advances to USA and subsidiaries generally represent net amounts transferred
from the Company to USA and its subsidiaries to fund operations and other
related items. Pursuant to the Investment Agreement, all excess cash held at USA
and subsidiaries is transferred to the Company no less frequently than monthly
and the Company may transfer funds to USA to satisfy obligations of USA and its
subsidiaries. Under the Investment Agreement, transfers of cash are evidenced by
a demand note and accrue interest at the Company's borrowing rate under the
credit facility.
During the year ended December 31, 2001, net transfers from USA to USANi LLC
totaled approximately $547.0 million, principally due to the proceeds of $589.6
from the sale of all of the capital stock of certain USA Broadcasting ("USAB")
subsidiaries that own 13 full-power television stations and minority interests
in four additional full-power stations to Univision Communications Inc., and net
receipts of $67.4 million and $23.8 million from USA Films and PRC,
respectively. The receipts were offset by $77.8 million to fund two acquisitions
by PRC and $40.9 million to fund the operations of USA's television broadcast
operations, as USA continued to air HSN programming on a majority of the
stations until January 2002.
During the year ended December 31, 2000, net transfers from USANi LLC to USA
totaled approximately $350.4 million, including $70.8 million related to
contingent purchase price payments on the Hotel Reservations Network
transaction, $69.2 million to fund the operations of USA's television broadcast
operations, $50.7 million to fund the operations and acquisitions of
Ticketmaster, $26.9 million to fund the operations and acquisition of PRC and
$32.3 million to pay off outstanding debt of PRC at the date of acquisition,
offset partially by net receipts of $25.1 million from USA Films.
During the year ended December 31, 1999, net transfers from USANi LLC to USA
totaled approximately $429.1 million, including $372.2 million related to the
Hotel Reservations Network Transaction and the October Films/PFE Transaction
(including $200 million advanced to Universal pursuant to an eight year, full
recourse, interest-bearing note in connection with the acquisition of October
Films, in which Universal owned a majority interest, and the domestic film
distribution and development business of Universal previously operated by
Polygram Filmed Entertainment, Inc.), $50.9 million to fund the operations of
USA's television broadcast operations, $98.6 million to repay a portion of the
outstanding borrowings assumed in the October Films/PFE Transaction and $8.8
million to fund the operations of USA Films. Funds were also transferred to USA
to purchase shares of treasury stock. These amounts were offset by $79.4 million
and $40.0 million of funds transferred to USANi LLC from the Ticketing
operations business and the Hotel reservations business, respectively. During
the year ended December 31, 1998 net cash transfers totaling approximately
$118.2 million were made to repay USA's revolving credit facility, repay
Ticketmaster's bank credit facility, and fund the operations of USA's broadcast
operation, offset by proceeds from the sale of the assets of SF Broadcasting and
USA's Baltimore television station. The interest incurred on the net transfers
for the years ended December 31, 2000, 1999 and 1998 was approximately $2.9
million, $7.2 million and $9.5 million, respectively.
The Company allocates certain overhead expenses to the USA parent company
based upon the fair value of services performed. Expenses allocated for the
periods ended December 31, 2001, 2000 and 1999 were $8.6 million, $11.6 million
and $8.6 million, respectively.
154
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--QUARTERLY RESULTS (UNAUDITED)
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------- -------------- --------- ----------
(IN THOUSANDS)
Year Ended December 31, 2001
Net revenues.................................... $942,687 $862,646 $912,803 $904,782
Operating profit................................ 96,097 92,412 107,697 114,917
Net earnings(a)(b).............................. (2,391) 18,023 24,361 26,465
Year Ended December 31, 2000
Net revenues.................................... $970,939 $776,881 $799,806 $807,166
Operating profit................................ (34,826) 81,347 99,769 117,984
Net earnings(a)(c).............................. (13,546) 34,197 22,585 21,790
- ------------------------
(a) The Company recorded losses of $7.5 million and $0.4 million during the
fourth and second quarters of 2001, respectively, related to the write-down
of equity investments to fair value. The Company recorded losses of $5.4
million and $30.5 million during the fourth and third quarters of 2000,
respectively, related to the write-down of equity investments to fair value.
(b) During the first quarter of 2001, the Company adopted Statement of Position
00-2, "Accounting By Producers or Distributors of Films." The Company
recorded income of $1.9 million related to the cumulative effect of
adoption.
(c) The quarterly results include the operations of Styleclick.com since its
acquisition on July 27, 2000, and PRC since its acquisition on April 5,
2000. During the third quarter of 2000, the Company recorded a pre-tax gain
of $104.6 million related to the Styleclick Transaction. During the fourth
quarter of 2000, the Company recorded a pre-tax charge of $145.6 million
related to the impairment of Styleclick goodwill.
NOTE 16--INDUSTRY SEGMENTS
The Company operates principally in five industry segments: Cable and
studios, HSN-US, ECS/ Styleclick, Emerging networks and HSN-International and
other.
Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") is defined as operating income plus (1)
depreciation and amortization, (2) amortization of cable distribution fees of
$44.0 million, $36.3 million and $26.7 million in fiscal years 2001, 2000 and
1999, respectively (3) amortization of non-cash distribution and marketing
expense and (4) disengagement expenses (described below) of $4.1 million in
2001. Adjusted EBITDA is presented here as a tool and as a valuation methodology
used by management in evaluating the business. Adjusted EBITDA does not purport
to represent cash provided by operating activities. Adjusted EBITDA should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. Adjusted
EBITDA may not be comparable to calculations of similarly titled measures
presented by other companies.
155
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
The following is a reconciliation of Operating Income to Adjusted EBITDA for
2001, 2000 and 1999.
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Operating income............................ $411,123 $264,274 $343,595
Depreciation and amortization............... 236,819 376,791 175,539
Amortization of cable distribution fees..... 43,975 36,322 26,680
Amortization of non cash compensation
expense................................... 9,799 9,704 6,314
Disengagement expenses...................... 4,052 -- --
-------- -------- --------
Adjusted EBITDA............................... $705,768 $687,091 $552,128
-------- -------- --------
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
REVENUES
Cable and studios........................ $1,633,130 $1,525,124 $1,304,683
HSN--U.S.(a)............................. 1,658,904 1,533,271 1,332,911
Electronic Commerce
Solutions/Styleclick................... 34,229 30,350 31,886
Trio, NWI, Crime, other emerging media... 24,086 20,332 1,188
HSN--International and other(b).......... 272,569 245,715 8,917
Other.................................... -- -- 6,894
---------- ---------- ----------
TOTAL................................ $3,622,918 $3,354,792 $2,686,479
---------- ---------- ----------
OPERATING PROFIT (LOSS)
Cable and studios........................ $ 486,667 $ 435,116 $ 320,878
HSN--U.S.(a)(c).......................... 86,825 105,152 104,963
Electronic Commerce
Solutions/Styleclick................... (73,145) (230,021) (46,588)
Trio, NWI, Crime, other emerging media... (20,133) (13,244) (2,989)
HSN--International and other(b).......... (34,907) 4,641 (4,517)
Corporate & other........................ (34,184) (37,370) (28,152)
---------- ---------- ----------
TOTAL.................................. $ 411,123 $ 264,274 $ 343,595
---------- ---------- ----------
ADJUSTED EBITDA
Cable and studios........................ $ 613,587 $ 547,684 $ 434,084
HSN--U.S.(a)............................. 213,239 211,462 188,984
Electronic Commerce
Solutions/Styleclick................... (58,364) (50,163) (43,421)
Trio, NWI, Crime, other emerging media... (11,467) (7,120) (2,989)
HSN--International and other(b).......... (25,306) 10,740 (4,505)
Corporate & other........................ (25,921) (25,512) (20,025)
---------- ---------- ----------
TOTAL.................................. $ 705,768 $ 687,091 $ 552,128
---------- ---------- ----------
156
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
ASSETS
Cable and studios........................ $6,189,380 $5,885,301 $5,524,236
HSN--U.S................................. 1,849,946 1,855,512 1,771,560
Electronic Commerce
Solutions/Styleclick................... (42,751) 36,726 28,623
Trio, NWI, Crime, other emerging media... 97,376 100,943 200
HSN--International and other............. 212,549 133,654 37,840
Corporate & other........................ (482,125) (469,086) (130,815)
---------- ---------- ----------
TOTAL.................................. 7,824,375 $7,543,050 $7,231,644
---------- ---------- ----------
DEPRECIATION AND AMORTIZATION OF
INTANGIBLES AND CABLE DISTRIBUTION FEES
Cable and studios........................ $ 122,008 $ 112,568 $ 113,034
HSN--U.S................................. 122,115 106,059 83,796
Electronic Commerce
Solutions/Styleclick................... 14,589 179,858 3,167
Trio, NWI, Crime, other emerging media... 8,666 6,124 --
HSN--International and other............. 9,601 6,099 12
Corporate & other........................ 3,815 2,405 2,210
---------- ---------- ----------
TOTAL.................................. $ 280,794 $ 413,113 $ 202,219
---------- ---------- ----------
CAPITAL EXPENDITURES
Cable and studios........................ $ 12,907 $ 15,229 $ 6,771
HSN--U.S................................. 42,615 34,122 33,412
Electronic Commerce
Solutions/Styleclick................... 2,292 5,047 13,657
Trio, NWI, Crime, other emerging media... 61 600 --
HSN--International and other............. 6,031 18,105 13,746
Corporate & other........................ 4,590 21,723 3,095
---------- ---------- ----------
TOTAL.................................. $ 68,496 $ 94,826 $ 70,681
---------- ---------- ----------
- ------------------------
(a) Includes estimated revenue in 2000 generated by homes lost by HSN following
the sale of USA Broadcasting to Univision, which is estimated to be $6.2
million. Adjusted EBITDA for these homes is estimated at $0.9 million.
(b) Includes impact of foreign exchange fluctuations, which reduced revenue by
$44.0 million and $36.3 million in 2001 and 2000, respectively, if the
results are translated from Euros to U.S. dollars at a constant exchange
rate, using 1999 as the base year.
(c) 2001 includes $4.1 million of costs incurred related to the disengagement of
HSN from USA Broadcasting stations. Amounts primarily related to payments to
cable operators and related marketing expenses in the disengaged markets.
157
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies when available. The carrying
value of all current assets and current liabilities approximates fair value due
to their short-term nature.
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 779,592 $ 779,592 $ 71,816 $ 71,816
Long-term investments......................... 39,485 39,485 29,187 29,187
Long-term obligations......................... (532,424) (532,424) (524,116) (524,116)
NOTE 18--EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 2001, USA beneficially owned 46.7% of the outstanding common
stock of Hot Networks AG, a German stock corporation, the subsidiaries of which
operate electronic retailing operations in Europe. This investment is accounted
for using the equity method. Due to the significance of the results of Hot
Networks, AG, in relation to USA's results, summary financial information for
Hot Networks AG is presented below. There were no significant operations in
1999.
AS OF AND FOR THE
YEARS ENDED
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Current assets......................................... $ 17,597 $ 6,943
Noncurrent assets...................................... 157,274 42,784
Current liabilities.................................... 46,085 37,531
Noncurrent liabilities................................. 194,249 23,668
Net sales.............................................. 8,215 6,242
Gross profit........................................... 277 1,301
Net loss............................................... (51,453) (20,254)
To date, the Company has contributed approximately $125.3 million, including
$105.5 million in 2001, and recorded equity losses in unconsolidated
subsidiaries of $30.5 million, including $27.6 million in 2001.
NOTE 19--PROGRAM RIGHTS AND FILM COSTS
As of December 31, 2001, the liability for program rights, representing
future payments to be made under program contract agreements amounted to $510.1
million. Annual payments required are $259.3 million in 2002, $156.6 million in
2003, $70.8 million in 2004, $17.0 million in 2005, $3.9 million in 2006 and
$2.5 million in 2007 and thereafter. Amounts representing interest are $48.1
million and the present value of future payments is $462.0 million.
As of December 31, 2001, the liability for film costs amounted to $95.9
million. Annual payments are $51.6 million in 2002, $42.4 million in 2003 and
$1.9 million in 2004.
158
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--GUARANTEE OF NOTES
USA issued $500.0 million 6 3'4% Senior Notes due 2005 (the "Notes"). USANi
LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of USA,
including the Company and all of the subsidiaries of USANi LLC (other than
subsidiaries that are, individually and in the aggregate, inconsequential to
USANi LLC on a consolidated basis) (collectively, the "Subsidiary Guarantors").
All of the Subsidiary Guarantors (other than the Company) (the "Wholly Owned
Subsidiary Guarantors") are wholly owned, directly or indirectly, by the Company
or USANi LLC, as the case may be.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because the
Company's management has determined that the information contained in such
documents would not be material to investors.
159
REPORT OF INDEPENDENT AUDITORS
The Members of USANi LLC
We have audited the accompanying consolidated balance sheets of USANi LLC
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, members' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
USANi LLC and subsidiaries at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, on January
1, 2001, the Company adopted AICPA Statement of Position 00-2, "Accounting by
Producers or Distributors of Films."
/s/ ERNST & YOUNG LLP
New York, New York
January 29, 2002
160
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Product sales.......................................... $1,935,542 $1,799,932 $1,370,790
Service revenue........................................ 1,687,376 1,554,860 1,315,689
---------- ---------- ----------
Net revenues 3,622,918 3,354,792 2,686,479
Operating costs and expenses:
Cost of sales--product sales........................... 1,287,630 1,178,369 900,896
Cost of sales--service revenue......................... 16,823 6,360 4,446
Program costs.......................................... 726,549 684,992 630,956
Selling and marketing.................................. 421,259 383,722 277,257
General and administrative............................. 336,140 284,800 231,003
Other operating costs.................................. 132,801 129,458 89,793
Amortization of cable distribution fees................ 43,975 36,322 26,680
Amortization of non-cash compensation expense.......... 9,799 9,704 6,314
Depreciation and amortization.......................... 236,819 376,791 175,539
---------- ---------- ----------
Total operating costs and expenses..................... 3,211,795 3,090,518 2,342,884
---------- ---------- ----------
Operating profit....................................... 411,123 264,274 343,595
Other income (expense):
Interest income........................................ 43,675 61,336 37,573
Interest expense....................................... (73,183) (69,659) (73,106)
Gain on sale of securities............................. -- -- 89,721
Gain on sale of subsidiary stock....................... -- 104,625 --
Loss in unconsolidated subsidiaries and other.......... (40,395) (45,859) 2,103
---------- ---------- ----------
(69,903) 50,443 56,291
---------- ---------- ----------
Earnings before income taxes and minority interest and
cumulative effect of accounting change................. 341,220 314,717 399,886
Income tax expense....................................... (13,133) (26,437) (5,501)
Minority interest........................................ 9,782 41,597 603
---------- ---------- ----------
Earnings before cumulative effect of accounting change... 337,869 329,877 394,988
Cumulative effect of accounting change................... 6,470 -- --
---------- ---------- ----------
NET EARNINGS............................................. $ 344,339 $ 329,877 $ 394,988
---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
161
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 779,592 $ 71,816
Accounts and notes receivable, net of allowance of $30,586
and $50,646, respectively................................. 533,869 519,365
Inventories, net............................................ 404,155 396,523
Investments held for sale................................... -- 750
Other current assets, net................................... 26,120 18,024
---------- ----------
Total current assets...................................... 1,743,736 1,006,478
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 132,712 143,559
Buildings and leasehold improvements........................ 79,043 71,979
Furniture and other equipment............................... 96,941 76,623
Land........................................................ 10,386 10,281
Projects in progress........................................ 40,032 32,747
---------- ----------
359,114 335,189
Less accumulated depreciation and amortization............ (120,468) (83,549)
---------- ----------
238,646 251,640
OTHER ASSETS
Intangible assets, net...................................... 4,970,259 5,099,476
Cable distribution fees, net................................ 158,880 159,473
Long-term investments....................................... 39,485 29,187
Notes and accounts receivable, net ($99,819 and $22,575,
respectively, from related parties)....................... 130,368 33,571
Inventories, net............................................ 484,679 430,215
Advances to USA and subsidiaries............................ 581,367 918,817
Deferred charges and other, net............................. 58,475 44,011
---------- ----------
$8,405,895 $7,972,868
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 32,911 $ 20,053
Accounts payable, trade..................................... 233,063 201,484
Obligations for program rights and film costs............... 272,601 283,812
Cable distribution fees payable............................. 32,795 33,598
Deferred revenue............................................ 58,949 41,335
Other accrued liabilities................................... 409,286 342,995
---------- ----------
Total current liabilities................................... 1,039,605 923,277
LONG-TERM OBLIGATIONS (net of current maturities)........... 499,513 504,063
OBLIGATIONS FOR PROGRAM RIGHTS AND FILM COSTS, NET OF
CURRENT................................................... 285,378 295,210
OTHER LONG-TERM LIABILITIES................................. 28,783 81,925
MINORITY INTEREST........................................... 12,939 28,662
COMMITMENTS AND CONTINGENCIES............................... -- --
MEMBERS' EQUITY
Class A (261,947,704 and 252,679,887 shares,
respectively)............................................. 2,090,818 2,007,736
Class B (282,161,530 shares)................................ 2,978,635 2,978,635
Class C (45,774,708 shares)................................. 466,252 466,252
Retained earnings........................................... 1,009,585 695,986
Accumulated other comprehensive income...................... (5,613) (8,878)
---------- ----------
Total members' equity..................................... 6,539,677 6,139,731
---------- ----------
$8,405,895 $7,972,868
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
162
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
ACCUMULATED
OTHER
CLASS A LLC CLASS B LLC CLASS C LLC RETAINED COMPREHENSIVE UNEARNED
TOTAL SHARES SHARES SHARES EARNINGS INCOME COMPENSATION
---------- ------------ ------------ ------------ ---------- -------------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1998.................... $5,115,405 $1,753,618 $2,736,363 $466,252 $ 142,045 $ 17,850 $(723)
Comprehensive income:
Net earnings for the
year ended
December 31, 1999..... 394,988 -- -- -- 394,988 -- --
Decrease in unrealized
gains in available for
sale securities....... (17,850) -- -- -- -- (17,850) --
----------
Comprehensive income.... 377,138 -- -- -- -- -- --
----------
Issuance of LLC
Shares................ 410,545 168,273 242,272 -- -- -- --
Repurchase of LLC
shares................ (8,934) (8,934) -- -- -- -- --
Mandatory tax
distribution to LLC
partners.............. (52,755) -- -- -- (52,755) -- --
Cancellation of employee
equity program........ 280 (443) -- -- -- -- 723
---------- ---------- ---------- -------- ---------- --------- -----
BALANCE AT DECEMBER 31,
1999.................... 5,841,679 1,912,514 2,978,635 466,252 484,278 -- --
Comprehensive income:
Net earnings for the
year ended
December 31, 2000..... 329,877 -- -- -- 329,877 -- --
Decrease in unrealized
gains in available for
sale securities....... (9,291) -- -- -- -- (9,291) --
Foreign currency
translation........... 413 -- -- -- -- 413 --
----------
Comprehensive income.... 320,999 -- -- -- -- -- --
----------
Issuance of LLC
shares................ 225,129 225,129 -- -- -- -- --
Repurchase of LLC
shares................ (129,907) (129,907) -- -- -- -- --
Mandatory tax
distribution to LLC
partners.............. (118,169) -- -- -- (118,169) -- --
---------- ---------- ---------- -------- ---------- --------- -----
BALANCE AT DECEMBER 31,
2000.................... 6,139,731 2,007,736 2,978,635 466,252 695,986 (8,878) --
Comprehensive income:
Net earnings for the
year ended
December 31, 2001..... 344,339 -- -- -- 344,339 -- --
Decrease in unrealized
gains in available for
sale securities....... 9,291 -- -- -- -- 9,291 --
Foreign currency
translation........... (6,026) -- -- -- -- (6,026) --
----------
Comprehensive income...... 347,604 -- -- -- -- -- --
----------
Issuance of LLC shares.... 85,010 85,010 -- -- -- -- --
Repurchase of LLC shares.. (1,928) (1,928) -- -- -- -- --
Mandatory tax distribution
to LLC partners......... (30,740) -- -- -- (30,740) -- --
---------- ---------- ---------- -------- ---------- --------- -----
BALANCE AT DECEMBER 31,
2001.................... $6,539,677 $2,090,818 $2,978,635 $466,252 $1,009,585 $ (5,613) $ --
---------- ---------- ---------- -------- ---------- --------- -----
Accumulated other comprehensive income is comprised of unrealized (losses)
gains on available for sale securities of $0 and $(9,291) for December 31, 2001
and 2000, respectively and foreign currency translation adjustments of $(5,613)
and $413 for December 31, 2001 and 2000 respectively. There were no foreign
currency translation adjustments for December 31, 1999.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
163
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................... $ 344,339 $ 329,877 $ 394,988
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization.......................... 236,819 376,791 175,539
Amortization of cable distribution fees................ 43,975 36,322 26,680
Amortization of program rights and film costs.......... 658,328 597,659 532,900
Cumulative effect of accounting change................. (6,470) -- --
Gain on sale of subsidiary stock....................... -- (104,625) --
Gain on sale of securities............................. -- -- (89,721)
Amortization of deferred financing costs............... -- 2,457 5,035
Non-cash stock compensation............................ 9,799 9,704 6,314
Equity in (earnings) losses of unconsolidated
affiliates........................................... 38,155 46,025 (1,866)
Minority interest...................................... (9,782) (41,597) (603)
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable.................................... (40,545) (105,835) (33,879)
Inventories............................................ 30,210 (44,687) (16,805)
Accounts payable....................................... 25,118 34,425 (11,233)
Accrued liabilities and deferred revenue............... 1,530 41,136 28,738
Payment for program rights and film costs.............. (764,625) (739,066) (555,383)
Increase in cable distribution fees.................... (47,393) (64,876) (42,887)
Other, net............................................. (17,319) (13,471) 9,881
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 502,139 360,239 427,698
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired....................... (35,845) (110,780) (7,500)
Capital expenditures..................................... (68,496) (94,826) (70,681)
Increase in long-term investments and notes receivable... (110,871) (40,220) (54,478)
Proceeds from sale of securities......................... -- 2,194 107,231
Payment of merger and financing costs.................... -- -- --
Other, net............................................... 21,627 (2,168) 8,654
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES.................. (193,585) (245,800) (16,774)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................... 22,494 64,611 --
Payment of mandatory tax distribution to LLC partners.... (30,740) (118,169) (52,755)
Principal payments on long-term obligations.............. (14,842) (60,981) (253,224)
Repurchase of LLC shares................................. (1,928) (129,907) (8,934)
Proceeds from issuance of LLC shares..................... 80,931 210,455 410,545
Advances from (to) USA and subsidiaries.................. 351,239 (246,775) (493,985)
Other.................................................... (5,821) (10,531) --
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.... 401,333 (291,297) (398,353)
Effect of exchange rate changes on cash and cash
equivalents............................................ (2,111) 1,200 --
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 707,776 (175,658) 12,571
Cash and cash equivalents at beginning of period......... 71,816 247,474 234,903
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 779,592 $ 71,816 $ 247,474
---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
164
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
GENERAL
USANi LLC (the "Company" or "LLC"), a Delaware limited liability company,
was formed on February 12, 1998 and is a subsidiary of Home Shopping Network,
Inc. ("Home Shopping" or "Holdco"), which is a subsidiary of USA Networks, Inc.
("USA"). At its formation, USA and Home Shopping contributed substantially all
of the operating assets and liabilities of Home Shopping to the Company in
exchange for Class A LLC Shares of the Company. On February 12, 1998, the
Company acquired USA Networks, a New York general partnership consisting of USA
Network and Sci Fi Channel, as well as the domestic television production and
distribution businesses of Universal Studios (the "Universal Transaction"). LLC
is organized into two groups, the Interactive Group and the Entertainment Group.
The Interactive Group consists of Home Shopping Network (including HSN
International and HSN.com); Electronic Commerce Solutions; and Styleclick (OTC:
IBUY). The Entertainment Group consists of USA Cable, including USA Network and
Sci Fi Channel and Emerging networks TRIO, Newsworld International, and Crime;
and Studios USA, which produces and distributes television programming.
On December 17, 2001, USA and Vivendi Universal, S.A. ("Vivendi") announced
a transaction (the "Vivendi Transaction") in which USA's Entertainment Group,
consisting of USA Cable, Studios USA, and USA Films, would be contributed to
Vivendi Universal Entertainment, a new joint venture controlled by Vivendi. See
below for further discussion under "Subsequent Events".
SUBSEQUENT EVENTS (UNAUDITED)
CONTRIBUTION OF THE USA ENTERTAINMENT GROUP TO VUE
On December 17, 2001, USA announced it had entered into an agreement with
Vivendi pursuant to which USA would contribute USA's Entertainment Group to a
limited liability entity (Vivendi Universal Entertainment, "VUE") to be
controlled by Vivendi, to which Vivendi would contribute the film, television
and theme park businesses of Universal Studios, Inc. ("Universal"). Upon
consummation of the Vivendi transaction, the joint venture will be controlled by
Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi,
5.44% by USA and 1.5% by Mr. Diller, Chairman and CEO of USA.
In connection with the Vivendi Transaction, USA and its subsidiaries will
receive the following at the closing of the transactions: (i) approximately
$1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment
for a 15-year period, (ii) a $750 million face value Class A preferred interest
in VUE, with a 5% annual paid-in-kind dividend and a 20-year term, to be settled
in cash at its then face value at maturity; (iii) a $1.75 billion face value
Class B preferred interest in VUE, with a 1.4% annual paid-in-kind dividend, a
3.6% annual cash dividend, callable and puttable after 20 years, to be settled
by Universal at its then face value with a maximum of approximately 56.6 million
USA common shares, provided that Universal may substitute cash in lieu of shares
of USA common stock (but not USA Class B common stock), at its election; (iv) a
5.44% common interest in VUE, generally callable by Universal after five years
and puttable by USA after eight years, which may be settled in either Vivendi
stock or cash, at Universal's election, and (v) a cancellation of Universal's
USANi LLC interests currently exchangeable into USA common shares including
USANi LLC interests obtained from Liberty in connection with a related
transaction (see immediately below).
Related to the transaction, Liberty will exchange 7,079,726 shares of USANi
LLC for shares of USA common stock, and subsequently transfer to Universal
25,000,000 shares of USA common stock,
165
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION (CONTINUED)
its remaining 38,694,982 shares of USANi LLC, as well as the assets and
liabilities of Liberty Programming France (which consist primarily of 4,921,250
shares of multiThematiques S.A., a French entity), in exchange for 37,386,436
Vivendi ordinary shares.
In addition, USA will issue to Universal ten-year warrants to acquire shares
of USA common stock as follows: 24,187,094 shares at $27.50 per share;
24,187,094 shares at $32.50 per share; and 12,093,547 shares at $37.50 per
share. Barry Diller, USA's chairman and chief executive officer, will receive a
common interest in VUE with a 1.5% profit sharing percentage, with a minimum
value of $275.0 million, in return for his agreeing to specified non-competition
provisions and agreeing to serve as chairman and chief executive officer of VUE.
USA and Mr. Diller have agreed that they will not compete with Vivendi's
television and filmed entertainment businesses (including VUE) for a minimum of
18 months.
In February 2002, Mr. Diller assigned to three executive officers of USA,
the right to receive economic interests in a portion of the common interests in
VUE that Mr. Diller will receive upon closing of the transactions.
The Vivendi Transaction is subject to USA shareholder vote, including the
approval of 66 2/3% of the outstanding USA common stock and USA preferred stock,
voting together as a single class, and excluding shares held by Vivendi,
Liberty, Mr. Diller and their respective affiliates, as well as other customary
regulatory approvals, and there can be no assurance that the transaction will be
completed.
BASIS OF PRESENTATION
The contribution of assets by USA and Home Shopping to the Company was
accounted for in the accompanying consolidated financial statements in a manner
similar to the pooling-of-interests for business combinations due to the common
ownership of Home Shopping and USANi LLC. Accordingly, the assets and
liabilities were transferred to the LLC at Home Shopping's historical cost.
Given that equity interests in limited liability companies are not in the
form of common stock, earnings per share data is not presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and voting-controlled subsidiaries. The Company
consolidates HSN--Germany based upon a Pooling Agreement allowing for the
Company to elect a majority of the Board of Directors and to control the
operations of HSN--Germany. Significant intercompany transactions and accounts
have been eliminated.
Investments in which the Company owns a 20%, but not in excess of 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. In addition,
partnership interests are recorded 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.
166
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES
CABLE AND STUDIOS
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
are recognized as revenues on the commencement date of the license agreement,
provided the program is available for exhibition.
USA Cable advertising revenue is recognized in the period in which the
advertising commercials are aired on the cable networks. Certain contracts with
advertisers contain minimum commitments with respect to advertising viewership.
In the event that such minimum commitments are not met, the contracts require
additional subsequent airings of the advertisement. As a result, provisions are
recorded against advertising revenues for audience under deliveries
("makegoods") until such subsequent airings are conducted. Affiliate fees are
recognized in the period during which the programming is provided.
ELECTRONIC RETAILING
Revenues from Home Shopping primarily consist of merchandise sales and are
reduced by incentive discounts and sales returns to arrive at net sales.
Revenues for domestic sales are recorded for credit card sales upon transaction
authorization, which occurs only if the goods are in stock, and for check sales
upon receipt of customer payment, which does not vary significantly from the
time goods are shipped. Revenues for international sales are recorded upon
shipment. Home Shopping's sales policy allows merchandise to be returned at the
customer's discretion within 30 days of the date of delivery. Allowances for
returned merchandise and other adjustments are provided based upon past
experience.
OTHER
Revenues from all other sources are recognized either upon delivery or when
the service is provided.
