UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 1, 2002
USA NETWORKS, INC.
(Exact name of Registrant as specified in charter)
Delaware 0-20570 59-2712887
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
152 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 314-7300
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
The following financial information for the Company for the year ended
December 31, 2001 and for certain of its subsidiaries, USANi LLC and Home
Shopping Network, Inc., is set forth in the exhibits to this Form 8-K and such
exhibits are incorporated by reference herein. The Management's Discussion and
Analysis covering the applicable periods for USA Networks, Inc. is also
attached as an exhibit hereto and is incorporated herein by reference.
(1) Consolidated Financial Statements of USA Networks, Inc.
o Report of Independent Auditors--Ernst & Young LLP
o Consolidated Statement of Operations for the Years Ended
December 31, 2001, 2000 and 1999
o Consolidated Balance Sheets as of December 31, 2001 and 2000
o Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
o Consolidated Statements of Cash Flows for Years Ended December
31, 2001, 2000 and 1999
o Notes to Consolidated Financial Statements
(2) Home Shopping Network, Inc. and Subsidiaries Financial Statements
o Report of Independent Auditors--Ernst & Young LLP
o Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999
o Consolidated Balance Sheets as of December 31, 2001 and 2000
o Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
o Notes to Consolidated Financial Statements
(3) USANi LLC and Subsidiaries Financial Statements
o Report of Independent Auditors--Ernst & Young LLP
o Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999
o Consolidated Balance Sheets as of December 31, 2001 and 2000
o Consolidated Statements of Members' Equity for the Years Ended
December 31, 2001, 2000 and 1999
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
o Notes to Consolidated Financial Statements
(4) USA Networks, Inc. Management's Discussion and Analysis
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(c) Exhibits.
99.1 Consolidated Financial Statements of USA Networks, Inc. and
Subsidiaries
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations of USA Networks, Inc. and
Subsidiaries
99.3 Consolidated Financial Statements of Home Shopping Network,
Inc. and Subsidiaries
99.4 Consolidated Financial Statements of USANi LLC and
Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USA NETWORKS, INC.
By: /s/ Dara Khosrowshahi
---------------------------------
Name: Dara Khosrowshahi
Title: Executive Vice President and
Chief Financial Officer
Date: March 1, 2002
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
99.1 Consolidated Financial Statements of USA Networks,
Inc. and Subsidiaries
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations of USA Networks,
Inc. and Subsidiaries
99.3 Consolidated Financial Statements of Home Shopping
Network, Inc. and Subsidiaries
99.4 Consolidated Financial Statements of USANi LLC and
Subsidiaries
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 of USA Networks, Inc. and our reports dated
January 29, 2002 with respect to the consolidated financial statements of Home
Shopping Network, Inc. and Subsidiaries and USANi LLC and Subsidiaries included
in the Current Report on Form 8-K dated February 28, 2002 for the year ended
December 31, 2001, filed with the Securities Exchange Commission.
/s/ Ernst & Young LLP
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-3, No. 333-81576
Form S-3, No. 333-68388
Form S-4, No. 333-68120
New York, New York
February 28, 2002
Exhibit 99.1
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. 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
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.
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
1
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues..................................................................... $5,284,807 $4,596,152 $3,371,745
Operating costs and expenses:
Cost of sales.................................................................... 2,481,881 2,072,901 1,364,945
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.
2
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2001 2000
---- ----
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
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 138,644 38,301
related parties)..............................................................................
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.
3
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2001 2000
---- ----
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
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.
4
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTE
----
RECEIVABLE
FROM KEY
EXECUTIVE
CLASS B RETAINED ACCUM. FOR
CONVERTIBLE ADDIT. EARNINGS OTHER UNEARNED COMMON
COMMON COMMON PAID-IN /(ACCUM. COMP. TREASURY COMPENSA STOCK
TOTAL STOCK STOCK CAPITAL DEFICIT) INCOME STOCK TION ISSUANCE
----- ----- ----- ------- -------- ------ ----- ---- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998...... $2,571,405 $2,545 $630 $2,592,456 $(26,727) $8,852 -- $(1,353) $(4,998)
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) 722 --
Amortization of unearned
compensation related to stock
options and equity participation
plans........................... 631 -- -- -- -- -- -- 631 --
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999...... 2,769,729 2,740 630 2,830,506 (54,358) 4,773 (9,564) -- (4,998)
Comprehensive income:
Net loss for the 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) -- (4,998)
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) $ -- $(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.
5
USA NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
(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.
6
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.
7
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, 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.
8
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.
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
9
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
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
10
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.
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
11
below under "New Accounting Pronouncements" for further information related to
goodwill and other intangible assets.
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
$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.
12
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.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the 2001 presentation, including all
amounts charged to customers for shipping and handling, which are now presented
as revenue and cost of goods sold.
NOTE 3-- BUSINESS ACQUISITIONS
The Company has made numerous acquisitions during the reporting
periods. Below is a discussion of each significant acquisition.
13
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 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.
14
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 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).
15
2001 2000
---- ----
YEARS ENDED DECEMBER 31,
------------------------
(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/ 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:
2001 2000
---- ----
DECEMBER 31,
--------------
(IN THOUSANDS)
Intangible Assets, net:
Goodwill.................................................................. $7,015,952 $7,181,196
Other..................................................................... 220,331 280,666
---------------------------
$7,236,283 $7,461,862
---------------------------
16
NOTE 5 -- LONG-TERM OBLIGATIONS
2001 2000
---- ----
DECEMBER 31,
--------------
(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; .... 498,515 498,213
interest payable May 15 and November 15 commencing May 15, 1999. Interest rate
at December 31, 2001 was 6.75%
Unsecured $37,782,000 7% Convertible Subordinated Debentures ("Savoy Debentures") 36,118 35,163
due July 1, 2003 convertible into USAi Common Stock at a conversion price of
$33.22 per share
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
----------------------
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.
17
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
-----------------------
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:
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
(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:
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
(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
----------------------------------------
18
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.
2001 2000
---- ----
DECEMBER 31,
-----------------
(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.
19
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
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
(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
--------------------------------------------------
20
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 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.
21
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 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
22
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.
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.
23
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
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:
24
Shares Price Shares Price Shares Price
------ Range ------ Range ------ Range
----- ----- -----
2001 2000 1999
---- ---- ----
December 31,
------------
(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 mergers.................... 7,503 $19-$28 19,526 $4-$28 10,007 $16-28
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.
Range of Exercise Price Outstanding At Weighted Weighted Exercisable At Weighted
- ----------------------- December 31, 2001 Average Average December 31, 2000 Average
----------------- Remaining Exercise ----------------- Exercise
Contractual Price Price
Life ----- -----
----
Options Outstanding Options Exercisable
------------------- -------------------
(In thousands) (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 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
25
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:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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.
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.
26
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 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.
27
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:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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
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).
28
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.
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 .... (56,948) 427,575 39,551 (17,383)
change (a) (b)
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)
29
- -----------
(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.
(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.
The following is a reconciliation of Operating Income to Adjusted
EBITDA for 2001, 2000 and 1999.
30
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
------------------------------
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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.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
-----------------------------------------
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.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
-----------------------------------------
31
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