FILM COSTS
Film costs consist of direct production costs and production overhead, less
accumulated amortization. Prior to the adoption of SOP 00-2 on January 1, 2001
(see below for further information), development roster (and related costs),
abandoned story and development costs were 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 film costs are
amortized, and participation expenses are accrued, for each production in the
proportion that current period revenue recognized
167
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, are classified as non-current 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.
ADVERTISING BARTER TRANSACTIONS
Barter transactions represent the exchange of commercial air-time for
programming, merchandise or services. The transactions are recorded at the
estimated fair market value of the asset or services received or given in
accordance with Emerging Issues Task Force Issue No. 99-17, "Accounting for
Advertising Barter Transactions." Barter revenue for the year ended December 31,
2001 was $42.2 million. Barter revenues for the year ended December 31, 2000 and
1999 are not material to the Company's statement of operations.
MERCHANDISE INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehouse costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Merchandise inventories are presented net of an inventory
carrying adjustment of $40.4 million and $37.9 million at December 31, 2001 and
2000, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments.
Short-term investments consist primarily of U.S. Treasury Securities, U.S.
Government agencies and certificates of deposit with original maturities of less
than 91 days.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
168
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
ASSET CATEGORY DEPRECIATION/AMORTIZATION PERIOD
- -------------- --------------------------------
Computer and broadcast equipment.................. 3 to 13 Years
Buildings......................................... 30 to 40 Years
Leasehold improvements............................ 4 to 20 Years
Furniture and other equipment..................... 3 to 10 Years
Depreciation and amortization expense on property, plant and equipment was
$83.6 million, $65.2 million and $41.0 million for the years ended December 31,
2001, 2000 and 1999, respectively.
LONG-LIVED ASSETS INCLUDING INTANGIBLES
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of long-lived assets, including goodwill
and other intangibles and property, plant and equipment, is to review the
carrying value of the assets if the facts and circumstances suggest that they
may be impaired. If this review indicates that the carrying value will not be
recoverable, as determined based on the projected undiscounted future cash
flows, the carrying value is reduced to its estimated fair value. See below
under "New Accounting Pronouncements" for further information related to
goodwill and other intangible assets. The Company amortizes goodwill and other
intangible assets over their estimated useful lives, which range from 3 to 40
years for goodwill and 1 to 5 years for intangibles.
CABLE DISTRIBUTION FEES
Cable distribution fees relate to upfront fees paid in connection with
multi-year cable contracts for carriage of Home Shopping's programming. These
fees are amortized to expense on a straight line basis over the terms of the
respective contracts.
ADVERTISING
Advertising costs are primarily expensed in the period incurred. Advertising
expense for the years ended December 31, 2001, 2000 and 1999 were $137.3
million, $127.5 million and $95.5 million, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees." In cases
where exercise prices are less than fair value as of the grant date,
compensation is recognized over the vesting period. For stock-based compensation
issued to non-employees, the Company accounts for the grants in accordance with
FASB Statement No. 123, "Accounting for Stock Based Compensation."
MINORITY INTEREST
Minority interest represents the ownership interests of third parties in the
net assets and results of operations of certain consolidated subsidiaries.
Minority interest primarily represents the public's ownership interest in
Styleclick since July 27, 2000 and the public's ownership interest in HSN--
Germany since its consolidation as of January 1, 2000.
169
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of all foreign operations are
consolidated using the local currency as the functional currency. Local currency
assets and liabilities are translated at the rates of exchange on the balance
sheet date, and local currency revenues and expenses are translated at average
rates of exchange during the period. Resulting translation gains or losses,
which have not been material, are included as a component of accumulated other
comprehensive income (loss) in accumulated deficit.
ISSUANCES OF SUBSIDIARY STOCK
The Company accounts for issuances of stock by a subsidiary via income
statement recognition, recording income or losses as non-operating
income/(expense). During the year ended December 31, 2000, the Company recorded
a gain of $104.6 million related to the issuance of subsidiary stock. See
Note 3 for further discussion.
ACCOUNTING ESTIMATES
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net earnings
during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include the inventory carrying adjustment, program rights and film
cost amortization, sales return and other revenue allowances, allowance for
doubtful accounts, recoverability of intangibles and other long-lived assets,
estimates of film revenue ultimates and various other operating allowances and
accruals.
NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, all calendar year companies will be required to
adopt Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Other Intangible Assets." The new rules eliminate amortization of
goodwill and other intangible assets with indefinite lives and establish new
measurement criterion for these assets. Although it has not completed its
assessment, the Company does not anticipate a write-off upon adoption.
The rules are expected to reduce USA's annual amortization by approximately
$145.4 million.
FILM ACCOUNTING
The Company adopted SOP 00-2, "Accounting by Producers or Distributors of
Films" ("SOP 00-2") during the twelve months ended December 31, 2001. SOP 00-2
established new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and television
product to be expensed as incurred. This compares to the Company's previous
policy of first capitalizing these costs and then expensing them over the
related revenue streams. In addition,
170
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOP 00-2 requires development costs for abandoned projects and certain indirect
overhead costs to be charged directly to expense, instead of those costs being
capitalized to film costs, which was required under the previous accounting
rules. SOP 00-2 also requires all film costs to be classified in the balance
sheet as non-current assets. Provisions of SOP 00-2 in other areas, such as
revenue recognition, generally are consistent with the Company's existing
accounting policies.
SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a
one-time, non-cash benefit of $6.5 million. The benefit is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the 2001 presentation.
NOTE 3--BUSINESS ACQUISITIONS
STYLECLICK TRANSACTION
On July 27, 2000, USA and Styleclick.com Inc., an enabler of e-commerce for
manufacturers and retailers, completed the merger of Internet Shopping Network,
a subsidiary of USA, and Styleclick.com (the "Styleclick Transaction"). The
entities were merged with a new company, Styleclick, Inc., which owns and
operates the combined properties of Styleclick.com and ISN. Styleclick, Inc. is
traded on the OTC under the symbol "IBUY". In accordance with the terms of the
agreement, USA invested $40 million in cash and agreed to contribute $10 million
in dedicated media, and received warrants to purchase additional shares of the
new company. At closing, Styleclick.com repaid $10 million of borrowings
outstanding under a bridge loan provided by USA.
The aggregate purchase price, including transaction costs, of $211.9 million
was determined as follows:
(IN THOUSANDS)
--------------
Value of portion of Styleclick.com acquired in the merger... $121,781
Additional cash and promotional investment by USA........... 50,000
Fair value of outstanding "in the money options" and
warrants of Styleclick.com................................ 37,989
Transaction costs........................................... 2,144
--------
Total acquisition costs..................................... $211,914
--------
The fair value of Styleclick.com was based on the fair value of $15.78 per
share times 7.7 million shares outstanding. Fair value of the shares was
determined by taking an average of the opening and closing price of
Styleclick.com common stock for the period just before and just after the terms
of the transaction were agreed to by the Company and Styleclick.com and
announced to the public. In conjunction with the transaction, the Company
recorded a pre-tax gain of $104.6 million in accordance with Staff Accounting
Bulletin No. 51, "Accounting for Sales of Stock by a Subsidiary", based upon the
25% of ISN's net book value exchanged for 75% of Styleclick.com's fair value,
determined based upon the fair value of Styleclick.com common stock received in
the merger.
171
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS ACQUISITIONS (CONTINUED)
The Styleclick transaction has been accounted for under the purchase method
of accounting. The purchase price has been allocated to the assets acquired and
liabilities assumed based on their respective fair values at the date of
purchase. The unallocated excess of acquisition costs over net assets acquired
of $170.2 million has been allocated to goodwill, which originally was being
amortized over 3 years.
In March 2001, Styleclick announced a new company organization designed to
advance its offering of scaleable commerce services. The announcement included
Styleclick's acquisition of the MVP.com technology platform. Also in March 2001,
the Styleclick Board elected two executives of ECS to top management positions
at Styleclick, and certain senior executives of Styleclick left the Company. As
of December 31, 2000, as a result of the historical and anticipated operating
losses of Styleclick, and the continuing evaluation of the operations and
technology, Styleclick determined the goodwill recorded in conjunction with the
Styleclick Merger was impaired and recorded a write-down of $145.6 million as
goodwill amortization in fiscal 2000. Since the second quarter of 2001,
Styleclick has focused on e-commerce services and technology while eliminating
its online retail business. During this transition, Styleclick continued to
incur significant net losses from operations that raise substantial doubt about
Styleclick's ability to continue as a going concern. Styleclick is considering
its options with respect to the situation.
BUSINESS ACQUISITION PRO FORMA RESULTS
The following unaudited pro forma condensed consolidated financial
information for the twelve months ended December 31, 2000 and 1999 is presented
to show the results of the Company as if the Styleclick Transaction had occurred
on January 1, 2000. The pro forma results reflect certain adjustments, including
increased amortization related to goodwill and other intangibles, and are not
necessarily indicative of what the results would have been had the transactions
actually occurred on January 1, 1999.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Net revenues......................................... $3,356,681 $2,692,653
Net income........................................... 321,026 351,630
NOTE 4--INTANGIBLE ASSETS
Intangible assets represents goodwill which is amortized using the
straight-line method over periods ranging from 3 to 40 years.
Goodwill primarily relates to various transactions, and represents the
excess of purchase price over the fair value of assets acquired and is net of
accumulated amortization of $573.1 million and $453.6 million at December 31,
2001 and 2000, respectively.
172
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM OBLIGATIONS
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Unsecured Senior Credit Facility ("New Facility"); with
a $40,000,000 sub-limit for letters of credit, entered
into February 12, 1998, which matures on December 31,
2002. At the Company's option, the interest rate on
borrowings is tied to the London Interbank Offered
Rate ("LIBOR") or the Alternate Base Rate ("ABR"),
plus an applicable margin. Interest rate at
December 31, 2000 was 2.9%............................ $ -- $ --
$500,000,000 6 3/4% Senior Notes (the "Senior Notes")
due November 15, 2005; interest payable May 15 and
November 15 commencing May 15, 1999. Interest rate at
December 31, 2001 was 6.75%........................... 498,515 498,213
Other long-term obligations maturing through 2005....... 33,909 25,903
-------- --------
Total long-term obligations............................. 532,424 524,116
Less current maturities................................. (32,911) (20,053)
-------- --------
Long-term obligations, net of current maturities........ $499,513 $504,063
-------- --------
On February 12, 1998, USA and USANi LLC, as borrower, entered into a credit
agreement which provides for a $1.6 billion credit facility. The credit facility
was used to finance the Universal Transaction and to refinance USA's
then-existing $275.0 million revolving credit facility. The credit facility
consists of (1) a $600.0 million revolving credit facility with a $40.0 million
sub-limit for letters of credit, (2) a $750.0 million Tranche A Term Loan and,
(3) a $250.0 million Tranche B Term Loan. The Tranche A Term Loan and the
Tranche B Term Loan have been permanently repaid as of December 31, 1999, as
described below.
The existing credit facility is guaranteed by certain of USA's subsidiaries.
The interest rate on borrowings under the existing credit facility is tied to an
alternate base rate or the London InterBank Rate, in each case, plus an
applicable margin, and $595.4 million was available for borrowing as of December
31, 2001 after taking into account outstanding letters of credit. The credit
facility includes covenants requiring, among other things, maintenance of
specific operating and financial ratios and places restrictions on payment of
certain dividends, incurrence of indebtedness and investments. The Company pays
a commitment fee of .1875% on the unused portion of the credit facility. Note
that with the closing of the Vivendi Transaction, the Company expects that the
existing credit facility will expire.
Aggregate contractual maturities of long-term obligations are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 32,911
2003........................................................ 748
2004........................................................ 50
2005........................................................ 498,715
--------
$532,424
--------
173
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
The Company was formed as a limited liability company on February 12, 1998
and is treated as a partnership for income tax purposes. As such, the individual
LLC members are subject to federal and state taxes based on their allocated
portion of income and expenses and the Company is not subject to Federal and
state income taxation. The Company is subject to taxes in Germany and New York
unincorporated business tax.
The Company has Federal income tax returns under examination by the Internal
Revenue Service. The Company has received proposed adjustments related to
certain examinations. Management believes that the resolution of the proposed
adjustments will not have a material adverse effect on the Company's
consolidated financial statements.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space, as well as broadcast and production facilities, equipment and services
used in connection with its operations under various operating leases and
contracts, many of which contain escalation clauses.
Future minimum payments under non-cancelable agreements are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
2002........................................................ $ 42,608
2003........................................................ 23,089
2004........................................................ 20,088
2005........................................................ 10,480
2006........................................................ 7,029
Thereafter.................................................. 41,384
--------
$144,678
--------
Expenses charged to operations under these agreements were $61.8 million,
$56.4 million and $46.1 million for the years ended December 31, 2001, 2000 and
1999, respectively.
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 December 31, 2001, the unrecorded commitments amounted to $968.0 million.
Annual commitments are $153.8 million in 2002, $173.5 million in 2003, $189.1
million in 2004, $155.0 million in 2005, $112.4 million in 2006 and $184.2
million in 2007 and thereafter.
The Company is required to provide funding, from time to time, for the
operations of its investments in joint ventures accounted for under the equity
method. To date, HSN has funded $125.3 million to Hot Networks, a company
operating electronic retailing operations in Europe in which the Company holds
an equity stake.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INVENTORIES
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
(IN THOUSANDS)
Film costs:
Released, net of amortization...................... $ -- $210,325 $ -- $216,656
In process and unreleased.......................... -- 25,411 -- 34,713
Programming costs, net of amortization............. 209,798 248,943 172,493 178,846
Sales merchandise, net............................. 194,357 -- 224,030 --
-------- -------- -------- --------
Total.............................................. $404,155 $484,679 $396,523 $430,215
-------- -------- -------- --------
The Company estimates that approximately 90% of unamortized film costs at
December 31, 2001 will be amortized within the next three years.
NOTE 9--MEMBERS' EQUITY
On January 20, 2000, the Board of Directors declared a two-for-one stock
split of USANi LLC's members' equity interests, payable in the form of a
dividend to shareholders of record as of the close of business on February 10,
2000. The 100% stock dividend was paid on February 24, 2000. All share numbers
give effect to such stock split.
In connection with the Universal Transaction, the Company was formed through
the authorization and issuance of three classes of shares, Class A LLC Shares,
Class B LLC Shares and Class C LLC Shares. In return for LLC Shares (i) USA (and
certain of its subsidiaries) contributed its assets and liabilities related to
its Electronic retailing and Internet services businesses and (ii) Universal
(and certain of its subsidiaries) contributed USA Cable and Studios USA. On June
30, 1998, and in connection with the Universal Transaction, Liberty purchased
30,000,000 Class C LLC Shares for $308.5 million. USA, Home Shopping, Universal
and Liberty (and their respective subsidiaries) are collectively referred to
herein as the "Members".
In connection with various equity transactions at USA in 1998, Universal
completed its mandatory purchase obligation in exchange for total consideration
of $539.3 million in the form of $234.7 million in cash and $304.6 million
applied against the deferred purchase obligations (including accrued interest).
In 1998, Liberty exercised certain of its preemptive rights and acquired
9,394,900 shares of USA Common Stock in exchange for $93.9 million. USA
contributed $93.9 million to the LLC in exchange for 9,394,900 Class A LLC
Shares. In addition, Liberty exercised certain of its preemptive rights and
acquired 15,774,708 Class C LLC Shares in exchange for $157.7 million in cash.
On December 30, 1998, USA acquired from Universal an entity which owned
3,411,308 Class B LLC shares in exchange for issuing to Universal 670,000 shares
of USA Class B Common Stock and 2,741,308 shares of USA Common Stock. The
transaction resulted in those Class B LLC Shares being converted into Class A
LLC Shares.
In 2000, in connection with Liberty's exercise of certain of its preemptive
rights, USA acquired 7,920,274 Class A LLC shares in exchange for $179.1
million. In addition, USA sold 5,836,950 Class A LLC shares back to the LLC in
exchange for $129.9 million.
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USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--MEMBERS' EQUITY (CONTINUED)
In 1999, USA acquired 7,277,290 Class A LLC shares in exchange for $120.3
million. In addition, USA acquired 11,244,900 Class A LLC shares in exchange for
$48.0 million and sold 477,892 Class A LLC shares back to the LLC in exchange
for $8.9 million.
In 1999, Universal exercised certain of its preemptive rights and acquired
14,781,752 Class B LLC shares in exchange for $242.3 million.
Each of the classes of the LLC Shares are identical in all material
respects. The business and affairs of the Company are managed by Mr. Barry
Diller and USA in accordance with the Governance Agreement among USA, Universal,
Liberty and Mr. Diller.
By various methods, Universal and Liberty hold the right, from time to time,
to exchange Class B LLC Shares and Class C LLC Shares of the Company for either
USA Common Stock or USA Class B Common Stock.
In connection with the Vivendi Transaction, the Company expects to cancel
282,161,530 Class B LLC Shares and 45,774,708 Class C LLC Shares of the Company.
In total, 327,936,238 are expected to be cancelled, with 7,079,726 exchanged for
USA Common Stock.
NOTE 10--LITIGATION
In the ordinary course of business, the Company is engaged in various
lawsuits, including a certain class action lawsuit initiated in connection with
the Vivendi Transaction. In the opinion of management, the ultimate outcome of
the various lawsuits should not have a material impact on the liquidity, results
of operations or financial condition of the Company.
NOTE 11--BENEFIT PLANS
The Company offers various plans pursuant to Section 401(k) of the Internal
Revenue Code covering substantially all full-time employees who are not party to
collective bargaining agreements. The Company's share of the matching employer
contributions is set at the discretion of the Board of Directors or the
applicable committee thereof.
NOTE 12--STOCK OPTION PLANS
The following describes the stock option plans. Share numbers, prices and
earnings per share reflect USA's two-for-one stock split to holders of record at
the close of business on February 10, 2000.
USA has outstanding options to employees of the Company under several plans
(the "Plans") which provide for the grant of options to purchase USA's common
stock at not less than fair market value on the date of the grant. The options
under the Plans vest ratably, generally over a range of three to five years from
the date of grant and generally expire not more than 10 years from the date of
grant. Five of the Plans have options available for future grants.
USA also has outstanding options to outside directors under one plan (the
"Directors Plan") which provides for the grant of options to purchase USA's
common stock at not less than fair market value on the date of the grant. The
options under the Directors Plan vest ratably, generally over three years from
the date of grant and expire not more than 10 years from the date of grant. A
summary of
176
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTION PLANS (CONTINUED)
changes in outstanding options under the stock option plans following the
Company's two-for-one stock split, is as follows:
DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999
------------------- ------------------ -------------------
PRICE PRICE PRICE
SHARES RANGE SHARES RANGE SHARES RANGE
-------- -------- -------- ------- -------- --------
(SHARES IN THOUSANDS)
Outstanding at beginning of period..... 78,053 $ 1-$37 68,330 $ 1-$37 68,916 $ 2-37
Granted or issued in connection with
mergers.............................. 5,676 $19-$28 13,445 $17-$28 8,093 $16-28
Exercised.............................. (7,016) $ 3-$28 (1,915) $ 3-$17 (7,881) $ 1-13
Cancelled.............................. (1,060) $ 5-$28 (1,807) $ 6-$37 (798) $ 6-18
------- ------- -------
Outstanding at end of period........... 75,653 $ 1-$28 78,053 $ 1-$28 68,330 $ 1-37
------- -------- ------- ------- ------- --------
Options exercisable.................... 58,591 $ 1-$28 52,082 $ 1-$37 44,697 $ 1-37
------- ------- -------
The weighted average exercise prices during the year ended December 31,
2001, were $22.87, $8.93 and $20.62 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.69.
The weighted average exercise prices during the year ended December 31,
2000, were $20.92, $9.69 and $20.13 for options granted, options exercised and
options cancelled, respectively. The weighted average fair value of options
granted during the year was $8.10.
The weighted average exercise prices during the year ended December 31,
1999, were $23.77, $6.05 and $11.56 for options granted, exercised and
cancelled, respectively. The weighted average fair value of options granted
during the year was $9.52.
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE EXERCISABLE AT AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICE DECEMBER 31, 2000 LIFE PRICE 2000 PRICE
- ------------------------------------ ----------------- ----------- -------- -------------- --------
(IN THOUSANDS)
$ 0.01 to $ 5.00.................... 18,043 3.9 $ 4.72 18,043 $ 4.72
$ 5.01 to $10.00.................... 30,088 5.0 8.43 30,085 8.43
$10.01 to $15.00.................... 4,008 6.5 12.46 2,795 12.42
$15.01 to $20.00.................... 8,422 7.2 18.74 3,748 18.71
$20.01 to $25.00.................... 11,462 8.4 22.81 2,294 22.50
$25.01 to $27.91.................... 3,630 8.1 27.71 1,626 27.90
------ ------
75,653 5.7 10.27 58,591 7.53
------ ------
Pro forma information regarding net income and earnings per share is
required SFAS 123. The information is determined as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair market value method. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
177
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTION PLANS (CONTINUED)
weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rates
of 5.0%; a dividend yield of zero; a volatility factor of .72 .62, and .44,
respectively, based on the expected market price of USA Common Stock based on
historical trends; and a weighted-average expected life of the options of five
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair market value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair market value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Pro forma net income.......................... $264,008 $268,677 $357,900
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
NOTE 13--STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31,
2001:
For the twelve months ended December 31, 2001, the Company incurred non-cash
compensation expense of $9.8 million, including $4.9 million related to an
agreement with and executive.
In 2001 the Company realized pre-tax losses of $30.7 million on equity
losses in unconsolidated subsidiaries, resulting primarily from HOT Networks,
which operates electronic retailing operations in Europe. In 2001 the Company
realized pre-tax losses of $7.9 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31,
2000:
As of January 1, 2000 the Company began to consolidate the accounts of HOT
Germany, an electronic retailer operating principally in Germany, whereas its
investment in HOT Germany was previously accounted for under the equity method
of accounting.
On January 20, 2000, the Company completed its acquisition of Ingenious
Designs, Inc. ("IDI"), by issuing approximately 190,000 shares of USA common
stock for all the outstanding stock of IDI, for a total value of approximately
$5.0 million.
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USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STATEMENTS OF CASH FLOWS (CONTINUED)
For the twelve months ended December 31, 2000, the Company incurred non-cash
compensation expense of $9.7 million, including $3.8 million related to a
consulting agreement with an executive.
In 2000 the Company realized pre-tax losses of $7.9 million on equity losses
in unconsolidated subsidiaries resulting primarily from HOT Networks, which
operates electronic retailing operations in Europe. In d 2000 the Company also
realized pre-tax losses of $35.9 million related to the write-off of equity
investments to fair value. The write-off in equity investments was based upon
management's estimate of the current value of the investments, considering the
current business environment, financing opportunities of the investees,
anticipated business plans and other factors. Note that the majority of
investments were in Internet related companies.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31,
1999:
For the twelve months ended December 31, 1999, the Company incurred non-cash
compensation expense of $6.5 million.
In 1999, the Company acquired post-production equipment through a capital
lease totaling $2.5 million.
Supplemental disclosure of cash flow information:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
CASH PAID DURING THE PERIOD FOR:
Interest......................................... $35,856 $35,688 $47,112
Income tax payments.............................. 12,499 5,680 3,935
Income tax refund................................ 1,053 1,250 --
NOTE 14--RELATED PARTY TRANSACTIONS
As of December 31, 2001, the Company was involved in several agreements with
related parties as follows:
Universal provides certain support services to the Company under a
Transition Services agreement entered into in connection with the Universal
Transaction. For these services, which include use of pre-production, production
and post-production facilities, information technology services, physical
distribution, contract administration, legal services and office space,
Universal charged the Company $7.1 million, $8.2 million and $12.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively, of which $5.7
million, $4.7 million and $8.0 million was capitalized to production costs,
respectively.
Universal and the Company entered into an International Television
Distribution Agreement under which the Company pays to Universal a distribution
fee of 10% on all programming owned or controlled by the Company distributed
outside of the United States. For the years ended December 31, 2001, 2000 and
1999, the fee totaled $13.6 million, $14.0 million and $9.0 million,
respectively.
In addition, the Company and Universal entered into a Domestic Television
Distribution Agreement under which the Company distributes in the United States
certain of Universal's television
179
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS (CONTINUED)
programming. For the years ended December 31, 2001, 2000 and 1999, Universal
paid the Company $4.1 million, $1.5 million and $1.5 million, respectively.
Home Shopping has affiliation agreements with USA Broadcasting ("USAB"), a
wholly owned subsidiary of USA which provides for the USAB's broadcast of Home
Shopping's electronic retailing programming on a full-time basis. Expense
related to these affiliation agreements with USAB for the years ended December
31, 2001, 2000 and 1999 was $17.1 million, $35.0 million and $38.1 million,
respectively.
Under the USANi LLC Operating Agreement, USANi LLC is obligated to make a
distribution to each of the LLC members in an amount equal to each member's
share of USANi LLC's taxable income at a specified tax rate. The estimated
amount for 2001 is $153.5 and is expected to be paid on February 28, 2002. In
March 2000, the Company made a mandatory tax distribution payment to the
partners in the amount of $118.1 million related to the year ended December 31,
1999, of which $50.1 was paid to USA. In March 1999, the Company paid $52.8
million, of which $24.0 million was paid to USA.
In connection with the settlement of its interest in an international joint
venture, the Company received $24.0 million from Universal during 2001.
NOTE 15--TRANSACTIONS WITH USA AND SUBSIDIARIES
Advances to USA and subsidiaries generally represent net amounts transferred
from the Company to USA and its subsidiaries to fund operations and other
related items. Pursuant to the Investment Agreement, all excess cash held at USA
and subsidiaries is transferred to the Company no less frequently than monthly
and the Company may transfer funds to USA to satisfy obligations of USA and its
subsidiaries. Under the Investment Agreement, transfers of cash are evidenced by
a demand note and accrue interest at the Company's borrowing rate under the
credit facility.
During the year ended December 31, 2001, net transfers from USA to USANi LLC
totaled approximately $547.0 million, principally due to the proceeds of $589.6
from the sale of all of the capital stock of certain USA Broadcasting ("USAB")
subsidiaries that own 13 full-power television stations and minority interests
in four additional full-power stations to Univision Communications Inc., and net
receipts of $67.4 million and $23.8 million from USA Films and PRC,
respectively. The receipts were offset by $77.8 million to fund two acquisitions
by PRC and $40.9 million to fund the operations of USA's television broadcast
operations, as USA continued to air HSN programming on a majority of the
stations until January 2002.
During the year ended December 31, 2000, net transfers from USANi LLC to USA
totaled approximately $350.4 million, including $70.8 million related to
contingent purchase price payments on the Hotel Reservations Network
transaction, $69.2 million to fund the operations of USA's television broadcast
operations, $50.7 million to fund the operations and acquisitions of
Ticketmaster, $26.9 million to fund the operations and acquisition of PRC and
$32.3 million to pay off outstanding debt of PRC at the date of acquisition,
offset partially by net receipts of $25.1 million from USA Films.
During the year ended December 31, 1999, net transfers from USANi LLC to USA
totaled approximately $429.1 million, including $372.2 million related to the
Hotel Reservations Network Transaction and the October Films/PFE Transaction
(including $200 million advanced to Universal pursuant to an eight year, full
recourse, interest-bearing note in connection with the acquisition of
180
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--TRANSACTIONS WITH USA AND SUBSIDIARIES (CONTINUED)
October Films, in which Universal owned a majority interest, and the domestic
film distribution and development business of Universal previously operated by
Polygram Filmed Entertainment, Inc.), $50.9 million to fund the operations of
USA's television broadcast operations, $98.6 million to repay a portion of the
outstanding borrowings assumed in the October Films/PFE Transaction and $8.8
million to fund the operations of USA Films. Funds were also transferred to USA
to purchase shares of treasury stock. These amounts were offset by $79.4 million
and $40.0 million of funds transferred to USANi LLC from the Ticketing
operations business and the Hotel reservations business, respectively. During
the year ended December 31, 1998 net cash transfers totaling approximately
$118.2 million were made to repay USA's revolving credit facility, repay
Ticketmaster's bank credit facility, and fund the operations of USA's broadcast
operation, offset by proceeds from the sale of the assets of SF Broadcasting and
USA's Baltimore television station. The interest incurred on the net transfers
for the years ended December 31, 2000, 1999 and 1998 was approximately $2.9
million, $7.2 million and $9.5 million, respectively.
The Company allocates certain overhead expenses to the USA parent company
based upon the fair value of services performed. Expenses allocated for the
periods ended December 31, 2001, 2000 and 1999 were $8.6 million, $11.6 million
and $8.6 million, respectively.
In accordance with the Investment Agreement, certain transfers of funds
between the Company and USA are not evidenced by a demand note and do not accrue
interest, primarily relating to the establishment of the operations of the
Company and to equity contributions.
NOTE 16--QUARTERLY RESULTS (UNAUDITED)
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Net revenues.................................... $942,687 $862,646 $912,803 $904,782
Operating profit................................ 96,097 92,412 107,697 114,917
Net earnings(a)(b).............................. 64,523 82,924 90,805 106,087
YEAR ENDED DECEMBER 31, 2000
Net revenues.................................... $970,939 $776,881 $799,806 $807,166
Operating profit................................ (34,826) 81,347 99,769 117,984
Net earnings(a) (c)............................. (12,045) 148,020 88,783 105,119
- ------------------------
(a) The Company recorded losses of $7.5 million and $0.4 million during the
fourth and second quarters of 2001, respectively, related to the write-down
of equity investments to fair value. The Company recorded losses of $5.4
million and $30.5 million during the fourth and third quarters of 2000,
respectively, related to the write-down of equity investments to fair value.
(b) During the first quarter of 2001, the Company adopted Statement of Position
00-2, "Accounting By Producers or Distributors of Films." The Company
recorded income of $6.5 million related to the cumulative effect of
adoption.
(c) The quarterly results include the operations of Styleclick.com since its
acquisition on July 27, 2000, and PRC since its acquisition on April 5,
2000. During the third quarter of 2000, the Company recorded a pre-tax gain
of $104.6 million related to the Styleclick Transaction. During the fourth
quarter of 2000, the Company recorded a pre-tax charge of $145.6 million
related to the impairment of Styleclick goodwill.
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USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INDUSTRY SEGMENTS
The Company operates principally in five industry segments: Cable and
studios, HSN-US, ECS/ Styleclick, Emerging networks and HSN-International and
other.
Adjusted earnings before interest, income taxes, depreciation and
amortization ("Adjusted EBITDA") is defined as operating income plus (1)
depreciation and amortization, (2) amortization of cable distribution fees of
$44.0 million, $36.3 million and $26.7 million in fiscal years 2001, 2000 and
1999, respectively (3) amortization of non-cash distribution and marketing
expense and (4) disengagement expenses (described below) of $4.1 million in
2001. Adjusted EBITDA is presented here as a tool and as a valuation methodology
used by management in evaluating the business. Adjusted EBITDA does not purport
to represent cash provided by operating activities. Adjusted EBITDA should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. Adjusted
EBITDA may not be comparable to calculations of similarly titled measures
presented by other companies.
The following is a reconciliation of Operating Profit to Adjusted EBITDA for
2001, 2000 and 1999.
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Operating profit............................ $411,123 $264,274 $343,595
Depreciation and amortization............... 236,819 376,791 175,539
Amortization of cable distribution fees..... 43,975 36,322 26,680
Amortization of non cash compensation
expense................................... 9,799 9,704 6,314
Disengagement expenses...................... 4,052 -- --
-------- -------- --------
Adjusted EBITDA............................... $705,768 $687,091 $552,128
-------- -------- --------
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
REVENUES
Cable and studios........................ $1,633,130 $1,525,124 $1,304,683
HSN--U.S. (a)............................ 1,658,904 1,533,271 1,332,911
Electronic Commerce
Solutions/Styleclick................... 34,229 30,350 31,886
Trio, NWI, Crime, other emerging media... 24,086 20,332 1,188
HSN--International and other (b)......... 272,569 245,715 8,917
Other.................................... -- -- 6,894
---------- ---------- ----------
TOTAL.................................. $3,622,918 $3,354,792 $2,686,479
---------- ---------- ----------
182
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
OPERATING PROFIT (LOSS)
Cable and studios........................ $ 486,667 $ 435,116 $ 320,878
HSN--U.S.(a)(c).......................... 86,825 105,152 104,963
Electronic Commerce
Solutions/Styleclick................... (73,145) (230,021) (46,588)
Trio, NWI, Crime, other emerging media... (20,133) (13,244) (2,989)
HSN--International and other (b)......... (34,907) 4,641 (4,517)
Corporate & other........................ (34,184) (37,370) (28,152)
---------- ---------- ----------
TOTAL.................................. $ 411,123 $ 264,274 $ 343,595
---------- ---------- ----------
ADJUSTED EBITDA
Cable and studios........................ $ 613,587 $ 547,684 $ 434,084
HSN--U.S.(a)............................. 213,239 211,462 188,984
Electronic Commerce
Solutions/Styleclick................... (58,364) (50,163) (43,421)
Trio, NWI, Crime, other emerging media... (11,467) (7,120) (2,989)
HSN--International and other (b)......... (25,306) 10,740 (4,505)
Corporate & other........................ (25,921) (25,512) (20,025)
---------- ---------- ----------
TOTAL.................................. $ 705,768 $ 687,091 $ 552,128
---------- ---------- ----------
ASSETS
Cable and studios........................ $6,189,380 $5,885,301 $5,524,236
HSN--U.S................................. 1,849,946 1,855,512 1,771,560
Electronic Commerce
Solutions/Styleclick................... (42,751) 36,726 28,623
Trio, NWI, Crime, other emerging media... 97,376 100,943 200
HSN--International and other............. 212,549 133,654 37,840
Corporate & other........................ 99,395 (39,268) 110,467
---------- ---------- ----------
TOTAL.................................. $8,405,895 $7,972,868 $7,472,926
---------- ---------- ----------
DEPRECIATION AND AMORTIZATION OF
INTANGIBLES AND CABLE DISTRIBUTION FEES
Cable and studios........................ $ 122,008 $ 112,568 $ 113,034
HSN--U.S................................. 122,115 106,059 83,796
Electronic Commerce
Solutions/Styleclick................... 14,589 179,858 3,167
Trio, NWI, Crime, other emerging media... 8,666 6,124 --
HSN--International and other............. 9,601 6,099 12
Corporate & other........................ 3,815 2,405 2,210
---------- ---------- ----------
TOTAL.................................. $ 280,794 $ 413,113 $ 202,219
---------- ---------- ----------
183
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--INDUSTRY SEGMENTS (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
CAPITAL EXPENDITURES
Cable and studios........................ $ 12,907 $ 15,229 $ 6,771
HSN--U.S................................. 42,615 34,122 33,412
Electronic Commerce
Solutions/Styleclick................... 2,292 5,047 13,657
Trio, NWI, Crime, other emerging media... 61 600 --
HSN--International and other............. 6,031 18,105 13,746
Corporate & other........................ 4,590 21,723 3,095
---------- ---------- ----------
TOTAL.................................. $ 68,496 $ 94,826 $ 70,681
---------- ---------- ----------
- ------------------------
(a) Includes estimated revenue in 2000 generated by homes lost by HSN following
the sale of USA Broadcasting to Univision of $6.2 million. Adjusted EBITDA
for these homes is estimated at $0.9 million.
(b) Includes impact of foreign exchange fluctuations, which reduced revenue by
$44.0 million and $36.3 million in 2001 and 2000, respectively, if the
results are translated from Euros to U.S. dollars at a constant exchange
rate, using 1999 as the base year.
(c) 2001 includes $4.1 million of costs incurred related to the disengagement of
HSN from USA Broadcasting stations. Amounts primarily related to payments to
cable operators and related marketing expenses in the disengaged markets.
NOTE 18--FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies when available. The carrying
value of all current assets and current liabilities approximates fair value due
to their short-term nature.
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 779,592 $ 779,592 $ 71,816 $ 71,816
Long-term investments......................... 39,485 39,485 29,187 29,187
Long-term obligations......................... (532,424) (532,424) (524,116) (524,116)
NOTE 19--EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 2001, USA beneficially owned 46.7% of the outstanding common
stock of Hot Networks AG, a German stock corporation, the subsidiaries of which
operate electronic retailing operations in Europe. This investment is accounted
for using the equity method. Due to the
184
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
significance of the results of Hot Networks, AG, in relation to USA's results,
summary financial information for Hot Networks AG is presented below. There were
no significant operations in 1999.
AS OF AND FOR THE
YEARS ENDED
DECEMBER 31,
---------------------
2001 2000
--------- ---------
Current assets........................................ $ 17,597 $ 6,943
Noncurrent assets..................................... 157,274 42,784
Current liabilities................................... 46,085 37,531
Noncurrent liabilities................................ 194,249 23,668
Net sales............................................. 8,215 6,242
Gross profit.......................................... 277 1,301
Net loss.............................................. (51,453) (20,254)
To date, the Company has contributed approximately $125.3 million, including
$105.5 million in 2001, and recorded equity losses in unconsolidated
subsidiaries of $30.5 million, including $27.6 million in 2001.
NOTE 20--PROGRAM RIGHTS AND FILM COSTS
As of December 31, 2001, the liability for program rights, representing
future payments to be made under program contract agreements amounted to $510.1
million. Annual payments required are $259.3 million in 2002, $156.6 million in
2003, $70.8 million in 2004, $17.0 million in 2005, $3.9 million in 2006 and
$2.5 million in 2007 and thereafter. Amounts representing interest are $48.1
million and the present value of future payments is $462.0million.
As of December 31, 2001, the liability for film costs amounted to $95.9
million. Annual payments are $51.6 million in 2002, $42.4 million in 2003 and
$1.9 million in 2004.
NOTE 21--GUARANTEE OF NOTES
On November 23, 1998, USA and the Company completed an offering of $500.0
million 6 3/4% Senior Notes due 2005 (the "Old Notes"). In May 1999, the Old
Notes were exchanged in full for $500.0 million of new 6 3/4% Senior Notes due
2005 (the "Notes") that have terms that are substantially identical to the Old
Notes. Interest is payable on the Notes on May 15 and November 15 of each year,
commencing May 15, 1999. The Notes are jointly, severally, fully and
unconditionally guaranteed by certain subsidiaries of USA, including Holdco, a
non-wholly owned, direct subsidiary of USA, and all of the subsidiaries of the
Company (other than subsidiaries that are, individually and in the aggregate,
inconsequential to the Company on a consolidated basis) (collectively, the
"Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Holdco)
(the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly or
indirectly, by USA or the Company, as the case may be.
Separate financial statements for each of the Wholly Owned Subsidiary
Guarantors are not presented and such Wholly Owned Subsidiary Guarantors are not
filing separate reports under the Securities Exchange Act of 1934 because USA's
and the Company's management has determined that the information contained in
such documents would not be material to investors. USANi LLC and its
subsidiaries have no material restrictions on their ability to transfer amounts
to fund USA's operations.
185
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--GUARANTEE OF NOTES (CONTINUED)
During 2000, in conjunction with the Styleclick Transactions, Styleclick
became a non-guarantor. The following information is presented as of and for the
years ended December 31, 2001 and 2000:
As of and for the year ended December 31, 2001
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR LLC
LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Current assets.............. $ 796,233 $ 926,084 $ 21,419 $ -- $ 1,743,736
Property and equipment
net....................... 2,666 208,107 27,873 -- 238,646
Goodwill and other
intangible assets, net.... 2,260 4,881,063 86,936 -- 4,970,259
Investment in
subsidiaries.............. 5,727,463 101,680 -- (5,829,143) --
Other assets................ 540,368 2,026,746 13,100 (1,126,960) 1,453,254
----------- ------------ ---------- ------------ ------------
Total assets................ $ 7,068,990 $ 8,143,680 $ 149,328 $ (6,956,103) $ 8,405,895
----------- ------------ ---------- ------------ ------------
Current liabilities......... $ 31,135 $ 960,666 $ 47,804 $ -- $ 1,039,605
Long-term debt, less current
portion................... 498,515 998 -- -- 499,513
Other liabilities........... (337) 313,650 848 -- 314,161
Minority interest........... -- 10,313 -- 2,626 12,939
Interdivisional equity...... -- 6,858,053 100,676 (6,958,729) --
Stockholders' equity........ 6,539,677 -- -- -- 6,539,677
----------- ------------ ---------- ------------ ------------
Total liabilities and
shareholders' equity...... $ 7,068,990 $ 8,143,680 $ 149,328 $ (6,956,103) $ 8,405,895
----------- ------------ ---------- ------------ ------------
Revenue..................... $ -- $ 3,565,664 $ 57,254 $ -- $ 3,622,918
Operating expenses.......... (34,153) (3,029,742) (147,900) -- (3,211,795)
Interest expense, net....... 4,668 (34,365) 189 -- (29,508)
Gain on sale of
securities................ -- -- -- -- --
Other income (expense),
net....................... 261,200 (15,866) (7,898) (277,831) (40,395)
Provision for income
taxes..................... 106,154 (13,413) (1,208) (104,666) (13,133)
Minority interest........... -- (2,948) (1,979) 14,709 9,782
----------- ------------ ---------- ------------ ------------
Net (loss) income before
cumulative effect on
accounting change......... $ 337,869 $ 469,330 $ (101,542) $ (367,788) 337,869
Cumulative effect on
accounting change......... 6,470 6,470 -- (6,470) 6,470
----------- ------------ ---------- ------------ ------------
Net (loss) income........... $ 344,339 $ 475,800 $ (101,542) $ (374,258) $ 344,339
----------- ------------ ---------- ------------ ------------
Cash flows from
operations................ $ (24,108) $ 603,601 $ (77,354) $ -- $ 502,139
Cash flows used in investing
activities................ $ (7,774) $ (192,034) $ 6,223 $ -- $ (193,585)
Cash flows from financing
activities................ $ 743,684 $ (392,742) $ 50,391 $ -- $ 401,333
Effect of exchange rate..... (417) (1,694) -- -- (2,111)
Cash at the beginning of the
period.................... 78,079 (22,574) 16,311 -- 71,816
----------- ------------ ---------- ------------ ------------
Cash at the end of the
period.................... $ 789,464 $ (5,443) $ (4,429) $ -- $ 779,592
----------- ------------ ---------- ------------ ------------
186
USANI LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--GUARANTEE OF NOTES (CONTINUED)
As of and for the year ended December 31, 2000
WHOLLY
OWNED
USANI SUBSIDIARY NON-GUARANTOR LLC
LLC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Current assets.............. $ 80,996 $ 884,464 $ 41,018 $ -- $ 1,006,478
Property and equipment
net....................... 24,203 211,137 16,300 -- 251,640
Goodwill and other
intangible assets, net.... -- 4,997,365 102,111 -- 5,099,476
Investment in
subsidiaries.............. 5,596,407 99,345 -- (5,695,752) --
Other assets................ 966,855 1,653,553 -- (1,005,134) 1,615,274
----------- ------------ ---------- ------------ ------------
Total assets................ $ 6,668,461 $ 7,845,864 $ 159,429 $ (6,700,886) $ 7,972,868
----------- ------------ ---------- ------------ ------------
Current liabilities......... $ 30,517 $ 873,079 $ 19,681 $ -- $ 923,277
Long-term debt, less current
portion................... 498,213 5,850 -- -- 504,063
Other liabilities........... -- 374,320 26,230 (23,415) 377,135
Minority interest........... -- 15,082 -- 13,580 28,662
Interdivisional equity...... -- 6,577,533 113,518 (6,691,051) --
Stockholders' equity........ 6,139,731 -- -- -- 6,139,731
----------- ------------ ---------- ------------ ------------
Total liabilities and
shareholders' equity...... $ 6,668,461 $ 7,845,864 $ 159,429 $ (6,700,886) $ 7,972,868
----------- ------------ ---------- ------------ ------------
Revenue..................... $ -- $ 3,308,274 $ 46,518 $ -- $ 3,354,792
Operating expenses.......... (37,368) (2,766,943) (286,207) -- (3,090,518)
Interest expense, net....... 22,208 (30,531) -- -- (8,323)
Gain on sale of
securities................ -- -- -- -- --
Other income (expense),
net....................... 345,037 (5,189) 237 (281,319) 58,766
Provision for income
taxes..................... -- (25,132) (1,305) -- (26,437)
Minority interest........... -- (5,196) -- 46,793 41,597
----------- ------------ ---------- ------------ ------------
Net (loss) income........... $ 329,877 $ 475,283 $ (240,757) $ (234,526) $ 329,877
----------- ------------ ---------- ------------ ------------
Cash flows from
operations................ $ (9,402) $ 411,291 $ (41,650) $ -- $ 360,239
Cash flows used in investing
activities................ $ (6,061) $ (232,255) $ (7,484) $ -- $ (245,800)
Cash flows from financing
activities................ $ (128,052) $ (228,323) $ 65,078 $ -- $ (291,297)
Effect of exchange rate..... -- 1,200 -- -- 1,200
Cash at the beginning of the
period.................... 221,594 25,513 367 -- 247,474
----------- ------------ ---------- ------------ ------------
Cash at the end of the
period.................... $ 78,079 $ (22,574) $ 16,311 $ -- $ 71,816
----------- ------------ ---------- ------------ ------------
1999 is not presented because non-guarantor subsidiaries for these periods
were not material.
187
EXHIBIT 3.3
USA NETWORKS, INC.
BY-LAW AMENDMENT
RESOLVED, that, pursuant to its powers under the Certificate of
Incorporation, the Board of Directors hereby amends Article II, Section 6 of the
By-Laws so that, as so amended and restated, such Section shall read in its
entirety as set forth in EXHIBIT A hereto.
EXHIBIT A
SECTION 6. QUORUM. Except as otherwise required by law, the holders of
shares representing a majority of the voting power of the Corporation entitled
to vote, present in person or represented by proxy, shall constitute a quorum at
all meetings of the stockholders for the transaction of business; PROVIDED,
HOWEVER, that if such quorum shall not be present or represented at any meeting
of the stockholders, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. If at such adjourned meeting, a quorum
shall be present or represented, any business may be transacted that might have
been transacted at the meeting as originally notified. When a quorum is present
at any meeting, the vote of the holders of shares representing a majority of the
voting power of the Corporation entitled to vote present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the Delaware
General Corporate Law or of the Certificate of Incorporation, a different vote
is required, in which case such express provision shall govern and control the
decision of such question.
By law amendment 1.31.02
EXHIBIT 3.4
[USA NETWORKS INC LOGO]
-----------------
GENERAL BY-LAWS
AMENDED AND RESTATED AS OF
JANUARY 31, 2002
AMENDED AND RESTATED BY-LAWS
OF
USA NETWORKS, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The registered office of the Corporation
shall be located in the City of Wilmington, County of New Castle, State of
Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETING. Meetings of stockholders may be held at such
place, either within or without the State of Delaware, as may be designated by
the Board of Directors. If no designation is made, the place of the meeting
shall be the principal office of the Corporation.
SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders shall
be held at such date and time as may be fixed by resolution of the Board of
Directors.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders may be
called by the Chairman of the Board or a majority of the Board of Directors.
SECTION 4. NOTICE. Written notice stating the date, time and
place of the meeting, and in case of a special meeting, the purpose or purposes
thereof, shall be given to each stockholder entitled to vote thereat not less
than ten (10) nor more than sixty (60) days prior thereto, either personally or
by mail, facsimile or telegraph, addressed to each stockholder at his address as
it appears on the records of the Corporation. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be by facsimile, such notice shall be
deemed to be delivered when confirmation of receipt is received by the sender.
If notice be by telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. Such further notice shall be
given as may be required by law. Meetings may be held without notice if all
stockholders entitled to vote are present, or if notice is waived by those not
present. Any previously scheduled meeting of the stockholders may be postponed,
and (unless the Certificate of Incorporation otherwise provides) any special
meeting of the stockholders may be canceled, by resolution of the Board of
Directors upon public notice given prior to the date previously scheduled for
such meeting of stockholders.
SECTION 5. ADJOURNED MEETINGS. The Chairman of the meeting or a majority of
the voting power of the shares so represented may adjourn the meeting from time
to time, whether or not there is a quorum. When a meeting is adjourned to
another time or place, except as required by law, notice of the adjourned
meeting need not be given if the time and place thereof are announced at the
meeting at which the adjournment is taken, if the adjournment is for not more
than thirty (30) days, and if no new record date is fixed for the adjourned
meeting. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting.
SECTION 6. QUORUM. Except as otherwise required by law, the holders
of shares representing a majority of the voting power of the Corporation
entitled to vote, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business; PROVIDED, HOWEVER, that if such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. If at such adjourned meeting, a quorum shall be present or
represented, any business may be transacted that might have been transacted at
the meeting as originally notified. When a quorum is present at any meeting, the
vote of the holders of shares representing a majority of the voting power of the
Corporation entitled to vote present in person or represented by proxy shall
decide any question brought before such meeting, unless the question is one upon
which by express provision of the Delaware General Corporate Law or of the
Certificate of Incorporation, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
SECTION 7. VOTING. Each stockholder shall at every meeting of the
stockholders be entitled to vote in person or by proxy each share of the class
of capital stock having voting power held by such stockholder.
SECTION 8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of shares
of Common Stock to elect directors under specified circumstances, a plurality of
the votes cast thereat shall elect directors. Except as otherwise provided by
law, the Certificate of Incorporation, or these By-Laws, in all matters other
than the election of directors, the affirmative vote of a majority of the voting
power of the shares present in person or represented by proxy at the meeting and
entitled to vote on the matter shall be the act of the stockholders.
SECTION 9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board
of Directors by resolution shall appoint one or more inspectors, which inspector
or inspectors may include individuals who serve the Corporation in other
capacities, including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of stockholders, the Chairman of
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging the duties of an inspector, shall take and sign an
oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of the inspector's ability. The inspectors shall have the
duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at a meeting.
SECTION 10. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all of the shares entitled
to vote thereon were present and voted, provided that prompt notice of such
action shall be given to those stockholders who have not so consented in writing
to such action without a meeting
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TENURE. The business and affairs of the Corporation
shall be managed by the Board of Directors, the number thereof to be determined
from time to time by
resolution of the Board of Directors. Each director shall serve for a term of
one year from the date of his election and until his successor is elected.
Directors need not be stockholders.
SECTION 2. RESIGNATION OR REMOVAL. Any director may at any time resign
by delivering to the Board of Directors his resignation in writing, to take
effect no later than ten days thereafter. Any director or the entire Board of
Directors may at any time be removed effective immediately, with or without
cause, by the vote, either in person or represented by proxy, of a majority of
the voting power of shares of stock issued and outstanding of the class or
classes that elected such director and entitled to vote at a special meeting
held for such purpose or by the written consent of a majority of the voting
power of shares of stock issued and outstanding of the class or classes that
elected such director.
SECTION 3. VACANCIES. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by the
vote of a majority of the remaining directors, though less than a quorum, or a
majority of the voting power of shares of stock issued and outstanding and
entitled to vote at a special meeting held for such purpose or by the written
consent of a majority of the voting power of shares of stock issued and
outstanding. The directors so chosen shall hold office until the next annual
election and until their respective successors are duly elected.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such dates, times and places as may be designated by the
Chairman of the Board, and shall be held at least once each year.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board or a majority of the
directors. The person or persons calling a special meeting of the Board of
Directors may fix a place and time within or without the State of Delaware for
holding such meeting.
SECTION 6. NOTICE. Notice of any regular meeting or a special meeting
shall be given to each director, either orally, by facsimile or by hand
delivery, addressed to each director at his address as it appears on the records
of the Corporation. If notice be by facsimile, such notice shall be deemed to be
adequately delivered when the notice is transmitted at least twenty-four (24)
hours before such meeting. If by telephone or by hand delivery, the notice shall
be given at least twenty-four (24) hours prior to the time set for the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice of
such meeting. A meeting may be held at any time without notice if all the
directors are present or if those not present waive notice of the meeting in
accordance with Article IX of these By-Laws.
SECTION 7. QUORUM. At all meetings of the Board of Directors, a majority
of the total number of directors shall constitute a quorum for the transaction
of business and, unless otherwise provided in the Certificate of Incorporation
or these By-Laws, the act of a majority of the directors present at any meeting
at which there is a quorum shall be an act of the Board of Directors. If a
quorum is not present at any meeting of the Board of Directors, the directors
present may adjourn the meeting from time to time, without notice, until a
quorum shall be present. The directors present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough directors to leave less than a quorum. A director present at a meeting
shall be counted in determining the presence of a quorum, regardless of whether
a contract or transaction between the Corporation and any other Corporation,
partnership, association, or other reorganization in which such director is a
director or officer or has a financial interest, is authorized or considered at
such meeting.
SECTION 8. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing and such written
consent is filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 9. ACTION BY CONFERENCE TELEPHONE. Members of the Board of
Directors or any committee thereof may participate in a meeting of such Board of
Directors or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 10. COMMITTEES. The Board of Directors, by resolution adopted by
a majority of the whole Board of Directors, may designate one (1) or more
committees, each committee to consist of two (2) or more directors. The Board of
Directors may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of any member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in such resolution, shall have and may exercise all of the powers of
the Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it, except that no committee shall have the power or
authority to amend the Certificate of Incorporation, to adopt an agreement of
merger or consolidation, to recommend to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
to recommend to the stockholders a dissolution, to amend the By-Laws of the
Corporation, to declare a dividend, or to authorize the issuance of stock.
SECTION 11. COMPENSATION OF DIRECTORS. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER AND SALARIES. The officers of the Corporation shall
consist of a Chief Executive Officer (the "CEO") who shall also be the Chairman
of the Board (the "Chairman"), a Secretary, a Treasurer, and such other officers
and assistant officers and agents as may be deemed necessary by the Board of
Directors. Any two (2) or more offices may be held by the same person.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected by the Board of Directors at the first meeting of the Board of
Directors following the stockholders' annual meeting, and shall serve for a term
of one (1) year and until a successor is elected by the Board of Directors.
Unless otherwise provided in the Certificate of Incorporation or these By-Laws,
any officer appointed by the Board of Directors may be removed, with or without
cause, at any time by the CEO or by the Board of Directors. Each officer shall
hold his office until his successor is appointed or until his earlier
resignation, removal from office, or death. All officers elected by the Board of
Directors shall each have such powers and duties as generally pertain to their
respective offices, subject to the specific provisions of this Article IV. Such
officers shall also have such powers and duties as from time to time may be
conferred by the Board of Directors or by any committee thereof. The Board or
any committee thereof may from time to time elect, or the CEO may appoint, such
other officers (including a President, one or more Vice Presidents, Assistant
Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents,
as may be necessary or desirable for the conduct of the business of the
Corporation. Such other officers and agents shall have such duties and shall
hold their offices for such terms as shall be provided in these By-Laws or as
may be prescribed by the Board or such committee or by the CEO, as the case may
be.
SECTION 3. THE CHIEF EXECUTIVE OFFICER. The CEO shall be elected by the
Board of Directors from their own number and shall be the Chairman of the Board
and shall preside at all meetings of the stockholders and of the Board of
Directors. The CEO shall be responsible for the general management of the
affairs of the Corporation and shall perform all duties incidental to his
office. The CEO shall be empowered to sign all certificates, contracts and other
instruments of the Corporation, and to do all acts that are authorized by the
Board of Directors, and shall, in general, have such other duties and
responsibilities as are assigned consistent with the authority of a Chief
Executive Officer and Chairman of the Board of a corporation.
SECTION 4. THE PRESIDENT. The Board of Directors or the CEO may elect a
President to have such duties and responsibilities as from time to time may be
assigned to him by the CEO or the Board of Directors. The President shall be
empowered to sign all certificates, contracts and other instruments of the
corporation, and to do all acts which are authorized by the CEO or the Board of
Directors, and shall, in general, have such other duties and responsibilities as
are assigned consistent with the authority of a President of a corporation.
SECTION 5. VICE PRESIDENTS. The Board of Directors or the CEO may from
time to time name one or more Vice Presidents that may include the designation
of Executive Vice Presidents and Senior Vice Presidents all of whom shall
perform such duties as from time to time may be assigned to him by the CEO or
the Board of Directors.
SECTION 6. THE SECRETARY. The Secretary shall keep the minutes of the
proceedings of the stockholders and the Board of Directors; the Secretary shall
give, or cause to be given, all notices in accordance with the provisions of
these By-Laws or as required by law, shall be custodian of the corporate records
and of the seal of the Corporation, and, in general, shall perform such other
duties as may from time to time be assigned by the CEO or the Board of
Directors.
SECTION 7. TREASURER. The Treasurer or, if one is designated by the
Board of Directors, the Chief Financial Officer of the Corporation, shall act as
the chief financial officer of the Corporation, shall have the custody of the
corporate funds and securities, shall keep, or cause to be kept, correct and
complete books and records of account, including full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, shall deposit
all monies and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors, and in general
shall perform all duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the CEO or the Board of
Directors.
SECTION 8. ASSISTANT SECRETARIES. The Assistant Secretaries, if any, in
general shall perform such duties as from time to time may be assigned to them
by the Secretary or by the Board of Directors, and shall in the absence or
incapacity of the Secretary, perform his functions.
SECTION 9. ASSISTANT TREASURERS. The Assistant Treasurers, if any, in
general shall perform such duties as from time to time may be assigned to them
by the Treasurer or by the Board of Directors, and shall in the absence or
incapacity of the Treasurer perform his functions.
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. SIGNATURE BY OFFICERS. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in the name of the
Corporation by the CEO, the Chairman or President, if any (or any Vice
President), and the Secretary (or an Assistant Secretary) of the Corporation,
certifying the number of shares owned by the stockholder in the Corporation.
SECTION 2. FACSIMILE SIGNATURES. The signature of the CEO, Chairman,
President, Vice President, Treasurer or Assistant Treasurer, Secretary or
Assistant Secretary may be a facsimile. In case any officer or officers who have
signed, or whose facsimile signature or signatures have been used on any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates have been delivered by the Corporation, such
certificate or certificates may nevertheless be adopted by the Corporation and
be issued and delivered as though the person or persons who signed such
certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to be such officer or officers of the Corporation.
SECTION3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate(s) to be issued by the Corporation to replace any certificate(s)
alleged to have been lost or destroyed, upon its receipt of an affidavit of that
fact by the person claiming the certificate(s) of stock to be lost or destroyed.
When authorizing such issue of a new certificate(s), the Board of Directors may,
in its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost or destroyed certificate(s), or such owner's legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate(s) alleged to have been lost or destroyed.
SECTION 4. TRANSFER OF STOCK. Upon surrender to the Corporation or its
transfer agent of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of
Directors may close the stock transfer books of the Corporation for a period of
not more than sixty (60) nor less than ten (10) days preceding the date of any
meeting of stockholders, or the date for payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect or for a period of not more than
sixty (60) nor less than ten (10) days in connection with obtaining the consent
of stockholders for any purpose. In lieu of closing the stock transfer books,
the Board of Directors may fix in advance a date of not more than sixty (60) nor
less than ten (10) days preceding the date of any dividend, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, or a date in connection with obtaining such
consent, as a record date for the determination of the stockholders entitled to
notice of, and to vote at, any such meeting, and any adjournment thereof, or
entitled to receive payment of any such dividend, or to any such allotment of
rights, or to exercise the rights in respect of any change, conversion or
exchange of capital stock, or to give such consent. In such case and
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date, such stockholders as shall be stockholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting and any adjournment thereof, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, or to give such
consent, as the case may be.
SECTION 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner. Except as otherwise
provided by law, the Corporation shall not be bound to recognize any equitable
or other claim to or interest in such shares on the part of any other person
whether or not it shall have express or other notice thereof.
ARTICLE VI
CONTRACT, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. When the execution of any contract or other
instrument has been authorized by the Board of Directors without specification
of the executing officers, the CEO, the President, any Vice President, the
Treasurer or Assistant Treasurer and the Secretary, or any Assistant Secretary,
may execute the same in the name of and on behalf of the Corporation and may
affix the corporate seal thereto.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors.
SECTION 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 4. ACCOUNTS. Bank accounts of the Corporation shall be opened,
and deposits made thereto, by such officers or other persons as the Board of
Directors may from time to time designate.
ARTICLE VII
DIVIDENDS
SECTION 1. DECLARATION OF DIVIDENDS. Subject to the provisions, if any, of
the Certificate of Incorporation, dividends upon the capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or
contractual rights, or in shares of the Corporation's capital stock.
SECTION 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors shall think conducive to the
interests of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall be established by the Board of
Directors.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice whatever is required to be given by law, the
Certificate of Incorporation or these By-Laws, a written waiver thereof, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting.
ARTICLE X
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
ARTICLE XI
AMENDMENTS
Except as expressly provided otherwise by the Delaware General
Corporation Law, the Certificate of Incorporation, or other provisions of these
By-Laws, these By-Laws may be altered, amended or repealed and new By-Laws
adopted at any regular or special meeting of the Board of Directors by an
affirmative vote of a majority of all directors.
ARTICLE XII
INDEMNIFICATION AND INSURANCE
SECTION 1. INDEMNIFICATION. The Corporation shall, to the fullest extent
authorized by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit, investigation or proceeding, whether civil, criminal or
administrative (other than an action by or in the right of the Corporation) by
reason of the fact that he or a person of whom he is the legal representative is
or was a director or officer of the Corporation, or is or was a director or
officer of the Corporation serving at the request of the Corporation as a
director, officer or employee of another Corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise (whether the basis of
such proceeding is alleged action in an official capacity as a director or
officer or in any other capacity while serving as a director or officer) against
all expenses, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by him in connection therewith; PROVIDED,
HOWEVER, that except as provided in this By-Law, the Corporation shall indemnify
any such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors. The right to indemnification conferred in
this By-Law shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition, such advances to be paid by the Corporation
within 20 days after the receipt by the Corporation of a statement or statements
from the claimant requesting such advance or advances from time to time;
PROVIDED, HOWEVER, that if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred by a director or officer in his
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking by or on behalf of such director or officer,
to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this By-Law or
otherwise.
To obtain indemnification under this By-Law, a claimant shall
submit to the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to the claimant and is
reasonably necessary to determine whether and to what extent the claimant is
entitled to indemnification. Any indemnification (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct. Upon
written request by a claimant for indemnification pursuant to the preceding
sentence, a determination, if required by applicable law, with respect to a
claimant's entitlement thereto shall be made as follows: (i) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit, investigation or proceeding, or (ii) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the stockholders of the company. If it is so determined that the
claimant is entitled to indemnification, payment to the claimant shall be made
within 10 days after such determination.
If a claim under this By-Law is not paid in full by the
Corporation within 20 days after a written claim pursuant to this By-Law has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standard of conduct which makes it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors or stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board of Directors or
stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
If a determination shall have been made pursuant to this By-Law
that the claimant is entitled to indemnification, the Corporation shall be bound
by such determination in any judicial proceeding commenced pursuant to this
By-Law. Furthermore, the Corporation shall be precluded from asserting in any
judicial proceeding commenced pursuant to this By-Law that the procedures and
presumptions of this By-Law are not valid, binding and enforceable and shall
stipulate in such proceeding that the Corporation is bound by all the provisions
of this By-Law.
The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in this
By-Law shall not be exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-Law,
agreement, contract, vote of stockholders or disinterested directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that indemnification shall be made to the fullest extent permitted
by law. No repeal or modification of this By-Law shall in any way diminish or
adversely affect the rights of any director or officer of the Corporation (or
employee or agent of the Corporation to which rights to indemnification have
been granted) hereunder in respect of any occurrence or matter arising prior to
any such repeal or modification.
The indemnification and advancement of expenses shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to be
paid by the Corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the Corporation to
the fullest extent of the provisions of this By-Law with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
If any provision or provisions of this By-Law shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
legality and enforceability of the remaining
provisions of this By-Law (including, without limitation, each portion of any
paragraph of this By-Law containing any such provision held to be invalid,
illegal or unenforceable, that is not itself held to be invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (2) to
the fullest extent possible, the provisions of this By-Law (including, without
limitation, each such portion of any paragraph of this By-Law containing any
such provision held to be invalid, illegal or unenforceable) shall be construed
so as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Any notice, request or other communication required or permitted
to be given to the Corporation under this By-Law shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.
SECTION 2. INSURANCE. The Corporation may purchase and maintain insurance
on behalf of any person who is or will be a director, officer, employee or agent
of the Corporation, or is or will be a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another Corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any expense, liability or loss, whether
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the General Corporation Law of the State
of Delaware. To the extent that the Corporation maintains any policy or policies
providing such insurance, each such director or officer, and each such agent or
employee to which rights to indemnification have been granted, shall be covered
by such policy or policies in accordance with its or their terms to the maximum
extent of the coverage thereunder for any such director, officer, employee or
agent.
EXHIBIT 4.3
CERTIFICATE OF DESIGNATIONS
of
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
of
USA NETWORKS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
--------------
USA Networks, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the unanimous consent of the Board of Directors of the Corporation as required
by Section 151 of the General Corporation Law on November 30, 2001.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation in accordance with the provisions of the
Amended Certificate of Incorporation of the Corporation, a series of Convertible
Preferred Stock, par value $.01 per share, of the Corporation, be and hereby is
created, and that the number of shares thereof and the voting powers,
designations, preferences, limitations, restrictions, relative rights and
distinguishing designation of the shares of such series are as follows:
SECTION 1. DESIGNATION AND AMOUNT. The designation of such series of
Preferred Stock authorized by this resolution shall be the Series A Cumulative
Convertible Preferred Stock (the "CONVERTIBLE PREFERRED STOCK"). The number of
shares of Convertible Preferred Stock shall be 13,125,000. The face value of the
Convertible Preferred Stock shall be $50.00 (the "FACE VALUE").
SECTION 2. RANK AND TERM. All shares of Convertible Preferred Stock
shall rank prior, both as to payment of dividends and as to distributions of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, to all of the now or hereafter issued classes of
common stock, $0.01 par value per share, of the Corporation (the "COMMON
STOCK"). No other preferred stock of the Corporation shall rank senior to the
Convertible Preferred Stock with respect to payment upon liquidation or payment
of dividends without the consent of the holders of record of the Convertible
Preferred Stock (the "HOLDERS") representing a majority of the Convertible
Preferred Stock then outstanding. At the close of business on February 4, 2022
(the "EXPIRATION DATE"), without any further action on the part of the
Corporation or any Holder, but subject to payment of all accrued and unpaid
dividends on the Convertible Preferred Stock, all then outstanding shares of
Convertible Preferred Stock shall automatically be
1
converted to common stock in conformance with the provisions of Section 6 and no
shares of Convertible Preferred Stock shall thereafter be issued or outstanding.
SECTION 3. DIVIDENDS. The Holders shall be entitled to receive,
whether or not dividends are declared by the Board out of funds at the time
legally available therefor, annual dividends in the amount of (a) 1.99% of the
Face Value per annum per share of Convertible Preferred Stock, plus (b) the
excess, if any, of the value of any dividends paid with respect to the number of
shares of Common Stock into which each outstanding share of the Convertible
Preferred Stock is then convertible over the amount described in clause (a), and
no more. Dividends on the Convertible Preferred Stock shall be fully cumulative,
shall accrue without interest from the date of first issuance, and shall be
payable quarterly in arrears on February 15, May 15, August 15 and November 15
(each, a "DIVIDEND DATE") of each year (except that if any such date is a
Saturday, Sunday or Legal Holiday, then such dividend shall be payable on the
next succeeding day that is not a Saturday, Sunday or Legal Holiday) to holders
of record as they appear on the stock transfer books of the Corporation on the
close of business on the fifth Business Day prior to such Dividend Date. All
dividends on the Convertible Preferred Stock are payable, at the Corporation's
option, in cash, shares of Common Stock or any combination thereof, with the
Common Stock valued at the Market Price (as defined below) as of the applicable
Dividend Date. For purposes hereof, the term "LEGAL HOLIDAY" shall mean any day
on which banking institutions are authorized to close in New York, New York.
Dividends on account of arrears for any past dividend period may be declared and
paid at any time, without reference to any regular dividend payment date. The
amount of dividends payable per share of Convertible Preferred Stock with
respect to the amounts determined pursuant to clause (a) of this paragraph for
each quarterly dividend period shall be computed by dividing the annual amount
determined pursuant to such clause (a) by four. The amount of dividends payable
for the initial dividend period and any period shorter than a full quarterly
dividend period shall be computed on the basis of the number of days actually
elapsed of a 360-day year, provided that in no event shall the dividend amount
for any period shorter than a full quarterly dividend period be greater than the
full quarterly dividend amount.
If the Corporation elects to pay all or any portion of a dividend in
shares of Common Stock, the number of shares of Common Stock to be delivered by
the Corporation for each share of Convertible Preferred Stock held by a Holder
shall equal (x) the cash value of the dividend (or portion of a dividend) to be
paid with Common Stock divided by (y) the Market Price. The "MARKET PRICE" shall
be equal to the average of the daily Closing Prices (as defined below) of the
Common Stock for the 10 consecutive Trading Days (as defined below) ending on
the second Trading Day immediately preceding the applicable Dividend Date (or
other date with respect to which the Market Price is to be determined). The
"CLOSING PRICE" for each Trading Day shall be the last reported sales price
regular way, during regular trading hours, or, in case no such reported sales
takes place on such day, the average of the closing bid and asked prices regular
way, during regular trading hours, for such day, in each case on The Nasdaq
Stock Market or, if not listed or quoted on such market, on the principal
national securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if not listed or admitted to trading on a national
securities exchange, the last sale price regular way for
2
the Common Stock as published by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or if such last sale price is not so
published by NASDAQ or if no such sale takes place on such day, the mean between
the closing bid and asked prices for the Common Stock as published by NASDAQ. If
the shares of Common Stock are not listed or admitted to trading on a national
securities exchange or quoted by NASDAQ, the Market Price shall be determined in
good faith by the Board of Directors of the Corporation or, if such
determination cannot be made, by a nationally recognized independent investment
banking firm selected in good faith by the Board of Directors of the
Corporation. "TRADING DAY" shall mean a day on which the securities exchange
utilized for the purpose of calculating the Market Price shall be open for
business or, if the shares of Common Stock shall not be listed on such exchange
for such period, a day with respect to which quotations of the character
referred to in the next preceding sentence shall be reported. In lieu of any
fractional share of Common Stock which would otherwise be issued in payment for
a dividend on Convertible Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount in cash (computed
to the nearest cent) equal to the Market Price multiplied by the fractional
interest that otherwise would have been deliverable as a dividend on such
Convertible Preferred Stock.
On each Dividend Date all dividends which shall have accrued on each
share of Convertible Preferred Stock outstanding on such Dividend Date shall
accumulate and be deemed to become "due" whether or not there shall be funds
legally available for the payment thereof. Any dividend which shall not be paid
on the Dividend Date on which it shall become due shall be deemed to be "past
due" until such dividend shall be paid or until the share of Convertible
Preferred Stock with respect to which such dividend became due shall no longer
be outstanding, whichever is the earlier to occur. No interest, sum of money in
lieu of interest, or other property or securities shall be payable in respect of
any dividend payment or payments which are past due. Dividends paid on shares of
Convertible Preferred Stock in an amount less than the total amount of such
dividends at the time accumulated and payable on such shares shall be allocated
PRO RATA on a share-by-share basis among all such shares at the time
outstanding.
No dividends shall be paid or declared and set apart for payment on
the Corporation's Common Stock or on any class or series of the Corporation's
capital stock ranking, as to dividends, on a parity with the Convertible
Preferred Stock (the "PARITY DIVIDEND STOCK") for any period unless full
cumulative dividends have been, or contemporaneously are, paid or declared and
set apart for such payment on the Convertible Preferred Stock for all dividend
payment periods terminating on or prior to the date of payment of such full
cumulative dividends. No dividends shall be paid or declared and set apart for
payment on the Convertible Preferred Stock for any period unless cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for payment on the Parity Dividend Stock for all dividend periods terminating on
or prior to the date of payment of such full cumulative dividends. When
dividends are not paid in full upon the Convertible Preferred Stock and the
Parity Dividend Stock, all dividends paid or declared and set aside for payment
upon shares of Convertible Preferred Stock and the Parity Dividend Stock shall
be paid or declared and set aside for payment PRO RATA so that the amount of
dividends paid or declared and set aside for payment per share on the
3
Convertible Preferred Stock and the Parity Dividend Stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends per share on
the shares of Convertible Preferred Stock and the Parity Dividend Stock bear to
each other.
SECTION 4. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Holders shall be entitled to receive out of the assets of the Corporation,
whether such assets are stated capital or surplus of any nature, an amount equal
to the dividends accrued and unpaid thereon to the date of final distribution to
such Holders, whether or not declared, without interest, plus a sum per share of
Convertible Preferred Stock equal to the greater of (a) $50.00 and (b) the
liquidating distribution that would be paid with respect to the number of shares
of Common Stock into which a share of Convertible Preferred Stock is then
convertible, and no more. Such final distribution on the shares of the
Convertible Preferred Stock shall be made before any payment is made or assets
are distributed to the holders of Common Stock or any other class or series of
the Corporation's capital stock ranking junior as to liquidation rights to the
Convertible Preferred Stock (the "JUNIOR LIQUIDATION STOCK"). In the event the
assets of the Corporation available for distribution to stockholders upon any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full the amounts payable with
respect to the Convertible Preferred Stock and any other class or series of the
Corporation's capital stock which may hereafter be created having parity as to
liquidation rights with the Convertible Preferred Stock (the "PARITY LIQUIDATION
STOCK"), the Holders and the holders of the Parity Liquidation Stock shall share
ratably in any distribution of assets of the Corporation in proportion to the
full respective preferential amounts to which they are entitled (but only to the
extent of such preferential amounts). After payment in full of the liquidation
preferences of the shares of Convertible Preferred Stock, the Holders shall not
be entitled to any further participation in any distribution of assets by the
Corporation by virtue of their ownership of the Convertible Preferred Stock.
Except as set forth in Section 6(i), neither a consolidation, merger or other
business combination of the Corporation with or into another corporation or
other entity nor a sale or transfer of all or part of the Corporation's assets
for cash, securities or other property or any combination thereof shall be
considered a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 4 (unless in connection therewith the liquidation of
the Corporation is specifically approved).
A Holder shall not be entitled to receive any payment owed for such
shares under this Section 4 until such Holder shall cause to be delivered to the
Corporation (i) the certificate(s) representing such shares of Convertible
Preferred Stock (or, in the event such certificate(s) have been lost or
destroyed, an affidavit of the Holder of loss or destruction reasonably
satisfactory to the Corporation as well as other support as reasonably requested
by the Corporation) and (ii) transfer instrument(s) reasonably satisfactory to
the Corporation and sufficient to transfer such shares of Convertible Preferred
Stock to the Corporation free of any adverse interest. No interest shall accrue
on any payment upon liquidation after the due date thereof.
SECTION 5. REDEMPTION. (a) REDEMPTION AT THE OPTION OF THE
CORPORATION. Commencing on the tenth anniversary of the Effective Time (for the
purposes
4
hereof, the "EFFECTIVE TIME" shall be February 4, 2002), the Corporation, at its
option, may from time to time redeem all or a portion of (but if a portion,
shares representing at least 25% of the originally issued aggregate Face Value,
unless there shall remain outstanding less than 25% of such amount, in which
case all outstanding shares may be redeemed) of the outstanding Convertible
Preferred Stock at a redemption price equal to the Face Value plus all dividends
on the Convertible Preferred Stock being redeemed that are accrued and unpaid
thereon, whether or not declared or due, to the date fixed for redemption (the
"REDEMPTION DATE"), such sum being hereinafter referred to as the "REDEMPTION
PRICE". The Redemption Price may be paid in cash, shares of Common Stock or a
combination thereof, at the option of the Corporation.
If the Corporation elects to pay the Redemption Price in Common Stock,
the number of shares of Common Stock to be paid per share of Convertible
Preferred Stock being redeemed shall equal (x) the then-current Redemption Price
of the Convertible Preferred Stock (or portion thereof to be paid in shares of
Common Stock), divided by (y) the Market Price as of the date of the notice for
redemption described below.
In case of the redemption pursuant to this Section 5(a) of less than
all of the then outstanding Convertible Preferred Stock, the shares of
Convertible Preferred Stock to be redeemed shall be redeemed PRO RATA or by lot
or in such other manner as the Board of Directors may determine.
Not more than 60 nor less than 20 days prior to the Redemption Date,
notice by first class mail, postage prepaid, shall be given to each Holder of
Convertible Preferred Stock to be redeemed, at such Holder's address as it shall
appear upon the stock transfer books of the Corporation. Each such notice of
redemption shall specify the Redemption Date, the Redemption Price, the place or
places of payment, that payment will be made upon presentation and surrender of
the certificate(s) evidencing the shares of Convertible Preferred Stock to be
redeemed, that on and after the Redemption Date, dividends will cease to accrue
on such shares of Convertible Preferred Stock to be redeemed, the then effective
conversion price pursuant to Section 6 and that the right of holders to convert
such shares of Convertible Preferred Stock to be redeemed shall terminate at the
close of business on the Redemption Date (unless the Corporation defaults in the
payment of the Redemption Price).
Any notice that is mailed as provided in Section 13 shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice; and failure to give such notice by mail, or any defect in
such notice, to the Holders of any shares designated for redemption shall not
affect the validity of the proceedings for the redemption of any other shares of
Convertible Preferred Stock. On or after the Redemption Date as stated in such
notice, each Holder of the shares called for redemption shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice and shall thereupon be entitled to receive payment of the Redemption
Price as herein provided. If less than all the shares represented by any such
surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. If, on the Redemption Date, shares of Common
Stock and/or funds, as the case may be, necessary for the redemption shall be
available therefor and shall have been irrecoverably deposited or set aside,
then, notwithstanding that the certificates evidencing any shares so
5
called for redemption shall not have been surrendered the dividends with respect
to the shares so called shall cease to accrue after the Redemption Date, the
shares shall no longer be deemed outstanding, the Holders thereof shall cease to
be Holders, and all rights whatsoever with respect to the shares so called for
redemption (except the right of the Holders to receive payment of the Redemption
Price as herein provided without interest upon surrender of their certificates
therefor) shall terminate. At the close of business on the Redemption Date, each
Holder of Convertible Preferred Stock so redeemed (unless the Corporation
defaults on its obligations to deliver shares of Common Stock or cash) shall be,
without any further action, to the extent the Corporation elected to pay the
Redemption Price in shares of Common Stock, deemed a holder of the number of
shares, if any, of Common Stock for which such Convertible Preferred Stock is
redeemable, and, to the extent the Corporation elected to pay the Redemption
Price in cash, entitled to receive payment of the Redemption Price in cash,
without interest.
The shares of Convertible Preferred Stock shall not be subject to the
operation of any purchase, retirement, mandatory redemption (except as specified
in this Section) or sinking fund.
The Holder of any shares of Convertible Preferred Stock redeemed upon
any exercise of the Corporation's redemption right shall not be entitled to
receive payment of the Redemption Price for such shares until such Holder shall
cause to be delivered to the place specified in the notice given with respect to
such redemption (i) the certificate(s) representing such shares of Convertible
Preferred Stock redeemed (or, in the event such certificate(s) have been lost or
destroyed, an affidavit of the Holder of loss or destruction reasonably
satisfactory to the Corporation as well as other support as reasonably requested
by the Corporation) and (ii) transfer instrument(s) reasonably satisfactory to
the Corporation and sufficient to transfer such shares of Convertible Preferred
Stock to the Corporation free of any adverse interest. No interest shall accrue
on the Redemption Price of any share of Convertible Preferred Stock after its
Redemption Date provided that the shares of Common Stock and/or funds sufficient
for the redemption shall have been made available therefor and shall have been
irrecoverably deposited or set aside.
In the event that, prior to a Redemption Date, any shares of
Convertible Preferred Stock shall be converted into Common Stock pursuant to
Section 6, then (i) the Corporation shall not have the right to redeem such
shares and (ii) shares of Common Stock and any funds which shall have been
deposited for the payment of the Redemption Price for such shares of Convertible
Preferred Stock shall be returned to the Corporation immediately after such
conversion (subject to declared dividends payable to Holders on the record date
for such dividends being so payable, to the extent set forth in Section 6
hereof, regardless of whether such shares are converted subsequent to such
record date and prior to the related dividend payment date).
(b) REDEMPTION AT THE OPTION OF THE HOLDER. During the 20 Trading Day
period preceding each of the fifth, seventh, tenth and fifteenth anniversaries
of the Effective Time (each such period, a "HOLDER'S REDEMPTION PERIOD"), a
Holder may elect to cause the Corporation to redeem all or any of the shares of
Convertible Preferred Stock held by such Holder. The Corporation shall redeem
each such share for the Face Value,
6
plus all accrued and unpaid dividends whether or not declared through the
applicable anniversary (the "HOLDER'S REDEMPTION CONSIDERATION"), for cash,
shares of Common Stock or a combination thereof, at the Corporation's option.
For any shares of Convertible Preferred Stock that the Corporation
elects to redeem for Common Stock, the amount of Common Stock to be paid per
share of Convertible Preferred Stock so redeemed shall equal (x) the Holder's
Redemption Consideration (or portion thereof to be paid in shares of Common
Stock), divided by (y) the Market Price as of the applicable anniversary date.
A Holder electing to redeem one or more shares of Convertible
Preferred Stock shall provide notice in accordance with Section 13 to the
transfer agent designated by the Corporation for such purpose or, if there be
none, to the principal business offices of the Corporation (the "HOLDER'S
NOTICE"), postmarked (if not hand delivered) or received by the transfer agent
or principal business offices of the Corporation, as applicable (if hand
delivered), on a date within the applicable Holder's Redemption Period. Any
Holder's Notice that is mailed as herein provided, and includes the
documentation described in the next succeeding paragraph, shall be conclusively
presumed to have been duly given, and the shares of Convertible Preferred Stock
shall be deemed to be subject to redemption by the Corporation on the applicable
anniversary upon receipt of such notice by the Corporation.
A Holder shall include with the Holder's Notice (i) the certificate(s)
representing such shares of Convertible Preferred Stock redeemed (or, in the
event such certificate(s) have been lost or destroyed, an affidavit of the
Holder of loss or destruction reasonably satisfactory to the Corporation as well
as other support as reasonably requested by the Corporation) and (ii) transfer
instrument(s) reasonably satisfactory to the Corporation and sufficient to
transfer such shares of Convertible Preferred Stock to the Corporation free of
any adverse interest. No interest shall accrue on the Holder's Redemption
Consideration for any share of Convertible Preferred Stock after its redemption
date.
If less than all the shares represented by any such surrendered
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. If, on or after the date the Corporation receives the
Holder's Notice, shares of Common Stock and/or funds necessary for the
redemption shall have been made available therefor and shall have been
irrecoverably deposited or set aside, then the dividends with respect to the
shares to be so redeemed shall cease to accrue after the date fixed for
redemption, the shares shall no longer be deemed outstanding, the Holders
thereof shall cease to be Holders of Convertible Preferred Stock, and all rights
whatsoever with respect to the shares so requested to be redeemed (except the
right of the Holders to receive payment of the redemption price as herein
provided without interest upon surrender of their certificates therefor) shall
terminate.
SECTION 6. CONVERSION. (a) RIGHT OF CONVERSION/AUTOMATIC CONVERSION.
Subject to and upon compliance with the provisions of this Section 6, each share
of
7
Convertible Preferred Stock shall, at the option of the Holder, be convertible
at any time (unless such share is called for redemption, then to and including
but not after the close of business on the date fixed for such redemption,
unless the Corporation shall default in payment due upon redemption thereof),
into that number of fully paid and non-assessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) equal to
the quotient obtained by dividing $50.00 by the Conversion Price (as defined in
Section 6(d)) in effect at such time and by surrender of such share so to be
converted in the manner provided in Section 6(b).
Each share of Convertible Preferred Stock shall automatically be
converted into that number of fully paid and non-assessable shares of Common
Stock (calculated as to each conversion to the nearest 1/100th of a share) equal
to the quotient obtained by dividing $50.00 by the Conversion Price in effect as
of the Expiration Date.
(b) MANNER OF EXERCISE OF CONVERSION. In order to exercise the
conversion privilege (or, in the case of an automatic conversion, receive the
Common Stock into which the shares of Convertible Preferred Stock have been
converted), the Holder of one or more shares of Convertible Preferred Stock to
be converted (or that have been converted, in the case of an automatic
conversion) shall surrender the certificate(s) representing such shares (or, in
the event such certificate(s) have been lost or destroyed, an affidavit of the
Holder of loss or destruction reasonably satisfactory to the Corporation as well
as other support as reasonably requested by the Corporation) to the transfer
agent designated by the Corporation for such purpose or, if there be none, to
the principal business offices of the Corporation, accompanied by the funds, if
any, required by the last paragraph of this Section 6(b) and shall give written
notice of conversion in compliance with Section 13 in the form provided on such
shares of Convertible Preferred Stock (or such other notice as is acceptable to
the Corporation) to the Corporation at such office or agency that the Holder
elects to convert the shares of Convertible Preferred Stock specified in said
notice. Such notice shall also state the name or names, together with address or
addresses, in which the certificate or certificates for shares of Common Stock
which shall be issuable in such conversion shall be issued. Each share of
Convertible Preferred Stock surrendered for conversion shall, unless the shares
issuable on conversion are to be issued in the same name as the name in which
such share is registered, be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the Holder or his duly
authorized attorney and an amount sufficient to pay any transfer or similar tax.
As promptly as practicable after the surrender of such shares of Convertible
Preferred Stock and the receipt of such notice, instruments of transfer and
funds, if any, as aforesaid, the Corporation shall issue and shall deliver at
such office or agency to such Holder, or on his written order, a certificate or
certificates for the number of full shares of Common Stock issuable upon the
conversion of such share of Convertible Preferred Stock in accordance with the
provisions of this Section 6 and a check or cash in respect of any fractional
interest in a share of Common Stock arising upon such conversion, as provided in
Section 6(c).
Each conversion, other than an automatic conversion, shall be deemed
to have been effected immediately prior to the close of business on the date on
which such shares of Convertible Preferred Stock shall have been surrendered and
such notice (and
8
any applicable instruments of transfer and any required taxes) is deemed
received by the Corporation as aforesaid (such date, the "CONVERSION DATE"). In
the case of an automatic conversion, the Expiration Date shall be the Conversion
Date. The person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon a conversion,
including an automatic conversion, shall be deemed to have become the holder or
holders of record of the shares represented thereby at the close of business on
the Conversion Date, and such conversion shall be at the Conversion Price in
effect at such time on such date, unless the stock transfer books of the
Corporation shall be closed on that date, in which event such person or persons
shall be deemed to have become such holder or holders of record at the close of
business on the next succeeding day on which such stock transfer books are open,
but such conversion shall be at the Conversion Price in effect on the date upon
which such shares of Convertible Preferred Stock shall have been surrendered and
such notice received by the Corporation.
(c) CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares
or scrip representing fractions of shares of Common Stock shall be issued upon
conversion of Convertible Preferred Stock. If more than one share of Convertible
Preferred Stock shall be surrendered for conversion at one time by the same
Holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate of $50.00 for each such
share so surrendered. In lieu of any fractional interest in a share of Common
Stock which would otherwise be deliverable upon the conversion of any share of
Convertible Preferred Stock, the Corporation shall pay to the Holder of such
shares an amount in cash (computed to the nearest cent) equal to the Closing
Price on the Conversion Date (or the next Trading Day if such date is not a
Trading Day) multiplied by the fractional interest that otherwise would have
been deliverable upon conversion of such share.
(d) CONVERSION PRICE. The "CONVERSION PRICE" shall mean and be
$33.75, subject to adjustment by the Corporation on the applicable Conversion
Date as set forth in Section 6(e) below, and subject to adjustment by the
Corporation from time to time as set forth in Section 6(f), below.
(e) MARKET PRICE ADJUSTMENT TO CONVERSION PRICE. Solely with respect
to shares of Convertible Preferred Stock being converted on an applicable
Conversion Date:
(i) If and only if the Market Price on the applicable Conversion
Date exceeds $35.10 (as such amount may be adjusted pursuant to Section
6(f)(v), the "TRIGGER PRICE"), the Conversion Price with respect to the
shares of Convertible Preferred Stock being converted on such Conversion
Date shall be adjusted as set forth in Section 6(e)(ii) (such adjustment,
the "MARKET PRICE ADJUSTMENT").
(ii) If the Market Price Adjustment is applicable pursuant to
Section 6(e)(i) above, the Conversion Price on the applicable Conversion
Date shall be calculated as follows:
9
Revised ($50 X Market Price) D
Conversion Price ----------------------------------------------- X ------
[(Market Price X A) + {B X (Market Price - C)}] 33.75
where:
A = 1.4815
B = 0.4792
C = Trigger Price
D = Conversion Price in effect after giving effect to any adjustments
described in Section 6(f) and without giving effect to this
Section 6(e).
Any adjustment to the Conversion Price pursuant to this Section 6(e)(ii)
shall not require any adjustment to the Trigger Price pursuant to Section
6(f) below.
(f) OTHER ADJUSTMENTS.
(i) In case the Corporation shall (A) pay a dividend or make a
distribution on its Common Stock in shares of Common Stock, (B) subdivide
its outstanding shares of Common Stock into a greater number of shares, (C)
combine its outstanding shares of Common Stock into a smaller number of
shares, or (D) issue by reclassification, recapitalization or
reorganization of its Common Stock (other than a reorganization in which
the provisions of Section 6(i) apply) any shares of capital stock of the
Corporation, then in each such case the Conversion Price in effect
immediately prior to such action shall be equitably adjusted so that the
Holder of any share of Convertible Preferred Stock thereafter surrendered
for conversion shall be entitled to receive the number of shares of Common
Stock or other capital stock of the Corporation which such Holder would
have owned or been entitled to receive immediately following such action
had such share been converted immediately prior to the occurrence of such
event. An adjustment made pursuant to this subsection (f)(i) shall become
effective immediately after the record date, in the case of a dividend or
distribution, or immediately after the effective date, in the case of a
subdivision, combination, reclassification, recapitalization or
reorganization. If, as a result of an adjustment made pursuant to this
subsection (f)(i), the Holder of any share of Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock
and other capital stock of the Corporation, the Board of Directors in the
exercise of its good faith judgment (whose determination shall be described
in a statement filed by the Corporation with the stock transfer or
conversion agent, as appropriate) shall determine the allocation of the
adjusted Conversion Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock.
(ii) In case the Corporation shall issue options, rights or
warrants to holders of its outstanding shares of Common Stock entitling
them (for a period expiring within 45 days after the date mentioned below)
to subscribe for or purchase shares of Common Stock or other securities
convertible or exchangeable for shares of Common Stock at a price per share
less than the Current Market Price (as determined pursuant to subsection
(iv) of this Section 6(f)) (other than
10
pursuant to any stock option, restricted stock or other incentive or
benefit plan or stock ownership or purchase plan for the benefit of
employees, directors or officers or any dividend reinvestment plan of the
Corporation in effect at the time hereof or any other similar plan adopted
or implemented hereafter, it being agreed that none of the adjustments set
forth in this Section 6(f) shall apply to the issuance of stock, options,
rights, warrants or other property pursuant to any stock option, restricted
stock or other incentive or benefit plan or stock ownership or purchase
plan for the benefit of employees, directors or officers or any dividend
reinvestment plan for the Corporation in effect at the time hereof or any
other similar plan adopted or implemented hereafter), then the Conversion
Price in effect immediately prior thereto shall be adjusted so that it
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of issuance of such rights or warrants
by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or warrants
(immediately prior to such issuance) plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Current Market Price, and of which the denominator shall
be the number of shares of Common Stock outstanding on the date of issuance
of such rights or warrants (immediately prior to such issuance) plus the
number of additional shares of Common Stock offered for subscription or
purchase. Such adjustment shall be made successively whenever any rights or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants; PROVIDED, HOWEVER, in the event that all the shares of
Common Stock offered for subscription or purchase are not delivered upon
the exercise of such rights or warrants, upon the expiration of such rights
or warrants the Conversion Price shall be readjusted to the Conversion
Price which would have been in effect had the numerator and the denominator
of the foregoing fraction and the resulting adjustment been made based upon
the number of shares of Common Stock actually delivered upon the exercise
of such rights or warrants rather than upon the number of shares of Common
Stock offered for subscription or purchase. In determining whether any
security covered by this Section 6(f)(ii) entitles the holder thereof to
subscribe for or purchase shares of Common Stock at less than such Current
Market Price, and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any consideration
received by the Corporation for such rights, warrants or convertible or
exchangeable securities, plus the aggregate amount of additional
consideration (as set forth in the instruments relating thereto) to be
received by the Corporation upon the exercise, conversion or exchange of
such securities, the value of such consideration, if other than cash, to be
determined by the Board of Directors in the exercise of its good faith
judgment (whose determination shall be described in a statement filed by
the Corporation with the stock transfer or conversion agent, as
appropriate).
(iii) In case the Corporation shall, by dividend or otherwise,
distribute to holders of its outstanding Common Stock that is not also
distributed to holders of its Convertible Preferred Stock on an
as-converted basis as of the record date for the determination of
stockholders entitled to receive such distribution,
11
evidences of its indebtedness or assets (including securities and cash, but
excluding any regular periodic cash dividend of the Corporation and
dividends or distributions payable in stock for which adjustment is made
pursuant to subsection (i) of this Section 6(f)) or options, rights or
warrants to subscribe for or purchase securities of the Corporation
(excluding those referred to in subsection (ii) of this Section 6(f)), then
in each such case the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the record date of such distribution by a
fraction of which the numerator shall be the Current Market Price as of the
Time of Determination less the fair market value on such record date (as
determined by the Board of Directors in the exercise of its good faith
judgment, whose determination shall be described in a statement filed by
the Corporation with the stock transfer or conversion agent, as
appropriate) of the portion of the capital stock or assets or the evidences
of indebtedness or assets so distributed to the holder of one share of
Common Stock or of such subscription rights or warrants applicable to one
share of Common Stock, and of which the denominator shall be such Current
Market Price. Such adjustment shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
distribution.
(iv) For the purpose of any computation under subsections (ii)
and (iii) of this Section 6(f), the "CURRENT MARKET PRICE" per share of
Common Stock on any date shall be deemed to be the average of the daily
Closing Prices for the shorter of (A) 10 consecutive Trading Days ending on
the day immediately preceding the applicable Time of Determination (as
defined below) or (B) the period commencing on the date next succeeding the
first public announcement of the issuance of such rights or warrants or
such distribution through such last day prior to the applicable Time of
Determination. For purposes of the foregoing, the term "TIME OF
DETERMINATION" shall mean the time and date of the record date for
determining stockholders entitled to receive the rights, warrants or
distributions referred to in Section 6(f)(ii) and (iii).
(v) In any case in which this Section 6(f) shall require that
an adjustment be made to the Conversion Price, the Trigger Price shall be
adjusted as follows:
35.10
Revised Trigger Price - Revised Conversion Price X --------
33.75
(vi) In any case in which this Section 6(f) shall require that
an adjustment be made immediately following a record date or an effective
date, the Corporation may elect to defer (but only until the filing by the
Corporation with the stock transfer or conversion agent, as the case may
be, of the certificate required by subsection (viii)) issuing to the holder
of any share of Convertible Preferred Stock converted after such record
date or effective date the shares of Common Stock issuable upon such
conversion over and above the shares of Common Stock issuable upon such
conversion on the basis of the Conversion
12
Price prior to adjustment, and paying to such holder any amount of cash in
lieu of a fractional share.
(vii) No adjustment in the Conversion Price shall be required to
be made pursuant to this Section 6(f) unless such adjustment would require
an increase or decrease of at least 1% of such price; PROVIDED, HOWEVER,
that any adjustments which by reason of this subsection (f)(vii) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 6(f) shall be
made to the nearest cent or to the nearest 1/1000th of a share, as the case
may be. Anything in this Section 6(f) to the contrary notwithstanding, the
Corporation shall be entitled to make such reduction in the Conversion
Price, in addition to those required by this Section 6(f), as it in its
discretion shall determine to be advisable in order that any stock
dividend, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or
exchangeable for stock hereafter made by the Corporation to its
stockholders shall not be taxable to the recipients. Except as set forth in
subsections (f)(i), (f)(ii), and (f)(iii) and Section 6(e) above, the
Conversion Price shall not be adjusted for the issuance of Common Stock, or
any securities convertible into or exchangeable for Common Stock or
carrying the right to purchase any of the foregoing, in exchange for cash,
property or services.
(viii) Whenever the Conversion Price is adjusted pursuant to this
Section 6(f), (A) the Corporation shall promptly file with the stock
transfer or conversion agent, as appropriate, a certificate setting forth
the Conversion Price after such adjustment and a brief statement of the
facts requiring such adjustment and the manner of computing the same, which
certificate shall, absent manifest error (including the failure to make any
other required adjustment under this Section 6(f)), be conclusive evidence
of the correctness of such adjustment, and (B) the Corporation shall also
mail or cause to be mailed by first class mail, postage prepaid, as soon as
practicable to each Holder a notice stating that the Conversion Price has
been adjusted and setting forth the adjusted Conversion Price. The stock
transfer or conversion agent, as the case may be, shall not be under any
duty or responsibility with respect to the certificate required by this
subsection (viii) except to exhibit the same to any Holder who requests to
inspect it.
(ix) In the event that at any time, as a result of an adjustment
made pursuant to subsections (i), (ii) or (iii) of this Section 6(f), the
Holder of any share of Convertible Preferred Stock thereafter surrendered
for conversion shall become entitled to receive any shares of the
Corporation other than shares of Common Stock, thereafter the Conversion
Price of such other shares so receivable upon conversion of any share of
Convertible Preferred Stock shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in this Section.
(x) The Corporation from time to time in its sole discretion may
decrease the Conversion Price by any amount for any period of time if the
period is at least 20 days and if the decrease is irrevocable during the
period.
13
Whenever the Conversion Price is so decreased, the Corporation shall mail
to all Holders a notice of the decrease at least 15 days before the date
the decreased Conversion Price takes effect, and such notice shall state
the decreased Conversion Price and the period it will be in effect.
(g) RESERVATION OF SHARES OF COMMON STOCK. The Corporation covenants
that it will at all times reserve and keep available, free from preemptive
rights (other than such rights as do not affect the ownership of shares issued
to a Holder), out of the aggregate of its authorized but unissued shares of
Common Stock or its issued shares of Common Stock held in its treasury, or
both, for the purpose of effecting conversions of shares of Convertible
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Convertible Preferred Stock not
theretofore converted or redeemed and on or before taking any action that would
cause an adjustment of the Conversion Price resulting in an increase in the
number of shares of Common Stock deliverable upon conversion above the number
thereof previously reserved and available therefor, the Corporation shall take
all such action so required. For purposes of this Section 6(g), the number of
shares of Common Stock which shall be deliverable upon the conversion of all
outstanding shares of Convertible Preferred Stock shall be computed as if at
the time of computation all outstanding shares of Convertible Preferred Stock
were held by a single holder.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value (if any) of the shares of Common Stock
deliverable upon conversion of the shares of Convertible Preferred Stock, the
Corporation shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and non-assessable shares of Common Stock at such adjusted
Conversion Price.
(h) TRANSFER TAXES, ETC. The Corporation shall pay any and all
documentary stamp, issue or transfer taxes, and any other similar taxes payable
in respect of the issue or delivery of shares of Common Stock upon conversions
of shares of Convertible Preferred Stock pursuant hereto; PROVIDED, HOWEVER,
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue or delivery of shares of
Common Stock in a name other than that of the holder of the shares of
Convertible Preferred Stock to be converted and no such issue or delivery shall
be made unless and until the person requesting such issue or delivery has paid
to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(i) CONSOLIDATION OR MERGER OR SALE OF ASSETS. For purposes of this
paragraph (i), a "Sale Transaction" means any transaction or event, including
any merger, consolidation, sale of assets, tender or exchange offer,
reclassification, compulsory share exchange or liquidation, in which all or
substantially all outstanding shares of the Corporation's Common Stock are
converted into or exchanged for stock, other securities, cash or assets or
following which any remaining outstanding shares of Common Stock fail to meet
the listing standards imposed by each of the New York Stock Exchange, the
American Stock Exchange and the Nasdaq National Market at the time of such
transaction, but shall not include any transaction the primary purpose of which
is the reincorporation of
14
the Corporation in another U.S. jurisdiction so long as in such transaction
each share of Convertible Preferred Stock shall convert into an equity security
of the successor to the Corporation having identical dividends, rights and
preferences as the Convertible Preferred Stock. If a Sale Transaction occurs,
then each Holder shall have the right to elect one of the following: (i) such
Sale Transaction shall be deemed a liquidation for purposes of Section 4, and
the amount of the liquidating distribution to holders of Common Stock for
purposes of calculating the liquidation preference payable under Section 4
shall be deemed to be zero, (ii) provision shall be made so that such Holder
receives in exchange for each outstanding share of Convertible Preferred Stock
held by such Holder the kind and amount of securities, cash or other property
receivable upon such Sale Transaction by a holder of the number of shares of
Common Stock into which such share of Convertible Preferred Stock might have
been converted immediately prior to such Sale Transaction assuming such holder
of Common Stock did not exercise his rights of election, if any, as to the kind
or amount of securities, cash or other property receivable upon such Sale
Transaction (provided that, if the kind or amount of securities, cash or other
property receivable upon such Sale Transaction is not the same for each share
of Common Stock in respect of which such rights of election shall not have been
exercised ("NON-ELECTING SHARE"), then for the purposes of this Section 6(i)
the kind and amount of securities, cash or other property receivable upon such
Sale Transaction for each Non-Electing Share shall be deemed to be the kind and
amount so receivable per share by a plurality of the Non-Electing Shares) or
(iii) to the extent permitted under applicable law, lawful provision shall be
made by the corporation, if any, formed by the Sale Transaction or the
corporation, if any, whose securities, cash or other property will immediately
after the Sale Transaction be owned, by virtue of such Sale Transaction, by the
holders of Common Stock immediately prior to such Sale Transaction, or the
corporation, if any, which shall have acquired (whether directly or indirectly)
in such Sale Transaction such assets or securities of the Corporation
(collectively the "FORMED, SURVIVING OR ACQUIRING CORPORATION"), as the case
may be, providing that the Holder of each share of Convertible Preferred Stock
then outstanding shall receive in exchange for each such share of Convertible
Preferred Stock an equity security of the Formed, Surviving or Acquiring
Corporation having substantially equivalent dividends, rights and preferences
as the Convertible Preferred Stock ("MIRROR PREFERRED STOCK"), except that the
Holder thereof shall have the right thereafter to convert such Mirror Preferred
Stock into the kind and amount of securities, cash or other property receivable
upon such Sale Transaction by a holder of the number of shares of Common Stock
into which such share of Convertible Preferred Stock might have been converted
immediately prior to such Sale Transaction assuming such holder of Common Stock
did not exercise his rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon such Sale Transaction. Each
Holder shall be provided notice of the Sale Transaction not later than twenty
(20) days prior to the effective date thereof, which notice shall detail the
material terms of the Sale Transaction, including without limitation the nature
and amount of consideration payable to the holders of Common Stock in such Sale
Transaction. In the event that a Holder elects option (iii) and such option is
not permitted under applicable law, at the option of the Corporation, (A) the
Formed, Surviving or Acquiring Corporation will cause a U.S. subsidiary of such
Formed, Surviving or Acquiring Corporation to issue a security satisfying the
terms described in option (iii) above or (B) such Sale Transaction shall be
deemed a liquidation for purposes of Section 4, and the amount of the
liquidating
15
distribution to holders of Common Stock for purposes of calculating the
liquidation preference payable under Section 4 shall be deemed to be 20% of the
amount of the liquidation preference payable to a Holder of Convertible
Preferred Stock pursuant to clause (a) of Section 4 hereof (i.e., initially
$50), as such amount may be adjusted from time to time pursuant to the terms of
this Certificate. The Formed, Surviving or Acquiring Corporation shall, if
applicable, make provision in its certificate or articles of incorporation or
other constituent documents to the end that the provisions set forth in this
Section 6(i) shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the Convertible Preferred
Stock.
Notwithstanding anything to the contrary herein, there will be no
adjustment in connection with a Sale Transaction pursuant to Section 6(f) hereof
except as provided in this Section 6(i). The above provisions of this Section
6(i) shall similarly apply to successive Sale Transactions; PROVIDED, HOWEVER,
that in no event shall a Holder of a share of Convertible Preferred Stock be
entitled to more than one adjustment pursuant to this Section 6(i) in respect of
a series of related transactions.
SECTION 7. VOTING RIGHTS. The Holders shall not have any voting rights
by virtue of their ownership of the Convertible Preferred Stock except as set
forth herein or as otherwise from time to time may be required by law. In
connection with any vote in which the holders of Common Stock are entitled to
vote (other than pursuant to Section C(7) of Article IV of the Restated
Certificate of Incorporation of the Corporation relating to the separate right
of the holders of Common Stock as a class to elect 25% of the Corporation's
directors), a Holder will have two votes for each share of Convertible Preferred
Stock held, such votes to be cast together with the votes of the holders of the
Common Stock, voting together as a single class. Any shares of Convertible
Preferred Stock held by the Corporation or any entity controlled by the
Corporation shall not have voting rights hereunder and shall not be counted in
determining the presence of a quorum.
SECTION 8. OUTSTANDING SHARES. For purposes of this Certificate of
Resolution, all shares of Convertible Preferred Stock shall be deemed
outstanding except (i) from the date fixed for redemption pursuant to Section 5,
all shares of Convertible Preferred Stock that have been so called for
redemption under Section 5 if shares of Common Stock and funds necessary for
payment of the redemption price, as the case may be, have been irrevocably set
apart; (ii) from the date of surrender of certificates representing shares of
Convertible Preferred Stock, all shares of Convertible Preferred Stock converted
into Common Stock; and (iii) from the date of registration of transfer, all
shares of Convertible Preferred Stock held of record by the Corporation or any
subsidiary of the Corporation.
SECTION 9. STATUS OF ACQUIRED SHARES. Shares of Convertible Preferred
Stock redeemed by the Corporation, received upon conversion pursuant to
Section 6, cancelled pursuant to Section 2 or otherwise acquired by the
Corporation will be restored to the status of authorized and unissued shares of
preferred stock, without designation as to series, and may thereafter be issued,
but not as shares of Convertible Preferred Stock.
16
SECTION 10. PREEMPTIVE RIGHTS. The Convertible Preferred Stock is not
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.
SECTION 11. COVENANT REGARDING SHARES OF COMMON STOCK. All shares of
Common Stock which may be delivered upon conversion or redemption of shares of
Convertible Preferred Stock, or in connection with any dividend payment, will
upon delivery be duly and validly issued and fully paid and non-assessable,
free of all liens and charges and not subject to any preemptive rights (other
than rights which do not affect the Holder's right to own the shares of Common
Stock to be issued), and prior to the applicable Redemption Date, Dividend Date
or Conversion Date, the Corporation shall take any corporate action necessary
therefor. The issuance of all such shares of Common Stock shall, to the extent
permitted by law, be registered under the Securities Act of 1933, as amended.
SECTION 12. SEVERABILITY OF PROVISIONS. Whenever possible, each
provision hereof shall be interpreted in a manner as to be effective and valid
under applicable law, but if any provision hereof is held to be prohibited by
or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid
under applicable law.
SECTION 13. NOTICES. Any notice to Holders or USA required pursuant to
this Certificate of Designations shall be in writing and shall be deemed
effectively given: (i) upon personal delivery to the party to be notified, (ii)
three (3) business days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, (iii) one (1) day after deposit with
a nationally recognized overnight courier, specifying next day delivery, with
verification of receipt, and (iv) five (5) business days after having been sent
by first class mail, postage prepaid. All notices to Holders shall be addressed
to each Holder of record at the address of such Holder appearing on the books
of the Corporation.
17
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by Dara Khosrowshahi, its Executive Vice President,
and its corporate seal to be hereunto affixed and attested by Julius
Genachowski, its Secretary, this 4th day of February, 2002.
USA NETWORKS, INC.
By: /s/ Dara Khosrowshahi
-------------------------------
Name: Dara Khosrowshahi
Title: Executive Vice President
[SEAL]
Attest:
/s/ Julius Genachowski
- -----------------------------------
Julius Genachowski
Secretary
EXHIBIT 4.8
EQUITY WARRANT AGREEMENT
dated as of February 4, 2002
for
WARRANTS TO PURCHASE
UP TO 16,985,000 SHARES OF COMMON STOCK
EXPIRING FEBRUARY 4, 2009
between
USA NETWORKS, INC.
and
THE BANK OF NEW YORK, as
Equity Warrant Agent
TABLE OF CONTENTS
PAGE
----
ARTICLE 1. Definitions............................................................................. 1
ARTICLE 2. Issuance of Equity Warrants and Execution and Delivery of Equity Warrant Certificates... 2
2.1. Issuance of Equity Warrants............................................................. 2
2.2. Form and Execution of Equity Warrant Certificates....................................... 2
2.3. Issuance and Delivery of Equity Warrant Certificates.................................... 3
2.4. Temporary Equity Warrant Certificates................................................... 4
2.5. Payment of Taxes........................................................................ 4
ARTICLE 3. Duration and Exercise of Equity Warrants................................................ 4
3.1. Exercise Price.......................................................................... 4
3.2. Duration of Equity Warrants............................................................. 4
3.3. Exercise of Equity Warrants............................................................. 5
ARTICLE 4. Adjustments of Number of Shares......................................................... 5
4.1. Adjustments............................................................................. 5
4.2. Statement on Warrants................................................................... 8
4.3. Cash Payments in Lieu of Fractional Shares.............................................. 8
4.4. Notices to Warrantholders............................................................... 8
ARTICLE 5. Other Provisions Relating to Rights of Holders of Equity Warrants....................... 9
5.1. No Rights as Holder of Common Stock Conferred by Equity Warrants or Equity Warrant
Certificates............................................................................ 9
5.2. Lost, Stolen, Destroyed or Mutilated Equity Warrant Certificates........................ 9
5.3. Holders of Equity Warrants May Enforce Rights........................................... 9
5.4. Consolidation or Merger or Sale of Assets............................................... 9
ARTICLE 6. Exchange and Transfer of Equity Warrants................................................ 10
6.1. Equity Warrant Register; Exchange and Transfer of Equity Warrants....................... 10
6.2. Treatment of Holders of Equity Warrants................................................. 11
6.3. Cancellation of Equity Warrant Certificates............................................. 11
ARTICLE 7. Concerning the Equity Warrant Agent..................................................... 11
7.1. Equity Warrant Agent.................................................................... 11
7.2. Conditions of Equity Warrant Agent's Obligations........................................ 12
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7.3. Compliance with Applicable Laws......................................................... 14
7.4. Resignation and Appointment of Successor................................................ 14
ARTICLE 8. Miscellaneous........................................................................... 15
8.1. Amendment............................................................................... 15
8.2. Notices and Demands to the Company and Equity Warrant Agent............................. 15
8.3. Addresses for Notices................................................................... 15
8.4. Governing Law........................................................................... 16
8.5. Governmental Approvals.................................................................. 16
8.6. Reservation of Shares of Common Stock................................................... 16
8.7. Covenant Regarding Shares of Common Stock............................................... 16
8.8. Persons Having Rights Under Agreement................................................... 16
8.9. Delivery of Prospectus.................................................................. 17
8.10. Headings................................................................................ 17
8.11. Counterparts............................................................................ 17
8.12. Inspection of Agreement................................................................. 17
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THIS EQUITY WARRANT AGREEMENT (the "AGREEMENT"), dated as of
February 4, 2002, between USA Networks, Inc., a Delaware corporation (the
"COMPANY"), and Bank of New York, a New York corporation, as warrant agent (the
"EQUITY WARRANT AGENT").
WHEREAS, pursuant to the Amended and Restated Agreement and Plan
of Recapitalization and Merger, by and among the Company, Expedia, Inc.
("EXPEDIA"), Taipei, Inc. ("TAIPEI"), Microsoft Corporation, and Microsoft
E-Holdings, Inc., dated as of July 15, 2001, the Class B Common Stock of
Expedia, if issued, will be converted into the right to receive certain of the
Company's equity securities (the "USA EQUITY SECURITIES") in the merger of
Taipei with and into Expedia;
WHEREAS, the USA Equity Securities include warrants (the "EQUITY
WARRANTS" or, individually, an "EQUITY WARRANT") representing the right to
purchase shares of the common stock, par value $.01 per share, of the Company
(the "COMMON STOCK"), such Equity Warrants to be evidenced by certificates
herein called the "EQUITY WARRANT CERTIFICATES";
WHEREAS, the Company desires the Equity Warrant Agent to assist
the Company in connection with the issuance, exchange, cancellation, replacement
and exercise of the Equity Warrants, and in this Agreement wishes to set forth,
among other things, the terms and conditions on which the Equity Warrants may be
issued, exchanged, cancelled, replaced and exercised; and
WHEREAS, the Company has duly authorized the execution and
delivery of this Agreement to provide for the issuance of Equity Warrants to be
exercisable at such times and for such prices, and to have such other
provisions, as shall be fixed as hereinafter provided.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein contained, the parties hereto agree as follows:
ARTICLE 1.
DEFINITIONS
"CLOSING PRICE" for each Trading Day shall be the last reported
sales price regular way, during regular trading hours, or, in case no such
reported sales takes place on such day, the average of the closing bid and asked
prices regular way, during regular trading hours, for such day, in each case on
The Nasdaq Stock Market or, if not listed or quoted on such market, on the
principal national securities exchange on which the shares of Common Stock are
listed or admitted to trading or, if not listed or admitted to trading on a
national securities exchange, the last sale price regular way for the Common
Stock as published by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), or if such last sale price is not so published by
NASDAQ or if no such sale takes place on such day, the mean between the closing
bid and asked prices for the Common Stock as published by NASDAQ. If the Common
Stock is not publicly held or so listed or publicly traded, "Closing Price"
shall mean the Fair Market Value per share as determined in good faith by the
Board of Directors of the Company or, if such determination cannot be made, by a
nationally recognized independent investment banking firm selected in good faith
by the Board of Directors of the Company.
"COMMON STOCK" shall have the meaning set forth in the recitals
hereto.
"CURRENT MARKET PRICE" shall have the meaning set forth in
Section 4.1(d).
"EQUITY WARRANT REGISTER" shall have the meaning set forth in
Section 6.1.
"EXERCISE DATE" shall have the meaning set forth in 3.3(a).
"EXERCISE PRICE" shall have the meaning set forth in Section 3.1.
"EXPIRATION DATE" means 5:00 p.m. New York City time on February
4, 2009.
"FAIR MARKET VALUE" means the amount that a willing buyer would
pay a willing seller in an arm's length transaction.
"FORMED, SURVIVING OR ACQUIRING CORPORATION" shall have the
meaning set forth in Section 5.4.
"HOLDER" means the person or persons in whose name such Equity
Warrant Certificate shall then be registered as set forth in the Equity Warrant
Register to be maintained by the Equity Warrant Agent pursuant to Section 6.1
for that purpose.
"NON-ELECTING SHARE" shall have the meaning set forth in
Section 5.4.
"OFFICER'S CERTIFICATE" shall have the meaning set forth in
Section 7.2(e).
"PROSPECTUS" shall have the meaning set forth in Section 8.9.
"SALE TRANSACTION" shall have the meaning set forth in
Section 5.4.
"TIME OF DETERMINATION" shall have the meaning set forth in
Section 4.1(d).
"TRADING DAY" shall mean a day on which the securities exchange
utilized for the purpose of calculating the Closing Price shall be open for
business or, if the shares of Common Stock shall not be listed on such exchange
for such period, a day on which The Nasdaq Stock Market is open for business.
ARTICLE 2.
ISSUANCE OF EQUITY WARRANTS AND EXECUTION AND
DELIVERY OF EQUITY WARRANT CERTIFICATES
2.1. ISSUANCE OF EQUITY WARRANTS. Equity Warrants may be issued by the
Company from time to time, together with or separately from the other USA Equity
Securities.
2.2. FORM AND EXECUTION OF EQUITY WARRANT CERTIFICATES.
(a) The Equity Warrants shall be evidenced by the Equity Warrant
Certificates, which shall be in registered form and substantially in the form
set forth as Exhibit A
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attached hereto. Each Equity Warrant Certificate shall be dated the date it is
countersigned by the Equity Warrant Agent and may have such letters, numbers or
other marks of identification and such legends or endorsements printed,
lithographed or engraved thereon as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
securities exchange on which the Equity Warrants may be listed, or to conform to
usage, as the officer of the Company executing the same may approve (his
execution thereof to be conclusive evidence of such approval). Each Equity
Warrant Certificate shall evidence one or more Equity Warrants.
(b) The Equity Warrant Certificates shall be signed in the name
and on behalf of the Company by its Chairman, its Vice Chairman, its Chief
Executive Officer, President or a Vice President (any reference to a Vice
President of the Company herein shall be deemed to include any Vice President of
the Company whether or not designated by a number or a word or words added
before or after the title "Vice President") under its corporate seal, and
attested by its Secretary or an Assistant Secretary. Such signatures may be
manual or facsimile signatures of the present or any future holder of any such
office and may be imprinted or otherwise reproduced on the Equity Warrant
Certificates. The seal of the Company may be in the form of a facsimile thereof
and may be impressed, affixed, imprinted or otherwise reproduced on the Equity
Warrant Certificates.
(c) No Equity Warrant Certificate shall be valid for any
purpose, and no Equity Warrant evidenced thereby shall be deemed issued or
exercisable, until such Equity Warrant Certificate has been countersigned by the
manual or facsimile signature of the Equity Warrant Agent. Such signature by the
Equity Warrant Agent upon any Equity Warrant Certificate executed by the Company
shall be conclusive evidence that the Equity Warrant Certificate so
countersigned has been duly issued hereunder.
(d) In case any officer of the Company who shall have signed any
Equity Warrant Certificate either manually or by facsimile signature shall cease
to be such officer before the Equity Warrant Certificate so signed shall have
been countersigned and delivered by the Equity Warrant Agent, such Equity
Warrant Certificate nevertheless may be countersigned and delivered as though
the person who signed such Equity Warrant Certificate had not ceased to be such
officer of the Company; and any Equity Warrant Certificate may be signed on
behalf of the Company by such person as, at the actual date of the execution of
such Equity Warrant Certificate, shall be the proper officer of the Company,
although at the date of the execution of this Agreement such person was not such
an officer.
2.3. ISSUANCE AND DELIVERY OF EQUITY WARRANT CERTIFICATES. At any time
and from time to time after the execution and delivery of this Agreement, the
Company may deliver Equity Warrant Certificates executed by the Company to the
Equity Warrant Agent for countersignature. Except as provided in the following
sentence, the Equity Warrant Agent shall thereupon countersign and deliver such
Equity Warrant Certificates to or upon the written request of the Company.
Subsequent to the original issuance of an Equity Warrant Certificate evidencing
Equity Warrants, the Equity Warrant Agent shall countersign a new Equity Warrant
Certificate evidencing such Equity Warrants only if such Equity Warrant
Certificate is issued in
-3-
exchange or substitution for one or more previously countersigned Equity Warrant
Certificates evidencing such Equity Warrants or in connection with their
transfer, as hereinafter provided.
2.4. TEMPORARY EQUITY WARRANT CERTIFICATES. Pending the preparation of
a definitive Equity Warrant Certificate, the Company may execute, and upon the
order of the Company the Equity Warrant Agent shall countersign and deliver,
temporary Equity Warrant Certificates that are printed, lithographed,
typewritten, mimeographed or otherwise produced, substantially of the tenor of
the definitive Equity Warrant Certificates in lieu of which they are issued and
with such appropriate insertions, omissions, substitutions and other variations
as the officer executing such Equity Warrant Certificates may determine, as
evidenced by his execution of such Equity Warrant Certificates.
If temporary Equity Warrant Certificates are issued, the Company
will cause definitive Equity Warrant Certificates to be prepared without
unreasonable delay. After the preparation of definitive Equity Warrant
Certificates, the temporary Equity Warrant Certificates shall be exchangeable
for definitive Equity Warrant Certificates upon surrender of the temporary
Equity Warrant Certificates at the corporate trust office of the Equity Warrant
Agent. Upon surrender for cancellation of any one or more temporary Equity
Warrant Certificates, the Company shall execute and the Equity Warrant Agent
shall countersign and deliver in exchange therefor definitive Equity Warrant
Certificates representing the same aggregate number of Equity Warrants. Until so
exchanged, the temporary Equity Warrant Certificates shall in all respects be
entitled to the same benefits under this Agreement as definitive Equity Warrant
Certificates.
2.5. PAYMENT OF TAXES. The Company will pay all stamp and other
duties, if any, to which this Agreement or the original issuance, or exercise,
of the Equity Warrants or Equity Warrant Certificates may be subject under the
laws of the United States of America or any state or locality; PROVIDED,
HOWEVER, that the Holder, and not the Company, shall be required to pay any
stamp or other tax or other governmental charge that may be imposed in
connection with any transfer involved in the issuance of the Common Stock where
the Holder designates the shares to be issued in a name other than the name of
the Holder; and in the event that any such transfer is involved, the Company
shall not be required to issue any Common Stock (and the purchase of the shares
of Common Stock issued upon the exercise of such Holder's Equity Warrant shall
not be deemed to have been consummated) until such tax or other charge shall
have been paid or it has been established to the Company's satisfaction that no
such tax or other charge is due.
ARTICLE 3.
DURATION AND EXERCISE OF EQUITY WARRANTS
3.1. EXERCISE PRICE. Each Equity Warrant shall entitle the Holder
thereof to purchase one share of Common Stock for $35.10 (the "EXERCISE PRICE"),
subject to the terms herein. The number of shares of Common Stock which shall be
purchasable upon the payment of the Exercise Price shall be subject to
adjustment pursuant to Article 4 hereof.
3.2. DURATION OF EQUITY WARRANTS. Each Equity Warrant may be
exercised at any time up to the Expiration Date. Each Equity Warrant not
exercised at or before the Expiration Date
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shall become void, and all rights of the Holder of such Equity Warrant
thereunder and under this Agreement shall cease.
3.3. EXERCISE OF EQUITY WARRANTS.
(a) The Holder of an Equity Warrant shall have the right, at its
option, to exercise such Equity Warrant and purchase one share of Common Stock
during the period referred to in Section 3.2, subject to adjustment pursuant to
Article 4 hereof. Except as may be provided in an Equity Warrant Certificate, an
Equity Warrant may be exercised by completing the form of election to purchase
set forth on the reverse side of the Equity Warrant Certificate, by duly
executing the same, and by delivering the same, together with payment in full of
the Exercise Price, in lawful money of the United States of America, in cash or
by certified or official bank check or by bank wire transfer, to the Equity
Warrant Agent. Except as may be provided in an Equity Warrant Certificate, the
date on which such Equity Warrant Certificate and payment are received by the
Equity Warrant Agent as aforesaid shall be deemed to be the date on which the
Equity Warrant is exercised and the relevant shares of Common Stock are issued
(the "EXERCISE DATE").
(b) Upon the exercise of an Equity Warrant, the Company shall,
as soon as practicable, issue, to or upon the order of the Holder of such Equity
Warrant, the shares of Common Stock to which such Holder is entitled, registered
in such name or names as may be directed by such Holder.
(c) Unless the Equity Warrant Agent and the Company agree
otherwise, the Equity Warrant Agent shall deposit all funds received by it in
payment of the Equity Warrant Price for Equity Warrants in the account of the
Company maintained with it for such purpose and shall advise the Company by
telephone by 5:00 P.M., New York City time, of each day on which a payment of
the Exercise Price for Equity Warrants is received of the amount so deposited in
its account. The Equity Warrant Agent shall promptly confirm such telephone
advice in writing to the Company.
(d) The Equity Warrant Agent shall, from time to time, as
promptly as practicable, advise the Company of (i) the number of Equity Warrants
exercised as provided herein, (ii) the instructions of each Holder of such
Equity Warrants with respect to delivery of the Common Stock issued upon
exercise of such Equity Warrants to which such Holder is entitled upon such
exercise, and (iii) such other information as the Company shall reasonably
require. Such advice may be given by telephone to be confirmed in writing.
ARTICLE 4.
ADJUSTMENTS OF NUMBER OF SHARES
4.1. ADJUSTMENTS. The number of shares of Common Stock purchasable
upon the exercise of the Equity Warrants shall be subject to adjustment as
follows:
(a) In case the Company shall (A) pay a dividend or make a
distribution on its Common Stock in shares of Common Stock, (B) subdivide its
outstanding shares of Common Stock into a greater number of shares, (C) combine
its outstanding shares of Common Stock into
-5-
a smaller number of shares, or (D) issue by reclassification, recapitalization
or reorganization of its Common Stock any shares of capital stock of the
Company, then in each such case the number of shares of Common Stock issuable
upon exercise of an Equity Warrant shall be equitably adjusted so that the
Holder of any Equity Warrant thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock or other capital stock
of the Company which such Holder would have owned or been entitled to receive
immediately following such action had such Equity Warrant been exercised
immediately prior to the occurrence of such event. An adjustment made pursuant
to this subsection 4.1(a) shall become effective immediately after the record
date, in the case of a dividend or distribution, or immediately after the
effective date, in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this subsection 4.1(a), the
Holder of any Equity Warrant thereafter exercised shall become entitled to
receive shares of two or more classes of capital stock or shares of Common Stock
and other capital stock of the Company, the Board of Directors (whose
determination shall be in its good faith judgment and shall be described in a
statement filed by the Company with the Equity Warrant Agent) shall determine
the allocation of the Exercise Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock.
(b) In case the Company shall issue options, rights or warrants
to holders of its outstanding shares of Common Stock entitling them (for a
period expiring within 45 days after the record date mentioned below) to
subscribe for or purchase shares of Common Stock or other securities convertible
or exchangeable for shares of Common Stock at a price per share of Common Stock
less than the Current Market Price (as determined pursuant to subsection (d) of
this Section 4.1) (other than pursuant to any stock option, restricted stock or
other incentive or benefit plan or stock ownership or purchase plan for the
benefit of employees, directors or officers or any dividend reinvestment plan of
the Company in effect at the time hereof or any other similar plan adopted or
implemented hereafter, it being agreed that none of the adjustments set forth in
this Section 4.1 shall apply to the issuance of stock, rights, warrants or other
property pursuant to such benefit plans), then the number of shares of Common
Stock issuable upon exercise of an Equity Warrant shall be adjusted so that it
shall equal the product obtained by multiplying the number of shares of Common
Stock issuable upon exercise of an Equity Warrant immediately prior to the date
of issuance of such rights or warrants by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights or warrants (immediately prior to such issuance) plus
the number of additional shares of Common Stock offered for subscription or
purchase and of which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or warrants
(immediately prior to such issuance) plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Current Market Price. Such adjustment shall be made successively
whenever any rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants; PROVIDED, HOWEVER, in the event that all the
shares of Common Stock offered for subscription or purchase are not delivered
upon the exercise of such rights or warrants, upon the expiration of such rights
or warrants the number of shares of Common Stock issuable upon exercise of an
Equity Warrant shall be readjusted to the number of shares of Common Stock
issuable upon exercise of an Equity Warrant which would have been in effect had
the numerator and the denominator of the foregoing fraction and the resulting
adjustment been made based upon the number of shares of Common Stock actually
-6-
delivered upon the exercise of such rights or warrants rather than upon the
number of shares of Common Stock offered for subscription or purchase. In
determining whether any security covered by this Section 4.1(b) entitles the
holders to subscribe for or purchase shares of Common Stock at less than such
Current Market Price, and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any consideration
received by the Company for the issuance of such options, rights, warrants or
convertible or exchangeable securities, plus the aggregate amount of additional
consideration (as set forth in the instruments relating thereto) to be received
by the Company upon the exercise, conversion or exchange of such securities, the
value of such consideration, if other than cash, to be determined by the Board
of Directors in its good faith judgment (whose determination shall be described
in a statement filed by the Company with the Equity Warrant Agent).
(c) In case the Company shall, by dividend or otherwise,
distribute to all holders of its outstanding Common Stock, evidences of its
indebtedness or assets (including securities and cash, but excluding any regular
periodic cash dividend of the Company and dividends or distributions payable in
stock for which adjustment is made pursuant to subsection (a) of this Section
4.1) or rights or warrants to subscribe for or purchase securities of the
Company (excluding those referred to in subsection (b) of this Section 4.1),
then in each such case the number of shares of Common Stock issuable upon
exercise of an Equity Warrant shall be adjusted so that the same shall equal the
product determined by multiplying the number of shares of Common Stock issuable
upon exercise of an Equity Warrant immediately prior to the record date of such
distribution by a fraction of which the numerator shall be the Current Market
Price as of the Time of Determination, and of which the denominator shall be
such Current Market Price less the Fair Market Value on such record date (as
determined by the Board of Directors in its good faith judgment, whose
determination shall be described in a statement filed by the Company with the
stock transfer or conversion agent, as appropriate) of the portion of the
capital stock or assets or the evidences of indebtedness or assets so
distributed to the holder of one share of Common Stock or of such subscription
rights or warrants applicable to one share of Common Stock. Such adjustment
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such distribution.
(d) For the purpose of any computation under subsections (b) and
(c) of this Section 4.1, the "CURRENT MARKET PRICE" per share of Common Stock on
any date shall be deemed to be the average of the daily Closing Prices for the
shorter of (A) 10 consecutive Trading Days ending on the day immediately
preceding the applicable Time of Determination or (B) the period commencing on
the date next succeeding the first public announcement of the issuance of such
rights or warrants or such distribution through such last day prior to the
applicable Time of Determination. For purposes of the foregoing, the term "TIME
OF DETERMINATION" shall mean the time and date of the record date for
determining stockholders entitled to receive the rights, warrants or
distributions referred to in Section 4.1(b) and (c).
(e) In any case in which this Section 4.1 shall require that an
adjustment in the amount of Common Stock or other property to be received by a
Holder upon exercise of an Equity Warrant be made effective as of a record date
for a specified event, the Company may elect to defer until the occurrence of
such event the issuance to the Holder of any Equity Warrant exercised after such
record date the Common Stock or other property issuable upon such exercise over
and above the shares of Common Stock issuable upon such exercise prior to such
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adjustment, PROVIDED, HOWEVER, that the Company shall deliver to such Holder a
due bill or other appropriate instrument evidencing such Holder's right to
receive such additional shares of Common Stock or other property, if any, upon
the occurrence of the event requiring such adjustment.
(f) No adjustment in the number of shares of Common Stock
issuable upon exercise of an Equity Warrant shall be required to be made
pursuant to this Section 4.1 unless such adjustment would require an increase or
decrease of at least 1% of such number; PROVIDED, HOWEVER, that any adjustments
which by reason of this subsection (f) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 4.1(f) shall be made to the nearest cent or to
the nearest 1/1000th of a share, as the case may be. Except as set forth in
subsections 4.1(a), (b), and (c) above, the number of shares of Common Stock
issuable upon exercise of an Equity Warrant shall not be adjusted as a result of
the issuance of Common Stock, or any securities convertible into or exchangeable
for Common Stock or carrying the right to purchase any of the foregoing, in
exchange for cash, property or services.
4.2. STATEMENT ON WARRANTS. Irrespective of any adjustment in the
amount of Common Stock issued upon exercise of an Equity Warrant, Equity
Warrants theretofore or thereafter issued may continue to express the same
number and kind of shares as are stated in the Equity Warrants initially
issuable pursuant to this Agreement.
4.3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES No fractional shares
or scrip representing fractions of shares of Common Stock shall be issued upon
exercise of the Equity Warrants. If more than one share of Equity Warrants shall
be exercised at one time by the same Holder, the number of full shares of Common
Stock issuable upon exercise thereof shall be computed on the basis of the
aggregate number of shares of Common Stock issuable. In lieu of any fractional
interest in a share of Common Stock which would otherwise be deliverable upon
the exercise of such Equity Warrants, the Company shall pay to the Holder of
such Equity Warrants an amount in cash (computed to the nearest cent) equal to
the Closing Price on the Exercise Date (or the next Trading Day if such date is
not a Trading Day) multiplied by the fractional interest that otherwise would
have been deliverable upon exercise of such Equity Warrants.
4.4. NOTICES TO WARRANTHOLDERS. (a) Upon any adjustment of the amount
of Common Stock issuable upon exercise of an Equity Warrant pursuant to Section
4.1 (but not for any fractional cumulation as described in Section 4.1(f)), the
Company within 30 days thereafter shall (i) cause to be filed with the Equity
Warrant Agent an Officer's Certificate (as defined hereinafter) setting forth
the amount of Common Stock issuable upon exercise of an Equity Warrant after
such adjustment and setting forth in reasonable detail the method of calculation
and the facts upon which such calculations are based, which certificate, absent
manifest error and any failure to comply with Section 4.1 (other than failures
that are de minimus in nature), shall be conclusive evidence of the correctness
of the matters set forth therein, and (ii) cause to be given to each of the
registered Holders at his address appearing on the Equity Warrant Register (as
defined hereinafter) written notice of such adjustments by first-class mail,
postage prepaid.
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ARTICLE 5.
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS
OF EQUITY WARRANTS
5.1. NO RIGHTS AS HOLDER OF COMMON STOCK CONFERRED BY EQUITY WARRANTS
OR EQUITY WARRANT CERTIFICATES. No Equity Warrant or Equity Warrant Certificate
shall entitle the Holder to any of the rights of a holder of Common Stock,
including, without limitation, voting, dividend or liquidation rights.
5.2. LOST, STOLEN, DESTROYED OR MUTILATED EQUITY WARRANT CERTIFICATES.
Upon receipt by the Company and the Equity Warrant Agent of evidence reasonably
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Equity Warrant Certificate and of indemnity (other than in
connection with any mutilated Equity Warrant certificates surrendered to the
Equity Warrant Agent for cancellation) reasonably satisfactory to them, the
Company shall execute, and the Equity Warrant Agent shall countersign and
deliver, in exchange for or in lieu of each lost, stolen, destroyed or mutilated
Equity Warrant Certificate, a new Equity Warrant Certificate evidencing a like
number of Equity Warrants of the same title. Upon the issuance of a new Equity
Warrant Certificate under this Section, the Company may require the payment of a
sum sufficient to cover any stamp or other tax or other governmental charge that
may be imposed in connection therewith and any other expenses (including the
fees and expenses of the Equity Warrant Agent) in connection therewith. Every
substitute Equity Warrant Certificate executed and delivered pursuant to this
Section in lieu of any lost, stolen or destroyed Equity Warrant Certificate
shall represent a contractual obligation of the Company, whether or not such
lost, stolen or destroyed Equity Warrant Certificate shall be at any time
enforceable by anyone, and shall be entitled to the benefits of this Agreement
equally and proportionately with any and all other Equity Warrant Certificates,
duly executed and delivered hereunder, evidencing Equity Warrants of the same
title. The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement of
lost, stolen, destroyed or mutilated Equity Warrant Certificates.
5.3. HOLDERS OF EQUITY WARRANTS MAY ENFORCE RIGHTS. Notwithstanding
any of the provisions of this Agreement, any Holder may, without the consent of
the Equity Warrant Agent, enforce and may institute and maintain any suit,
action or proceeding against the Company suitable to enforce, or otherwise in
respect of his right to exercise his Equity Warrants as provided in the Equity
Warrants and in this Agreement.
5.4. CONSOLIDATION OR MERGER OR SALE OF ASSETS. For purposes of this
Section 5.4, a "SALE TRANSACTION" means any transaction or event, including any
merger, consolidation, sale of assets, tender or exchange offer,
reclassification, compulsory share exchange or liquidation, in which all or
substantially all outstanding shares of the Company's Common Stock are converted
into or exchanged for stock, other securities, cash or assets or following which
any remaining outstanding shares of Common Stock fail to meet the listing
standards imposed by each of the New York Stock Exchange, the American Stock
Exchange and the Nasdaq National Market at the time of such transaction, but
shall not include any transaction the primary purpose of which is the
reincorporation of the Company in another U.S. jurisdiction so long as in such
transaction each Equity Warrant shall convert into an equity security of the
successor to the Company
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having identical rights as the Equity Warrant. If a Sale Transaction occurs,
then lawful provision shall be made by the corporation formed by such Sale
Transaction or the corporation whose securities, cash or other property will
immediately after the Sale Transaction be owned, by virtue of such Sale
Transaction, by the holders of Common Stock immediately prior to the Sale
Transaction, or the corporation which shall have acquired such securities of the
Company (collectively the "FORMED, SURVIVING OR ACQUIRING CORPORATION"), as the
case may be, providing that each Equity Warrant then outstanding shall
thereafter be exercisable for the kind and amount of securities, cash or other
property receivable upon such Sale Transaction by a holder of the number of
shares of Common Stock that would have been received upon exercise of such
Equity Warrant immediately prior to such Sale Transaction assuming such holder
of Common Stock did not exercise his rights of election, if any, as to the kind
or amount of securities, cash or other property receivable upon such Sale
Transaction (provided that, if the kind or amount of securities, cash or other
property receivable upon such Sale Transaction is not the same for each share of
Common Stock in respect of which such rights of election shall not have been
exercised ("NON-ELECTING SHARE"), then for the purposes of this Section 5.4 the
kind and amount of securities, cash or other property receivable upon such Sale
Transaction for each Non-Electing Share shall be deemed to be the kind and
amount so receivable per share by a plurality of the Non-Electing Shares). At
the option of USA, in lieu of the foregoing, USA may require that in a Sale
Transaction each Holder of an Equity Warrant shall receive in exchange for each
such Equity Warrant a security of the Formed, Surviving or Acquiring Corporation
having substantially equivalent rights, other than as set forth in this Section
5.4, as the Equity Warrant. Notwithstanding anything to the contrary herein,
there will be no adjustments pursuant to Article 4 hereof in case of the
issuance of any shares of our stock in a Sale Transaction except as provided in
this Section 5.4. The provisions of this Section 5.4 shall similarly apply to
successive Sale Transactions; PROVIDED, HOWEVER, that in no event shall a Holder
of an Equity Warrant be entitled to more than one adjustment pursuant to this
Section 5.4 in respect of a series of related transactions.
ARTICLE 6.
EXCHANGE AND TRANSFER OF EQUITY WARRANTS
6.1. EQUITY WARRANT REGISTER; EXCHANGE AND TRANSFER OF EQUITY
WARRANTS. The Equity Warrant Agent shall maintain, at its corporate trust office
or at 385 Rifle Camp Road, Reorganization Services Department, 5th Floor, West
Paterson, New Jersey 07424, a register (the "EQUITY WARRANT REGISTER") in which,
upon the issuance of Equity Warrants, and, subject to such reasonable
regulations as the Equity Warrant Agent may prescribe, it shall register Equity
Warrant Certificates and exchanges and transfers thereof. The Equity Warrant
Register shall be in written form or in any other form capable of being
converted into written form within a reasonable time.
Except as provided in the following sentence, upon surrender at
the corporate trust office of the Equity Warrant Agent or at 385 Rifle Camp
Road, Reorganization Services Department, 5th Floor, West Paterson, New Jersey
07424, Equity Warrant Certificates may be exchanged for one or more other Equity
Warrant Certificates evidencing the same aggregate number of Equity Warrants of
the same title, or may be transferred in whole or in part. A transfer shall be
registered and an appropriate entry made in the Equity Warrant Register upon
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surrender of an Equity Warrant Certificate to the Equity Warrant Agent at its
corporate trust office or at 385 Rifle Camp Road, Reorganization Services
Department, 5th Floor, West Paterson, New Jersey 07424 for transfer, properly
endorsed or accompanied by appropriate instruments of transfer and written
instructions for transfer, all in form satisfactory to the Company and the
Equity Warrant Agent. Whenever an Equity Warrant Certificate is surrendered for
exchange or transfer, the Equity Warrant Agent shall countersign and deliver to
the person or person entitled thereto one or more Equity Warrant Certificates
duly executed by the Company, as so requested. The Equity Warrant Agent shall
not be required to effect any exchange or transfer which will result in the
issuance of an Equity Warrant Certificate evidencing a fraction of an Equity
Warrant. All Equity Warrant Certificates issued upon any exchange or transfer of
an Equity Warrant Certificate shall be the valid obligations of the Company,
evidencing the same obligations, and entitled to the same benefits under this
Agreement, as the Equity Warrant Certificate surrendered for such exchange or
transfer.
No service charge shall be made for any exchange or transfer of
Equity Warrants, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any such exchange or transfer, in accordance with Section 2.5 hereof.
6.2. TREATMENT OF HOLDERS OF EQUITY WARRANTS. Every Holder of an
Equity Warrant, by accepting the Equity Warrant Certificate evidencing the same,
consents and agrees with the Company, the Equity Warrant Agent and with every
other Holder of Equity Warrants that the Company and the Equity Warrant Agent
may treat the record holder of an Equity Warrant Certificate as the absolute
owner of such Equity Warrant for all purposes and as the person entitled to
exercise the rights represented by such Equity Warrant.
6.3. CANCELLATION OF EQUITY WARRANT CERTIFICATES. In the event that
the Company shall purchase, redeem or otherwise acquire any Equity Warrants
after the issuance thereof, the Equity Warrant Certificate shall thereupon be
delivered to the Equity Warrant Agent and be canceled by it. The Equity Warrant
Agent shall also cancel any Equity Warrant Certificate (including any mutilated
Equity Warrant Certificate) delivered to it for exercise, in whole or in part,
or for exchange or transfer. Equity Warrant Certificates so canceled shall be
delivered by the Equity Warrant Agent to the Company from time to time, or
disposed of in accordance with the instructions of the Company.
ARTICLE 7.
CONCERNING THE EQUITY WARRANT AGENT
7.1. EQUITY WARRANT AGENT. The Company hereby appoints The Bank of New
York as Equity Warrant Agent of the Company in respect of the Equity Warrants
upon the terms and subject to the conditions set forth herein; and The Bank of
New York hereby accepts such appointment. The Equity Warrant Agent shall have
the powers and authority granted to and conferred upon it in the Equity Warrant
Certificates and hereby and such further powers and authority acceptable to it
to act on behalf of the Company as the Company may hereafter grant to or confer
upon it. All of the terms and provisions with respect to such powers and
authority
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contained in the Equity Warrant Certificates are subject to and governed by the
terms and provisions hereof.
7.2. CONDITIONS OF EQUITY WARRANT AGENT'S OBLIGATIONS. The Equity
Warrant Agent accepts its obligations set forth herein upon the terms and
conditions hereof, including the following, to all of which the Company agrees
and to all of which the rights hereunder of the Holders shall be subject:
(a) COMPENSATION AND INDEMNIFICATION. The Company agrees to pay
the Equity Warrant Agent from time to time such compensation for its
services as the Company and the Equity Warrant shall agree in writing
and to reimburse the Equity Warrant Agent for reasonable out-of-pocket
expenses (including reasonable counsel fees) incurred by the Equity
Warrant Agent in connection with the services rendered hereunder by the
Equity Warrant Agent. The Company also agrees to indemnify the Equity
Warrant Agent for, and to hold it harmless against, any loss, liability
or expenses (including the reasonable costs and expense of defending
against any claim of liability) incurred without negligence or bad faith
on the part of the Equity Warrant Agent arising out of or in connection
with its appointment as Equity Warrant Agent hereunder.
(b) AGENT FOR THE COMPANY. In acting under this Agreement and in
connection with any Equity Warrant Certificate, the Equity Warrant Agent
is acting solely as agent of the Company and does not assume any
obligation or relationship of agency or trust for or with any Holder.
(c) COUNSEL. The Equity Warrant Agent may consult with counsel
reasonably satisfactory to it, and the advice of such counsel shall be
full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in
accordance with the advice of such counsel.
(d) DOCUMENTS. The Equity Warrant Agent shall be protected and
shall incur no liability for or in respect of any action taken, suffered
or omitted by it in reliance upon any notice, direction, consent,
certification, affidavit, statement or other paper or document
reasonably believed by it to be genuine and to have been presented or
signed by the proper parties.
(e) OFFICER'S CERTIFICATE. Whenever in the performance of its
duties hereunder the Equity Warrant Agent shall reasonably deem it
necessary that any fact or matter be proved or established by the
Company prior to taking, suffering or omitting any action hereunder, the
Equity Warrant Agent may (unless other evidence in respect thereof be
herein specifically prescribed), in the absence of bad faith on its
part, rely upon a certificate signed by the Chairman, the Vice Chairman,
the Chief Executive Officer, the President, a Vice President, the
Treasurer, and Assistant Treasurer, the Secretary or an Assistant
Secretary of the Company (an "OFFICER'S CERTIFICATE") delivered by the
Company to the Equity Warrant Agent.
(f) ACTIONS THROUGH AGENTS. The Equity Warrant Agent may execute
and exercise any of the rights or powers hereby vested in it or perform
any duty hereunder
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either itself or by or through its attorneys or agents, provided,
however, that reasonable care shall be exercised in the selection and
continued employment of such attorneys and agents.
(g) CERTAIN TRANSACTIONS. The Equity Warrant Agent, and any
officer, director or employee thereof, may become the owner of, or
acquire interest in, any Equity Warrant, with the same rights that he,
she or it would have if it were not the Equity Warrant Agent, and, to
the extent permitted by applicable law, he, she or it may engage or be
interested in any financial or other transaction with the Company and
may serve on, or as depositary, trustee or agent for, any committee or
body of holders of any obligations of the Company as if it were not the
Equity Warrant Agent.
(h) NO LIABILITY FOR INTEREST. The Equity Warrant Agent shall
not be liable for interest on any monies at any time received by it
pursuant to any of the provisions of this Agreement or of the Equity
Warrant Certificates, except as otherwise agreed with the Company.
(i) NO LIABILITY FOR INVALIDITY. The Equity Warrant Agent shall
incur no liability with respect to the validity of this Agreement
(except as to the due execution hereof by the Equity Warrant Agent) or
any Equity Warrant Certificate (except as to the countersignature
thereof by the Equity Warrant Agent).
(j) NO RESPONSIBILITY FOR COMPANY REPRESENTATIONS. The Equity
Warrant Agent shall not be responsible for any of the recitals or
representations contained herein (except as to such statements or
recitals as describe the Equity Warrant Agent or action taken or to be
taken by it) or in any Equity Warrant Certificate (except as to the
Equity Warrant Agent's countersignature on such Equity Warrant
Certificate), all of which recitals and representations are made solely
by the Company.
(k) NO IMPLIED OBLIGATIONS. The Equity Warrant Agent shall be
obligated to perform only such duties as are specifically set forth
herein, and no other duties or obligations shall be implied. The Equity
Warrant Agent shall not be under any obligation to take any action
hereunder that may subject it to any expense or liability, the payment
of which within a reasonable time is not, in its reasonable opinion,
assured to it. The Equity Warrant Agent shall not be accountable or
under any duty or responsibility for the use by the Company of any
Equity Warrant Certificate countersigned by the Equity Warrant Agent and
delivered by it to the Company pursuant to this Agreement or for the
application by the Company of the proceeds of the issuance or exercise
of Equity Warrants. The Equity Warrant Agent shall have no duty or
responsibility in case of any default by the Company in the performance
of its covenants or agreements contained herein or in any Equity Warrant
Certificate or in case of the receipt of any written demand from a
Holder with respect to such default, including, without limiting the
generality of the foregoing, any duty or responsibility to initiate or
attempt to initiate any proceedings at law or otherwise or, except as
provided in Section 8.2 hereof, to make any demand upon the Company.
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7.3. COMPLIANCE WITH APPLICABLE LAWS. The Equity Warrant Agent agrees
to comply with all applicable federal and state laws imposing obligations on it
in respect of the services rendered by it under this Agreement and in connection
with the Equity Warrants, including (but not limited to) the provisions of
United States federal income tax laws regarding information reporting and backup
withholding. The Equity Warrant Agent expressly assumes all liability for its
failure to comply with any such laws imposing obligations on it, including (but
not limited to) any liability for failure to comply with any applicable
provisions of United States federal income tax laws regarding information
reporting and backup withholding.
7.4. RESIGNATION AND APPOINTMENT OF SUCCESSOR.
(a) The Company agrees, for the benefit of the Holders of the
Equity Warrants, that there shall at all times be an Equity Warrant Agent
hereunder until all the Equity Warrants are no longer exercisable.
(b) The Equity Warrant Agent may at any time resign as such
agent by giving written notice to the Company of such intention on its part,
specifying the date on which its desired resignation shall become effective,
subject to the appointment of a successor Equity Warrant Agent and acceptance of
such appointment by such successor Equity Warrant Agent, as hereinafter
provided. The Equity Warrant Agent hereunder may be removed at any time by the
filing with it of an instrument in writing signed by or on behalf of the Company
and specifying such removal and the date when it shall become effective. Such
resignation or removal shall take effect upon the appointment by the Company, as
hereinafter provided, of a successor Equity Warrant Agent (which shall be a
banking institution organized under the laws of the United States of America, or
one of the states thereof and having an office or an agent's office in the
Borough of Manhattan, the City of New York) and the acceptance of such
appointment by such successor Equity Warrant Agent. In the event a successor
Equity Warrant Agent has not been appointed and has not accepted its duties
within 90 days of the Equity Warrant Agent's notice of resignation, the Equity
Warrant Agent may apply to any court of competent jurisdiction for the
designation of a successor Equity Warrant Agent.
(c) In case at any time the Equity Warrant Agent shall resign,
or shall be removed, or shall become incapable of acting, or shall be adjudged
bankrupt or insolvent, or make an assignment for the benefit of its creditors or
consent to the appointment of a receiver or custodian of all or any substantial
part of its property, or shall admit in writing its inability to pay or meet its
debts as they mature, or if a receiver or custodian of it or all or any
substantial part of its property shall be appointed, or if any public officer
shall have taken charge or control of the Equity Warrant Agent or of its
property or affairs, for the purpose of rehabilitation, conservation or
liquidation, a successor Equity Warrant Agent, qualified as aforesaid, shall be
appointed by the Company by an instrument in writing, filed with the successor
Equity Warrant Agent. Upon the appointment as aforesaid of a successor Equity
Warrant Agent and acceptance by the latter of such appointment, the Equity
Warrant Agent so superseded shall cease to be the Equity Warrant Agent
hereunder.
(d) Any successor Equity Warrant Agent appointed hereunder shall
execute, acknowledge and deliver to its predecessor and to the Company an
instrument accepting such appointment hereunder, and thereupon such successor
Equity Warrant Agent, without any further
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act, deed or conveyance, shall become vested with all the authority, rights,
powers, trusts, immunities, duties and obligations of such predecessor with like
effect as if originally named as Equity Warrant Agent hereunder, and such
predecessor, upon payment of its charges and disbursements then unpaid, shall
thereupon become obligated to transfer, deliver and pay over, and such successor
Equity Warrant Agent shall be entitled to receive all moneys, securities and
other property on deposit with or held by such predecessor, as Equity Warrant
Agent hereunder.
(e) Any corporation into which the Equity Warrant Agent
hereunder may be merged or converted or any corporation with which the Equity
Warrant Agent may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Equity Warrant Agent shall be a party,
or any corporation to which the Equity Warrant Agent shall sell or otherwise
transfer all or substantially all of the assets and business of the Equity
Warrant Agent, provided that it shall be qualified as aforesaid, shall be the
successor Equity Warrant Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto.
ARTICLE 8.
MISCELLANEOUS
8.1. AMENDMENT.
(a) This Agreement and the Equity Warrants may be
amended by the Company and the Equity Warrant Agent, without the consent of the
Holders of Equity Warrants, for the purpose of curing any ambiguity, or of
curing, correcting or supplementing any defective or inconsistent provision
contained herein or therein or in any other manner which the Company may deem to
be necessary or desirable and which will not materially and adversely affect the
interests of the Holders of the Equity Warrants.
(b) The Company and the Equity Warrant Agent may modify or amend
this Agreement and the Equity Warrant Certificates with the consent of the
Holders of not fewer than a majority in number of the then outstanding
unexercised Equity Warrants affected by such modification or amendment, for any
purpose; PROVIDED, HOWEVER, that no such modification or amendment that shortens
the period of time during which the Equity Warrants may be exercised, or
increases the per share Exercise Price, or otherwise materially and adversely
affects the exercise rights of the holders or reduces the percentage of holders
of outstanding Equity Warrants the consent of which is required for modification
or amendment of this Agreement or the Equity Warrants, may be made without the
consent of each Holder affected thereby.
8.2. NOTICES AND DEMANDS TO THE COMPANY AND EQUITY WARRANT AGENT. If
the Equity Warrant Agent shall receive any notice or demand addressed to the
Company by any Holder pursuant to the provisions of the Equity Warrant
Certificate, the Equity Warrant Agent shall promptly forward such notice or
demand to the Company.
8.3. ADDRESSES FOR NOTICES. Any communications from the Company to the
Equity Warrant Agent with respect to this Agreement shall be addressed to The
Bank of New York, 385 Rifle Camp Road, Reorganization Services Department, 5th
Floor, West Paterson, New Jersey
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07424; any communications from the Equity Warrant Agent to the Company with
respect to this Agreement shall be addressed to USA Networks, Inc., 152 West
57th Street, New York, NY 10019, Attention: General Counsel; or such other
addresses as shall be specified in writing by the Equity Warrant Agent or by the
Company.
8.4. GOVERNING LAW. This Agreement and the Equity Warrants shall be
governed by the laws of the State of New York applicable to contracts made and
to be performed entirely within such state.
8.5. GOVERNMENTAL APPROVALS. The Company will from time to time use
all reasonable efforts to obtain and keep effective any and all permits,
consents and approvals of governmental agencies and authorities and the national
securities exchange on which the Equity Warrants may be listed or authorized for
trading from time to time and filings under the United States federal and state
laws, which may be or become requisite in connection with the issuance, sale,
trading, transfer or delivery of the Equity Warrants, and the exercise of the
Equity Warrants.
8.6. RESERVATION OF SHARES OF COMMON STOCK. The Company covenants that
it will at all times reserve and keep available, free from preemptive rights
(other than such rights as do not affect the ownership of shares issued to a
Holder), out of the aggregate of its authorized but unissued shares of Common
Stock or its issued shares of Common Stock held in its treasury, or both, for
the purpose of effecting exercises of Equity Warrants, the full number of shares
of Common Stock deliverable upon the exercise of all outstanding Equity Warrants
not theretofore exercised and on or before taking any action that would cause an
adjustment resulting in an increase in the number of shares of Common Stock
deliverable upon exercise above the number thereof previously reserved and
available therefor, the Company shall take all such action so required. For
purposes of this Section 8.6, the number of shares of Common Stock which shall
be deliverable upon the exercise of all outstanding Equity Warrants shall be
computed as if at the time of computation all outstanding Equity Warrants were
held by a single holder. Before taking any action which would cause an
adjustment reducing the price per share of Common Stock issued upon exercise of
the Equity Warrants below the then par value (if any) of such shares of Common
Stock, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and non-assessable shares of Common Stock at such Exercise
Price.
8.7. COVENANT REGARDING SHARES OF COMMON STOCK. All shares of Common
Stock which may be delivered upon exercise of the Equity Warrants will upon
delivery be duly and validly issued and fully paid and non-assessable, free of
all liens and charges and not subject to any preemptive rights (other than
rights which do not affect the Holder's right to own the shares of Common Stock
to be issued), and prior to the Exercise Date the Company shall take any
corporate action necessary therefor. The issuance of all such shares of Common
Stock shall, to the extent permitted by law, be registered under the Securities
Act of 1933, as amended.
8.8. PERSONS HAVING RIGHTS UNDER AGREEMENT. Nothing in this Agreement
expressed or implied and nothing that may be inferred from any of the provisions
hereof is intended, or shall be construed, to confer upon, or give to, any
person or corporation other than the Company, the Equity Warrant Agent and the
Holders any right, remedy or claim under or by reason of this
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Agreement or of any covenant, condition, stipulation, promise or agreement
hereof; and all covenants, conditions, stipulations, promises and agreements in
this Agreement contained shall be for the sole and exclusive benefit of the
Company and the Equity Warrant Agent and their successors and of the Holders of
Equity Warrant Certificates.
8.9. DELIVERY OF PROSPECTUS. The Company will furnish to the Equity
Warrant Agent sufficient copies of a prospectus or prospectuses relating to the
Common Stock deliverable upon exercise of any outstanding Equity Warrants (each
a "PROSPECTUS"), and the Equity Warrant Agent agrees to deliver to the Holder of
the Equity Warrant, prior to or concurrently with the delivery of the Common
Stock issued upon the exercise thereof, a copy of the Prospectus relating to
such Common Stock.
8.10. HEADINGS. The descriptive headings of the several Articles and
Sections and the Table of Contents of this Agreement are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions hereof.
8.11. COUNTERPARTS. This Agreement may be executed by the parties
hereto in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original; but all such counterparts shall
together constitute but one and the same instrument.
8.12. INSPECTION OF AGREEMENT. A copy of this Agreement shall be
available at all reasonable times at the principal corporate trust office of the
Equity Warrant Agent, for inspection by the Holders of Equity Warrants.
-17-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, all as of the day and year first above written.
USA NETWORKS, INC.
By /s/ Julius Genachowski
--------------------------------------
Senior Vice President
--------------------------------------
Attest: /s/ Joanne Hawkins
---------------------------
Name: Joanne Hawkins
----------------------------
Title: Assistant Secretary
----------------------------
THE BANK OF NEW YORK
By /s/ Ralph Chianese
--------------------------------------
Vice President
--------------------------------------
Attest: /s/ John Sivertsin
---------------------------
Name: John Sivertsin
----------------------------
Title: Vice President
----------------------------
-18-
EXHIBIT A
SPECIMEN
CUSIP
FACE
No. W __ Equity Warrants
EQUITY WARRANT CERTIFICATE
USA NETWORKS, INC.
This Warrant Certificate certifies that _________________________
_______________________________________________________________________________,
or registered assigns, is the registered Holder of Equity Warrants (the "Equity
Warrants") to purchase Common Stock, par value $0.01 per share, of USA Networks,
Inc., a Delaware corporation (the "Company"). Each Equity Warrant entitles the
Holder to purchase from the Company one fully paid and non-assessable share of
Common Stock, par value $0.01 per share, of the Company ("Common Stock") at any
time on or before 5:00 p.m. New York City time on February 4, 2009, at the
exercise price (the "Exercise Price") of $35.10 payable in lawful money of the
United States of America upon surrender of this Equity Warrant Certificate and
payment of the Exercise Price at the office or agency of the Warrant Agent in
the City of New York, the State of New York, upon such conditions set forth
herein and in the Equity Warrant Agreement (as hereinafter defined). Payment of
the Exercise Price must be made in lawful money of the United States of America,
in cash or by certified check or bank draft or bank wire transfer payable to the
order of the Company. The number of Shares which may be purchasable upon
exercise of the Equity Warrants and the Exercise Price is each subject to
adjustment upon the occurrence of certain events set forth in the Equity Warrant
Agreement.
By acceptance of this Equity Warrant Certificate, each Holder
agrees to be bound by the terms of the Equity Warrant Agreement.
Reference is hereby made to the further provisions of this Equity
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place. Capitalized defined terms used herein have the same meaning as in the
Equity Warrant Agreement.
This Equity Warrant Certificate shall not be valid unless
countersigned by the Equity Warrant Agent, as such term is used in the Equity
Warrant Agreement.
IN WITNESS WHEREOF, USA Networks, Inc. has caused this Equity
Warrant Certificate to be duly executed under its corporate seal.
USA NETWORKS, INC.
By: /s/
-------------------------------
Attest:
- --------------------
Countersigned:
The Bank of New York, as Equity Warrant Agent
By
------------------------------------
Authorized Signature
-2-
REVERSE
EQUITY WARRANT CERTIFICATE
USA NETWORKS, INC.
The Equity Warrants evidenced by this Equity Warrant Certificate
are part of a duly authorized issue of Equity Warrants issued pursuant to a
Warrant Agreement dated as of February 4, 2002 (the "Equity Warrant Agreement"),
duly executed and delivered by the Company to The Bank of New York (the "Equity
Warrant Agent"), which Equity Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Equity Warrant Agent, the Company and the Holders
(the words "Holders" or "Holder" meaning the registered Holders or registered
Holder) of the Equity Warrants.
Equity Warrants may be exercised to purchase shares of Common
Stock of the Company, par value $.01 per share ("Common Stock") upon such terms
and conditions as are set forth in the Equity Warrant Agreement at any time on
or before 5:00 p.m. New York City time on February 4, 2009, at the Exercise
Price set forth on the face hereof. The Holder of Equity Warrants evidenced by
this Equity Warrant Certificate may exercise them by surrendering the Equity
Warrant Certificate, with the form of election to purchase set forth hereon
properly completed and executed, together with payment of the Exercise Price at
the office of the Equity Warrant Agent in the City of New York in the State of
New York. In the event that upon any exercise of Equity Warrants evidenced
hereby the number of Equity Warrants exercised shall be less than the total
number of Equity Warrants evidenced hereby, there shall be issued to the Holder
hereof or his assignee a new Equity Warrant Certificate evidencing the number of
Equity Warrants not exercised. Nothing contained in the Equity Warrant Agreement
or in this Equity Warrant Certificate shall be construed as conferring upon the
Holders thereof the right to vote, to receive dividends or other distributions,
to exercise any preemptive right or to consent or to receive notice as
shareholders in respect of meetings of shareholders for the election of
Directors of the Company or any other matter, or any other rights whatsoever as
shareholders of the Company.
The Equity Warrant Agreement provides that upon the occurrence of
certain events, the number of shares of Common Stock issuable upon exercise of
an Equity Warrant may, subject to certain conditions, be adjusted.
Equity Warrant Certificates, when surrendered at the office of
the Equity Warrant Agent in the City of New York in the State of New York by the
registered Holder thereof in person or by a legal representative duly authorized
in writing or by registered mail, return receipt requested, may be exchanged, in
the manner and subject to the limitations provided in the Equity Warrant
Agreement, but without payment of any service charge, for another Equity Warrant
Certificate or Equity Warrant Certificates of like tenor evidencing in the
aggregate a like number of Equity Warrants and registered in the name of such
registered Holder.
Upon due presentment for registration of transfer of this Equity
Warrant Certificate at the office of the Equity Warrant Agent in the City of New
York in the State of New York or by registered mail, return receipt requested, a
new Equity Warrant Certificate or Equity Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Equity Warrants shall be issued to
the transferee(s) in exchange for this Equity Warrant Certificate, subject to
the limitations provided in the Equity Warrant Agreement, without charge except
for any tax or other governmental charge imposed in connection therewith.
The Company and the Equity Warrant Agent may deem and treat the
registered Holder(s) hereof as the absolute owner(s) of this Equity Warrant
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone), for the purpose of any exercise hereof, and of any distribution
to the Holder(s) hereof, and for all other purposes, and neither the Company nor
the Equity Warrant Agent shall be affected by any notice (other than a duly
presented registration of transfer in accordance with the previous paragraph) to
the contrary and shall not be bound to recognize any equitable or other claim to
or interest in such Equity Warrant on the part of any other person.
-2-
USA NETWORKS, INC.
ELECTION TO PURCHASE
USA NETWORKS, INC.
152 West 57th Street
New York, NY 10019
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by this Equity Warrant Certificate for ________ Equity
Warrants, and to purchase thereunder the shares of Common Stock (the "Shares")
provided for therein, and requests that certificates for the Shares be issued in
the name of:
(Please Print Name, Address and Social Security Number)
If said number of Equity Warrants to be exercised shall not be all of the Equity
Warrants evidenced by this Equity Warrant Certificate, the undersigned requests
that a new Equity Warrant Certificate for the balance of the Equity Warrants be
registered in the name of the undersigned or his Assignee as below indicated and
delivered to the address stated below:
Dated: ________________, 200_
Name of Equity Warrant Holder or
Assignee (Please Print):
------------------------------------------
Address:
-----------------------------------------------------------
Signature:
---------------------------------------------------------
(Signature must conform to name of Holder as specified on
the face of the Equity Warrant Certificate)
Signature Guaranteed:
----------------------------------
Signature of Guarantor
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer
Equity Warrants.)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
-----------------------------------------------------------
(Print name and address of transferee)
______ Equity Warrants, evidenced by this Equity Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint ______________________________ Attorney, to transfer the
within Equity Warrant Certificate on the books of the Company, with full power
of substitution. If said number of Equity Warrants to be transferred shall not
be all of the Equity Warrants evidenced by this Equity Warrant Certificate, the
assignor and assignee agree that such Attorney shall submit this Equity Warrant
Certificate to the Company and request that New Equity Warrant Certificates for
the applicable number of Equity Warrants be registered in the names of the
undersigned as below indicated and delivered to the addresses below:
Dated:
Signature:
- ------------------------------- -------------------------------
(Insert Social Security or (Signature must conform to name
Identifying Number of of holder as specified on the face
Assignee) of the Equity Warrant Certificate)
Address of Assignor (if necessary):
------------------------------------
Address of Assignee (if necessary):
------------------------------------
Signature Guaranteed:
- -------------------------------
Signature of Guarantor
EXHIBIT 10.34
SIXTH AMENDMENT dated as of December 7, 2001 (this
"AMENDMENT") to the Credit Agreement dated as of
February 12, 1998 (as amended, supplemented or
otherwise modified from time to time, the "CREDIT
AGREEMENT"), among USA NETWORKS, INC., a Delaware
corporation ("USANi"), USANi LLC, a Delaware limited
liability company (the "BORROWER"), the several banks
and other financial institutions and entities from time
to time parties thereto (the "LENDERS"), BANK OF
AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION and THE
BANK OF NEW YORK, as co-documentation agents (in such
capacity, the "CO-DOCUMENTATION AGENTS") and JPMORGAN
CHASE BANK (f/k/a The Chase Manhattan Bank), as
administrative agent (in such capacity, the
"ADMINISTRATIVE AGENT") and as collateral agent (in
such capacity, the "COLLATERAL AGENT").
WHEREAS, pursuant to the Credit Agreement, the Lenders have
agreed to make certain loans to the Borrower and the Issuing Bank has agreed to
issue certain Letters of Credit for the account of the Borrower; and
WHEREAS, the Borrower has requested that certain provisions of
the Credit Agreement be modified or waived in the manner provided for in this
Amendment, and the Lenders are willing to agree to such waivers and
modifications as provided for in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used and not defined
herein shall have the meanings given to them in the Credit Agreement.
2. AMENDMENTS AND WAIVERS. (a) Compliance with Sections 5.10,
5.16, 5.17, 5.18, 5.19 and 5.20 of the Credit Agreement is hereby waived to the
extent required to permit the consummation of the Borrower Transaction.
(b) The following amendments are made to the definitions contained in
Section 1.01 of the Credit Agreement:
(i) The definition of "CORE BUSINESS" is hereby amended by
deleting such definition in its entirety and substituting
in lieu thereof the following:
""CORE BUSINESS" shall mean any of the primary businesses
that USANi and its Subsidiaries and, following the
completion of the Expedia Acquisition, Expedia are engaged
in as of September 30, 2001 and natural extensions
thereof.", and
2
(ii) The definition of "GUARANTOR" is hereby amended by
deleting the parenthetical therein and substituting in
lieu thereof the following:
"(except for the Borrower, the Foreign Subsidiaries, those
subsidiaries listed on Schedule 1.01(b), the Non-Material
Subsidiaries and the Publicly-Traded Subsidiaries and each
of their respective Subsidiaries)".
(c) Section 1.01 of the Credit Agreement is hereby amended by
inserting the following definitions in their proper alphabetical order:
(i) ""BORROWER TRANSACTION" shall mean (i) the exchange or
conversion (by merger, share exchange or otherwise) of all
of the outstanding membership interests in the Borrower,
other than the membership interests in the Borrower held
by USANi, USANI Holding XI, Inc. and Home Shopping, for or
into shares of USANi capital stock and (ii) the exchange
or conversion (by merger, share exchange or otherwise) of
all of the outstanding capital stock of Home Shopping,
other than the capital stock of Home Shopping held by
USANi, for or into shares of USANi capital stock.",
(ii) ""EXPEDIA" shall mean Expedia, Inc., which, following the
completion of the Expedia Acquisition, will be a
majority-owned Subsidiary of USANi.",
(iii) ""EXPEDIA ACQUISITION" shall mean the acquisition by USANi
of a Controlling interest in Expedia in exchange for,
among other things, newly issued shares of USANi common
stock, up to 13,125,000 newly issued shares of Series A
Stock and warrants to acquire shares of USANi common
stock, in each case as described in the Expedia
Agreement.",
(iv) ""EXPEDIA AGREEMENT" shall mean the Amended and Restated
Agreement and Plan of Recapitalization and Merger, dated
as of July 15, 2001, by and among USANi, Taipei, Expedia,
and the other parties thereto, and the exhibits and other
attachments thereto, with such changes thereto that are
not in the aggregate materially adverse to the interests
of the Lenders.",
(v) ""EXPEDIA TRANSACTIONS" shall mean the Expedia
Acquisition, the NLG Payment, the Travel Channel Option,
the USA Media Transaction, the MS Guarantee and such other
related transactions as are described in the Expedia
Agreement.",
(vi) ""HRN" shall mean Hotel Reservations Network, Inc., a
majority-owned Subsidiary of USANi.",
3
(vii) ""MS GUARANTEE" shall mean USANi's agreement, in
connection with the completion of the Expedia Acquisition,
to Guarantee Expedia's payment obligations to Microsoft
Corporation under various service agreements between
Microsoft and Expedia.",
(viii) ""NLG PAYMENT" shall mean the payment of $20 million in
cash that USANi may be required to make to Expedia
pursuant to the Expedia Agreement following the completion
of the Expedia Acquisition as a result of the termination
of USANi's agreement to acquire National Leisure Group.",
(ix) ""PUBLICLY-TRADED SUBSIDIARIES" shall mean, collectively,
HRN, Styleclick, TM and, following the completion of the
Expedia Acquisition, Expedia.",
(x) ""SERIES A STOCK" shall mean the USANi Series A cumulative
convertible preferred stock, $50 per share face value,
with a term of 20 years and that is entitled to quarterly
dividend payments.",
(xi) ""STYLECLICK" shall mean Styleclick, Inc., a
majority-owned Subsidiary of USANi.",
(xii) ""TAIPEI" shall mean Taipei, Inc., a Wholly Owned
Subsidiary of USANi.","
(xiii) ""TM" shall mean Ticketmaster (f/k/a Ticketmaster
OnlineCitySearch, Inc.), a majority-owned Subsidiary of
USANi.",
(xiv) ""TRAVEL CHANNEL OPTION" shall mean the two year option
granted pursuant to the Expedia Agreement for Expedia to
acquire from USANi one-third of USANi's original equity
and economic interest in the travel channel cable network
currently under development by USANi for a purchase price
equal to one-third of the aggregate cost to date of
exercise incurred by USANi and its Subsidiaries in the
development of the travel channel plus interest at USANi's
cost of funds (such interest not to exceed the prime rate
plus 1%).",
(xv) ""USA MEDIA" shall mean USA Media, LLC, a Wholly Owned
Subsidiary of USANi.", and
(xvi) ""USA MEDIA TRANSACTION" shall mean the transfer pursuant
to the Expedia Agreement by USANi to Expedia of all of the
outstanding equity of USA Media, which will have as its
sole asset the right to receive at no cost to USA Media
advertising, marketing and promotional time valued at $15
million per year for each of the next five years, on the
various media outlets owned by USANi and
4
its Subsidiaries, which right can only be used to promote
the business of USA Media and its affiliates and their
respective partners, business affiliates and suppliers.".
(d) Section 5.01 of the Credit Agreement is hereby amended by adding
the following sentence at the end of the last paragraph thereof:
"Notwithstanding anything in this Agreement to the contrary, so long as the
Borrower is a Wholly Owned Subsidiary of USANi, the obligation of the Borrower
to provide the Administrative Agent, the Lenders and the Issuing Bank with the
financial statements of the Borrower set forth in this Section 5.01 shall cease
upon the later of (i) the consummation of the Borrower Transaction and (ii) the
date on which the Borrower is no longer required to file regular SEC Reports
with the Securities and Exchange Commission.".
(e) Section 5.07 of the Credit Agreement is hereby amended by:
(i) in clause (h) thereof, deleting the reference therein to
"$35,000,000" and replacing it with a reference to
"$70,000,000",
(ii) deleting clause (m) thereof in its entirety and replacing
it with the following: "Indebtedness of any Subsidiary
(other than the Publicly-Traded Subsidiaries and each of
their respective Subsidiaries) that is not a Guarantor to
the Borrower, USANi or any Guarantor in an aggregate
principal amount (together with all such other outstanding
Indebtedness of such Subsidiaries and Investments
outstanding under Section 5.19(h)) at any time outstanding
not in excess of $300,000,000;",
(iii) deleting "and" at the end of clause (o) thereof, and
(iv) deleting the period at the end of clause (p) thereof and
substituting the following therefor: "; (q) the MS
Guarantee; and (r) Indebtedness of the Publicly-Traded
Subsidiaries and each of their respective Subsidiaries to
the Borrower, USANi or any Guarantor in an aggregate
principal amount (together with all such other outstanding
Indebtedness of such Persons and Investments outstanding
under Section 5.19(j)) at any time outstanding not in
excess of $500,000,000.".
(f) Section 5.10 of the Credit Agreement is hereby amended by
deleting the last sentence thereof and replacing it with the following: "Nothing
in this Section 5.10 shall prohibit USANi, the Borrower or any Guarantor from
complying with the provisions of the Investment Agreement, the agreements listed
on Schedule 5.17 and the Expedia Agreement.".
(g) Section 5.16 of the Credit Agreement is hereby amended by:
5
(i) adding the following at the beginning of clause (a):
"except to consummate a transaction expressly permitted by
Section 5.17 or 5.20,", and
(ii) adding the following immediately after "PROVIDED, HOWEVER,
that none of the foregoing transactions shall be permitted
if a Default or an Event of Default has occurred and is
continuing or would result from the consummation of any
such transaction": ", and PROVIDED FURTHER, HOWEVER, that,
for purposes of this Section 5.16, none of the
Publicly-Traded Subsidiaries or any of their respective
Subsidiaries shall be considered a Material Subsidiary or
a Subsidiary constituting part of a Material Subsidiary
Group.".
(h) Section 5.17 of the Credit Agreement is hereby amended by:
(i) deleting "and" at the end of clause (i) thereof and
replacing the period at the end of clause (j) thereof with
"; and (k) the sale or other disposition of the rights of
USANi and/or one or more of its Subsidiaries as required
by the Expedia Agreement, including with respect to the
Travel Channel Option, the USA Media Transaction and the
NLG Payment.", and
(ii) adding the following at the end of such Section:
"Notwithstanding the foregoing, for purposes of this
Section 5.17, none of the Publicly-Traded Subsidiaries or
any of their respective Subsidiaries shall be considered a
Credit Party, a Material Subsidiary or a Subsidiary
constituting part of a Material Subsidiary Group.".
(i) Section 5.18(a) of the Credit Agreement is hereby amended by:
(i) in clause (i) thereof, adding the following immediately
after "except that USANi": "and the Publicly-Traded
Subsidiaries",
(ii) in clause (i) thereof, deleting the reference therein to
"$300,000,000" and replacing it with a reference to
"$500,000,000",
(iii) in clause (i) thereof, replacing "redeem shares of its
capital stock" with "redeem shares of their respective
capital stock",
(iv) in clause (i) thereof, adding the following before the ";"
at the end of such clause: "; PROVIDED that none of an
Investment made pursuant to Section 5.19(j), the
consummation of the Travel Channel Option, the
consummation of the USA Media Transaction or the
conversion or redemption of the Series A Stock in
6
accordance with its terms shall constitute a repurchase,
redemption or acquisition for purposes of this
clause (i)", and
(v) in clause (ii) thereof, deleting "and" at the end of
clause (B) thereof and replacing it with a "," and
inserting the following at the end of clause (C) thereof:
", (D) USANi may declare, make and pay (whether in cash or
shares of its capital stock, at USANi's option) dividends
on the Series A Stock in accordance with the terms
thereof, (E) USANi and any of its Subsidiaries may
declare, make and pay and agree to declare make and pay
dividends or other distributions consisting solely of
capital stock and/or rights to acquire capital stock of
the Person declaring, making or paying or agreeing to
declare make or pay such dividend or other distribution,
(F) any Subsidiary of any of the Publicly-Traded
Subsidiaries may declare, make or pay or agree to declare
make or pay dividends or other distributions to its
stockholders, and (G) in addition to the matters specified
in clauses (A) through (F) above, USANi and any of its
Subsidiaries may declare, make and pay cash dividends on
shares of its respective capital stock in an aggregate
annual amount of up to $2,000,000."
(j) Section 5.19 of the Credit Agreement is hereby amended by:
(i) in clause (e) thereof, deleting the reference therein to
"$300,000,000" and replacing it with a reference to
"$750,000,000",
(ii) in clause (h) thereof, deleting the reference therein to
"$200,000,000" and replacing it with a reference to
"$500,000,000", deleting the first parenthetical therein
in its entirety and replacing it with the following:
"(excluding the Publicly-Traded Subsidiaries and each of
their respective Subsidiaries)", and inserting the
following immediately prior to "not to exceed
$500,000,000": "outstanding",
(iii) deleting "and" at the end of clause (i) thereof,
(iv) deleting clause (j) thereof in its entirety and replacing
it with the following: " (j) Investments made after the
Effective Date in the Publicly-Traded Subsidiaries and any
of their respective Subsidiaries in an aggregate
outstanding amount not to exceed $500,000,000; PROVIDED
that any such Investment is evidenced by an intercompany
note", and
(v) inserting the following after clause (j) thereof: "; (k)
the MS Guarantee; and (l) in connection with the Expedia
Acquisition and immediately following the merger of Taipei
with and into Expedia,
7
the contributions of the Travel Channel Option and the
outstanding equity of USA Media to Expedia.".
(k) Section 5.20 of the Credit Agreement is hereby amended by:
(i) in clause (a) thereof, deleting the reference therein to
"$200,000,000" and replacing it with a reference to
"$500,000,000",
(ii) in clause (b) thereof, adding the following immediately
after "solely of capital stock": ", and/or rights to
acquire capital stock,", and
(iii) deleting "and" at the end of clause (c) thereof and
replacing the period at the end of clause (d) thereof with
"; and (e) the Expedia Acquisition.".
(l) Section 5.25 of the Credit Agreement is hereby amended by:
(i) in clause (a) thereof, adding the following at the end of
the last sentence of such Section: "; PROVIDED that,
notwithstanding the foregoing, neither USANi nor the
Borrower will be required to comply with this Section
5.25(a) with respect to any of the Publicly-Traded
Subsidiaries or any of their respective Subsidiaries
unless and until such Person becomes a Wholly Owned
Subsidiary of USANi", and
(ii) in clause (b) thereof, adding the following at the end of
the last sentence of such Section: "; PROVIDED that,
notwithstanding the foregoing, neither USANi nor the
Borrower will be required to comply with this Section
5.25(b) with respect to any of the Publicly-Traded
Subsidiaries or any of their respective Subsidiaries
unless and until such Person becomes a Wholly Owned
Subsidiary of USANi.".
(m) Set forth on Schedule I hereto is a true and complete list
of each Guarantor as of the date hereof.
3. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly
amended, waived, modified or supplemented hereby, the provisions of the Credit
Agreement are and shall remain in full force and effect.
4. REPRESENTATIONS AND WARRANTIES. Each of USANi and the
Borrower hereby represents and warrants to the Administrative Agent, the
Collateral Agent, the Issuing Bank and the Lenders as of the date hereof and as
of the Amendment Effective Date (as defined below) as follows:
(a) No Default or Event of Default has occurred and is continuing.
8
(b) The execution, delivery and performance by each of USANi and the
Borrower of this Amendment are within the scope of its corporate or company
powers, and have been duly authorized by all necessary corporate, company and,
if required, stockholder or member action on the part of each of them, and no
authorizations, approvals or consents of, and no filings or registrations with,
any governmental or regulatory authority or agency are necessary for the
execution or delivery of this Amendment by either of them or for the validity or
enforceability of this Amendment. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligation of each of USANi
and the Borrower, enforceable against each of them in accordance with its terms,
except as such enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general applicability
affecting the enforcement of creditors' rights and (b) the application of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(c) All representations and warranties of USANi and the Borrower
contained in the Credit Agreement (other than representations or warranties
expressly made only on and as of the Effective Date) are true and correct in all
material respects on and as of the date hereof with the same force and effect as
if made on and as of the date hereof.
5. EFFECTIVENESS. This Amendment shall become effective on
the date (the "AMENDMENT EFFECTIVE DATE") that the following conditions
precedent are satisfied in full:
(a) The Administrative Agent shall have received counterparts hereof,
duly executed and delivered by USANi, the Borrower and the Required Lenders; and
(b) The Administrative Agent shall have received such opinions and
certificates from USANi and the Borrower and their counsel as it may reasonably
request in form reasonably satisfactory to its counsel.
6. EXPENSES. The Borrower agrees to reimburse the
Administrative Agent and the Collateral Agent for its out-of-pocket expenses in
connection with this Amendment, including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent.
7. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the
rights and obligations of the parties hereto shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
USA NETWORKS, INC.,
by
/s/ William J. Severance
------------------------------------
Name: William J. Severance
Title: Vice President and Controller
USANi LLC,
by
/s/ William J. Severance
------------------------------------
Name: William J. Severance
Title: Vice President and Controller
JPMORGAN CHASE BANK
by
/s/ Peter B. Thauer
------------------------------------
Name: Peter B. Thauer
Title: Vice President
ABN AMRO BANK NV
by
/s/ David Carrington
------------------------------------
Name: David Carrington
Title: Group Vice President
by
/s/ Bryan Matthews
------------------------------------
Name: Bryan Matthews
Title: Corporate Banking Officer
BNP PARIBAS
by
/s/ Ben Todres
------------------------------------
Name: Ben Todres
Title: Director
Media & Telecom Finance
10
by
/s/ Serge Desrayaud
------------------------------------
Name: Serge Desrayaud
Title: Head of Asset Managment
Media & Telecom Finance
BANK OF AMERICA, N.A.
by
/s/ Thomas J. Kane
------------------------------------
Name: Thomas J. Kane
Title: Principal
THE BANK OF NEW YORK COMPANY, INC.
by
/s/ James W. Whitaker
------------------------------------
Name: James W. Whitaker
Title: Authorized Signer
THE BANK OF NOVA SCOTIA
by
/s/ Brenda S. Insull
------------------------------------
Name: Brenda S. Insull
Title: Authorized Signatory
CFP CAPITAL CORPORATION
(f/k/a Banque Worms Capital Corporation)
by
/s/ Dominique Picon
------------------------------------
Name: Dominique Picon
Title: CEO
CREDIT INDUSTRIEL ET COMMERCIAL
by
/s/ Eric Dulot
------------------------------------
Name: Eric Dulot
Title: Vice President
11
by
/s/ Eric Longuet
------------------------------------
Name: Eric Longuet
Title: Vice President
DAI-ICHI KANGYO BANK, LIMITED
by
/s/ Yudesh Sohan
-----------------------------------
Name: Yudesh Sohan
Title: Credit Officer
FIRST HAWAIIAN BANK
by
/s/ Shannon Sansevero
------------------------------------
Name: Shannon Sansevero
Title: Media Finance Officer
FLEET NATIONAL BANK
by
/s/ Manuel Bergueno
------------------------------------
Name: Manuel Bergueno
Title: Vice President
UNION BANK OF CALIFORNIA
by
/s/ Jenny Dongo
------------------------------------
Name: Jenny Dongo
Title: Vice President
12
WELLS FARGO BANK, NA
by
/s/ Glen P. Cummings
------------------------------------
Name: Glen P. Cummings
Title: Senior Vice President
SCHEDULE I
Guarantors
- --------------------------------------------- -----------------------------
NAME JURISDICTION
- --------------------------------------------- -----------------------------
Home Shopping Network, Inc. Delaware
- --------------------------------------------- -----------------------------
USANi Sub LLC Delaware
- --------------------------------------------- -----------------------------
USAi Sub, Inc. Delaware
- --------------------------------------------- -----------------------------
HSN, LP Delaware
- --------------------------------------------- -----------------------------
National Call Center LP Delaware
- --------------------------------------------- -----------------------------
HSN Capital LLC Delaware
- --------------------------------------------- -----------------------------
HSN Fulfillment LLC Delaware
- --------------------------------------------- -----------------------------
HSN Realty LLC Delaware
- --------------------------------------------- -----------------------------
HSN of Nevada LLC Delaware
- --------------------------------------------- -----------------------------
New-U Studios Holdings, Inc. Delaware
- --------------------------------------------- -----------------------------
HSN General Partner LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA LLC Delaware
- --------------------------------------------- -----------------------------
USA Networks Partner LLC Delaware
- --------------------------------------------- -----------------------------
USA Cable (New York General Partnership) New York
- --------------------------------------------- -----------------------------
Studios USA Television LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA First-Run Television LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Pictures LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Programming LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Talk Productions LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Talk Television LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Pictures Development LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Television Distribution LLC Delaware
- --------------------------------------------- -----------------------------
Studios USA Talk Video LLC Delaware
- --------------------------------------------- -----------------------------
New-U Pictures Facilities LLC Delaware
- --------------------------------------------- -----------------------------
EXHIBIT 10.43
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between
Julius Genachowski ("Executive") and USA Networks, Inc., a Delaware corporation
(the "Company"), and is effective August 9, 2000 (the "Effective Date").
WHEREAS, the Company desires to establish its right to the services of
Executive, in the capacity described below, on the terms and conditions
hereinafter set forth, and Executive is willing to accept such employment on
such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, Executive and the Company have agreed and do hereby agree as follows:
1A. EMPLOYMENT. The Company agrees to employ Executive as Senior Vice
President, General Counsel and Secretary, and Executive accepts and agrees to
such employment. During Executive's employment with the Company, Executive shall
do and perform all services and acts necessary or advisable to fulfill the
duties and responsibilities as are commensurate and consistent with Executive's
position and shall render such services on the terms set forth herein. Executive
shall have supervision and day-to-day authority over the legal affairs of the
Company and such other business and legal affairs as the parties may mutually
agree. During Executive's employment with the Company, Executive shall report
directly to the Vice Chairman (hereinafter referred to as the "Reporting
Officer"). During any period in which the position of Vice Chairman is vacant,
Executive shall report to the senior executive officer who has responsibility
for corporate staff functions. Executive shall have such powers and duties with
respect to the Company as may reasonably be assigned to Executive by the Board
or Reporting Officer, to the extent consistent with Executive's position and
status as set forth above. Executive agrees to devote all of his working time,
attention and efforts to the Company and to perform the duties of Executive's
position in accordance with the Company's policies as in effect from time to
time. Executive's principal place of employment shall be the Company's offices
located in New York City. Executive may work in the Washington, D.C. area every
other Friday (and remain in Washington, D.C. through the weekend), following an
initial transition of up to four months during which Executive may work in
Washington, D.C. every Friday. Executive may also occasionally work in
Washington D.C. on other weekdays, up to three days per month.
2A. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on
the Effective Date and shall continue until September 30, 2002, 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 Executive an
annual base salary of $400,000 (the "Base Salary"), payable in equal biweekly
installments or in accordance with the Company's payroll practice as in effect
from time to time.
(b) DISCRETIONARY BONUS. During the Term, Executive shall be eligible to
receive discretionary annual bonuses.
(c) STOCK OPTIONS. In consideration of Executive's entering into this
Agreement, Executive has been granted under USA Networks, Inc.'s 1997 Stock and
Annual Incentive Plan (the "Plan") a non-qualified stock option (the "Option")
to purchase 200,000 shares of USA Networks, Inc. ("USAi") common stock, par
value $.0l per share (the "Common Stock"). The exercise price of the Option is
$21.875. 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, one year following the termination of Executive's employment
with the Company for any reason other than Cause. The Option shall become vested
and exercisable following a Change in Control. Upon termination by the Company
other than for Cause, or by Executive for Good Reason, all of Executive's
options that would vest in the 12 months following such termination shall become
vested and exercisable immediately upon such termination. Notwithstanding the
foregoing, expiration of the Term without renewal shall not result in the
acceleration of any options that are not then vested and exercisable.
(d) BENEFITS. From the Effective Date through the date of termination of
Executive's employment with the Company for any reason, Executive 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 similarly situated Executives of
the Company. Without limiting the generality of the foregoing, Executive shall
be entitled to the following benefits:
(i) REIMBURSEMENT FOR BUSINESS EXPENSES. During the Term, the
Company shall reimburse Executive for all reasonable and necessary expenses
incurred by Executive in performing his duties for the Company, on the same
basis as similarly situated Executives and in accordance with the Company's
policies as in effect from time to time.
(ii) VACATION. During the Term, Executive 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
Executives of the Company generally.
(iii) APARTMENT. Throughout the period of the Executive's employment
with the Company during the Term, Executive shall receive up to $50,000
annually for an apartment in New York City for Executive's use, plus the
cost of a broker to obtain the initial New York Apartment (such broker cost
not to exceed $7,500 in the aggregate) but not the cost of a broker for any
successor apartment(s). Such payments shall begin as of the Effective Date,
and Executive shall be solely responsible for the payment for any
transitional housing until a rental apartment is obtained. The Company
shall pay the Executive such additional amounts as shall be necessary to
make the Executive whole on a net after-tax basis for all Taxes (as defined
herein) required to be paid by the Executive
2
with respect to all taxable income he receives pursuant to the provisions
of this Section 3A(d)(iii); provided that the aggregate amount payable by
the Company under this Section 3A(d)(iii) shall not exceed $100,000 per
year (with the exception that, if Executive uses the services of a broker
to obtain the New York apartment, the additional aggregate amount payable
by the Company, on a one-time basis, shall not exceed $15,000). The term
"Taxes" means all federal, state and local income, employment and capital
gains taxes. At the time Executive rents the New York apartment, he shall
notify the Company in writing of the annual rent for such apartment (and
from time to time for any successor apartment). Executive shall also
certify (from time to time and at the request of the Company) that he
continues to maintain a separate residence in the Washington D.C. area.
(iv) RELOCATION. Executive shall receive $7,500 for reasonable
relocation costs, including costs associated with setting up the New York
apartment for residency.
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 57th Street
New York, NY 10019
Attention: Vice Chairman
If to Executive: Julius Genachowski
3005 Porter Street, N.W.
Washington, D.C. 20008
Either party may change such party's address for notices by notice duly given
pursuant hereto.
5A. GOVERNING LAW; JURISDICTION. 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. Any and all disputes between the parties
which may arise pursuant to this Agreement will be heard and determined before
an appropriate federal court in New York, or, if not maintainable therein, then
in an appropriate New York state court. The parties acknowledge that such courts
have jurisdiction to interpret and enforce the provisions of this Agreement, and
the parties consent to, and waive any and all objections that they may have as
to, personal jurisdiction and/or venue in such courts.
3
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. Executive 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 Executive has executed
and delivered this Agreement on July 19, 2000.
USA NETWORKS, INC.
/s/ Victor A. Kaufman
------------------------------------------
By: Victor A. Kaufman
Title: Vice Chairman
/s/ Julius Genachowski
------------------------------------------
Julius Genachowski
4
STANDARD TERMS AND CONDITIONS
1. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. In the event Executive's employment hereunder is terminated by
reason of Executive's death, the Company shall pay Executive's designated
beneficiary or beneficiaries, within 30 days of Executive's death in a lump sum
in cash, Executive'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 Executive's incapacity due to physical
or mental illness ("Disability"), Executive shall have been absent from the
full-time performance of Executive's duties with the Company for a period of
four consecutive months and, within 30 days after written notice is provided to
him by the Company (in accordance with Section 6 hereof), Executive shall not
have returned to the full-time performance of his duties, Executive's employment
under this Agreement may be terminated by the Company for Disability. During any
period prior to such termination during which Executive is absent from the
full-time performance of Executive's duties with the Company due to Disability,
the Company shall continue to pay Executive's Base Salary at the rate in effect
at the commencement of such period of Disability, offset by any amounts payable
to Executive under any disability insurance plan or policy provided by the
Company. Upon termination of Executive's employment due to Disability, the
Company shall pay Executive within 30 days of such termination (i) Executive'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 Executive 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 Executive'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
Executive; PROVIDED, HOWEVER, that after indictment, the Company may suspend
Executive 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 Executive of a fiduciary duty owed to the Company; (iii) a material
breach by Executive of any of the covenants made by Executive in Section 2
hereof; or (iv) the willful or gross neglect by Executive of the material duties
required by this Agreement. In the event of Executive'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 Executive's employment is terminated by the Company for any reason other than
Executive's death or Disability or for Cause, or by Executive for Good Reason
(as defined below), then (i) the Company shall pay Executive the Base Salary
through the end of the Term over the course of the then remaining Term; and (ii)
the Company shall pay Executive 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), (iii) the Company shall continue to make New
York apartment payments pursuant to Section 3A(d)(iii) until the earliest time
that Executive can terminate or sublease the apartment lease; (iv) certain of
Executive's unvested stock options shall become vested and exercisable, pursuant
to Section 3A(c) of this Agreement. As used herein, "Good Reason" means that the
Company, without Executive's written consent (i) reduces Executive's Base Salary
or benefits, provided that Company may alter, amend or terminate any benefit
plan not expressly provided for under Sections 3A so long as any such changes
apply to executive officers generally; (ii) materially reduces Executive's
principal duties, responsibilities or authority as Senior Vice President and
General Counsel, including noncompliance with the reporting provision in
Section 1A; (iii) relocates Executive's principal place of employment outside
the New York metropolitan area or does not comply with the obligations
concerning Washington DC in Section 1A; or (iv) materially breaches this
Agreement.
(e) MITIGATION; OFFSET. In the event of termination of Executive's
employment prior to the end of the Term, Executive 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 Executive obtains other
employment during the Term, the amount of any payment or benefit provided for
under Section 1 hereof which has been paid to Executive shall be refunded to the
Company by Executive in an amount equal to any compensation earned by Executive
as a result of employment with or services provided to another employer after
the date of Executive's termination of employment and prior to the otherwise
applicable expiration of the Term, and all future amounts payable by the Company
to Executive during the remainder of the Term shall be offset by the amount
earned by Executive from another employer. For purposes of this Section 1(e),
Executive shall have an obligation to inform the Company regarding Executive'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 Executive'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 Executive (together with any interest or earnings thereon) that has
not yet been paid.
2. CONFIDENTIAL INFORMATION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.
(a) CONFIDENTIALITY. Executive acknowledges that while employed by the
Company Executive will occupy a position of trust and confidence. Executive
shall not, except as may be required to perform Executive's duties hereunder or
as required by applicable law, without limitation in time or until such
information shall have become public other than by Executive'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 Executive 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
2
client and customer lists and all papers, resumes, and records (including
computer records) of the documents containing such Confidential Information.
Executive 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. Executive agrees to deliver or return to the Company, at
the Company's request at any time or upon termination or expiration of
Executive'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 Company and its
subsidiaries or affiliates or prepared by Executive in the course of Executive'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) PROPRIETARY RIGHTS; ASSIGNMENT. All Executive Developments shall be
made for hire by the Executive for the Company or any of its subsidiaries or
affiliates. "Executive 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
Executive or work performed by the Executive 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 Executive
Developments shall remain the sole property of the Company or any of its
subsidiaries or affiliates. The Executive shall acquire no proprietary interest
in any Confidential Information or Executive Developments developed or acquired
during the Term. To the extent the Executive may, by operation of law or
otherwise, acquire any right, title or interest in or to any Confidential
Information or Executive Development, the Executive hereby assigns to the
Company all such proprietary rights. The Executive 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 Executive
Developments.
(c) COMPLIANCE WITH POLICIES AND PROCEDURES. During the Term, Executive
shall adhere to the policies and standards of professionalism set forth in the
Company's Policies and Procedures as they may exist from time to time.
(d) REMEDIES FOR BREACH. Executive expressly agrees and understands that
the remedy at law for any breach by Executive 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
Executive'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
3
any breach by Executive of any of the provisions of this Section 2, which may be
pursued by or available to the Company.
(e) 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 Executive'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) between the parties with
respect to the Executive's employment with the Company or any if its affiliates
(it being understood that this Agreement does not terminate or alter Executive's
prior grants of stock options and restricted stock). Executive 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 Executive has not relied upon,
any representations, promises or inducements except to the extent the same is
expressly set forth in this Agreement. Executive hereby represents and warrants
that by entering into this Agreement, Executive will not rescind or otherwise
breach an employment agreement with Executive'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 Executive 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 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
4
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. Subject to Section 1A above, neither the assignment of
Executive to a different Reporting Officer due to a reorganization or an
internal restructuring of the Company or its affiliated companies nor a change
in the title of the Reporting Officer shall constitute a modification or a
breach of this Agreement.
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 Executive harmless
for acts and omissions in Executive's capacity as an officer, director or
Executive 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 Executive for any losses incurred by Executive as a
result of acts described in Section 1(c) of this Agreement.
ACKNOWLEDGED AND AGREED:
Date: July 19, 2000
USA NETWORKS, INC.
/s/ Victor A. Kaufman
------------------------------------------
By: Victor A. Kaufman
Title: Vice Chairman
/s/ Julius Genachowski
------------------------------------------
Julius Genachowski
5
USA SUBSIDIARIES AS OF 12/31/01
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
AST LLC Delaware
AST SUB INC Delaware
Exception Management Services LP Delaware
Home Shopping Espanol S. De.R.L. Mexico
Home Shopping Network En Espanol LLC Delaware
Home Shopping Network En Espanol LP Delaware
HSE Media LLC Delaware
HSN Capital LLC Delaware
HSN Catalog Services, Inc Delaware
HSN Direct LLC Delaware
HSN Fulfillment LLC Delaware
HSN General Partner LLC Delaware
HSN Home Shopping Network GmbH Germany
HSN Improvements, LLC Delaware
HSN Interactive LLC Delaware
HSN LP Delaware
HSN of Nevada LLC Delaware
HSN Realty LLC Delaware
HSNAutomatic LLC Delaware
Ingenious Designs LLC Delaware
MarkeTech Services, Inc. Delaware
Short Shopping LLC Delaware
ECS Sports Fulfillment LLC Delaware
Home Shopping Network, Inc Delaware
Hotel Reservation Network, Inc. Delaware
HTRF Holdings, Inc Delaware
New-U Studios Holdings, Inc. Delaware
Precision Response Corp Florida
Silver King Investment Holdings, Inc. Delaware
SK Holding Inc. Delaware
SKC Investments Inc. Delaware
Styleclick, Inc. Delaware
Taipai, Inc Delaware
Taiwan Travel Inc. Delaware
Ticketmaster Delaware
TMC Realty LLC California
USA Broadcasting Inc. Delaware
USA Electronic Commerce Solutions LLC Delaware
USA Films, LLC Delaware
USA Media Corp Delaware
USA Media LLC Delaware
USA Network Interactive LLC Delaware
USA Networks Holdings, Inc. Delaware
USA Television Group LLC Delaware
USA Video Distribution LLC Delaware
USAi Sub Inc. Delaware
USANI Holding XI, Inc. Delaware
USANI LLC Delaware
USANI Sub LLC Delaware
ATL Productions, Inc. Delaware
Black Crow Productions, Inc. Delaware
Crosby Films Inc Wyoming
Eva Productions Inc Wyoming
Evergreen Pictures Inc California
Glacier Films, Inc. Delaware
Gramercy Films LLC Delaware
Interscope Communications, Inc. Delaware
Interscope Films, Ltd Delaware
Island Pictures Corporation Delaware
Lava Films, Inc. Delaware
McCools Inc. Wyoming
New Millenium Pictures LLC California
October Films Inc Delaware
OFI Holdings Inc. Delaware
Out There Productions Limited Delaware
PFE Development Inc Delaware
Polygram Filmed Entertainment Distribution, Inc. Delaware
Polygram Filmed Entertainment, Inc. Delaware
Shokri Pictures Inc Wyoming
Vat Films, Inc. California
Vat Productions, Inc. California
Volcanic Films, Inc. California
Yala Productions Inc. Massachusetts
Banderole Development LLC Delaware
Broadway Legends LLC Delaware
Crime Network, LLC Delaware
Exposure Studios LLC Delaware
Flagship Development LLC Delaware
Happy Hours Development LLC Delaware
Lexi Productions LLC Delaware
Music of Sci Fi Channel LLC Delaware
Music of USA Cable Entertainment LLC Delaware
Music of USA Network LLC Delaware
NATV Sales Inc. Nevada
NATV Sub Corp LLC Delaware
NCL LLC Delaware
Nicholas Productions LLC Delaware
North American Television, Inc. Nevada
North Bridge Programming Inc Canada
NWI Cable Nevada
NWI Direct Inc. Nevada
NWI Network Inc. Nevada
NWI Television Nevada
NWI Vision Inc Nevada
Sci Fi Channel Publishing LLC Delaware
Sci Fi Lab Development LLC Delaware
Sci Fi Lab LLC Delaware
Sci Fi LLC Delaware
Storm Front LLC Delaware
Trio Cable, Inc. Nevada
Trio Direct Inc. Nevada
Trio Entertainment, Inc Canada
Trio Network Inc. Nevada
Trio Productions, LLC Nevada
Trio Television Inc. Nevada
Trio Vision Inc Nevada
True Blue Productions LLC Delaware
Underworld Productions LLC Delaware
USA Cable New York
USA Cable Entertainment Development LLC Delaware
USA Cable Entertainment LLC Delaware
USA Cable Entertainment Publishing LLC Delaware
USA Network Publishing LLC Delaware
USA Networks Partner LLC Delaware
White Flag Development LLC Delaware
Writers Development LLC Delaware
Coldwater USA Cable Development LLC Delaware
Fare Holm Productions Limited Canada
Laurel Productions LLC Delaware
Music of Studios USA LLC California
New U Pictures Facilities LLC Delaware
Studios USA Canada Productions Delaware
Studios USA First Run Entertainment LLC Delaware
Studios USA First Run Productions LLC Delaware
Studios USA First-Run TV LLC Delaware
Studios USA LLC Delaware
Studios USA Music Publishing LLC Delaware
Studios USA Pictures Development LLC Delaware
Studios USA Pictures LLC Delaware
Studios USA Programming LLC Delaware
Studios USA Reality TV LLC Delaware
Studios USA Talk Productions LLC Delaware
Studios USA Talk Television LLC Delaware
Studios USA Talk Video Delaware
Studios USA TV Distribution LLC Delaware
Studios USA TV LLC Delaware
SUSA Music Publishing LLC Delaware
The Stupids Family Productions, Inc Delaware
Cinema Acquisition LLC Delaware
City Search (Canada) Canada
Cityauction, Inc California
FC1013 Limited (UK) United Kingdom
Match.com Delaware
Reserve America CA Inc Delaware
Reserve America Holdings, Inc Canada
Reserve America ON, Inc Canada
Reserve America US Holdings, Inc Delaware
Reserve America, Inc Delaware
Sidewalk.com, Inc. Nevada
Synchro Systems Limited (UK) United Kingdom
Ticketmaster California Gift Certificates LLC California
Ticketmaster Canada Ltd. (Canada) Canada
Ticketmaster Cinema Group LTD Delaware
Ticketmaster Group, Inc Illionois
Ticketmaster Indiana Holdings Corporation Indiana
Ticketmaster LLC Delaware
Ticketmaster Multimedia Holdings Inc Delaware
Ticketmaster New Ventures Holdings, Inc. Delaware
Ticketmaster Online City Search - Canada Canada
Ticketmaster Online City Search - UK United Kingdom
Ticketmaster Pacific Acquisitions, Inc. Delaware
Ticketmaster Ticketing Co., Inc. Delaware
Ticketmaster UK Limited (UK) United Kingdom
Ticketmaster-Indiana LLC Indiana
Ticketweb, Inc. Delaware
Ticketweb, Ltd. United Kingdom
TM Movie Tix, Inc. Delaware
TM Number One Limited (Uk) United Kingdom
TM Vista (fna 2B Technology) Virginia
World Wide Ticket Systems Washington
Access Direct Telemarkting Inc Iowa
Avaltus, Inc New Jersey
Hancock Information Group, Inc Florida
PRC Netcare.Com, Inc Delaware
Precision Relay Services, Inc. Florida
Precision Response of Colorado, Inc. Delaware
Precision Response of Louisana Delaware
Precision Response of North America Delaware
Precision Response of PA Delaware
Precision Response of Texas Delaware
City Desk, Inc Florida
Dance Show, Inc. Florida
Generation n, Inc. Florida
Hotties, Inc. Florida
Kenneth's Freakquency, Inc. Florida
Lincoln Lounge, Inc. Florida
Lips, USA Inc. Florida
Miami USA Broadcasting Productions, Inc. Florida
Miami USA Broadcasting, Inc. Florida
Neil at Night, Inc. Florida
North Central LPTV Inc. Delaware
Northeast LPTV, Inc Delaware
Ocean Drive, USA, Inc. Florida
Out Loud, Inc. Florida
Personal Box, Inc. Florida
Radio Daze, Inc. Florida
South Central LPTV Inc Delaware
Southeast LPTV, Inc. Delaware
Telemation Inc. Delaware
Traffic Jams, USA, Inc. Florida
USA Broadcasting Productions, Inc. Delaware
USA Station Group LPTV, Inc. Delaware
USA Station Group of Ann Arbor, Inc. Delaware
USA Station Group of Nebraska, LLC Delaware
USA Station Group of Northern Cal. Inc. Delaware
West LPTV, Inc. Delaware
Getting Away Productions, Inc. Canada
J&H Productions, Inc. Canada
Mariette Productions Canada, Inc. Canada
Savoy Pictures Entertainment Inc. Delaware
Savoy Pictures Inc. Massachusetts
Savoy Pictures Television Programming, Inc. Delaware
Savoy Stations, Inc Delaware
Savoy Television Holdings, Inc. Delaware
Simple Plan Productions, Inc Delaware
The Stupids Family Productions, Inc Delaware
SF Broadcasting of Green Bay, Inc. Delaware
SF Broadcasting of Honolulu, Inc. Delaware
SF Broadcasting of Mobile, Inc. Delaware
SF Broadcasting of New Orleans, Inc. Delaware
SF Broadcasting of Wisconsin Delaware
SF Green Bay License Subsidiary, Inc. Delaware
SF Honolulu License Subsidiary, Inc. Delaware
SF Mobile License Subsidiary, Inc. Delaware
SF Multistations, Inc. Delaware
SF New Orleans License Subsidiary, Inc. Delaware
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the following registration
statements of our report dated January 29, 2002 with respect to the consolidated
financial statements and financial statement schedule of USA Networks, Inc. and
our reports dated January 29, 2002 with respect to the consolidated financial
statements and financial statement schedule of Home Shopping Network, Inc. and
Subsidiaries and USANi LLC and Subsidiaries included in the Annual Report (Form
10-K) for the year ended December 31, 2001, filed with the Securities and
Exchange Commission:
COMMISSION FILE NO.
-------------------
Form S-8, No. 333-03717
Form S-8, No. 333-18763
Form S-8, No. 333-34146
Form S-8, No. 333-37284
Form S-8, No. 333-37286
Form S-8, No. 333-48863
Form S-8, No. 333-48869
Form S-8, No. 333-57667
Form S-8, No. 333-57669
Form S-8, No. 333-65335
Form S-8, No. 033-53909
Form S-8, No. 333-81576
Form S-8, No. 333-68388
Form S-8, No. 333-68120
New York, New York
April 1, 2002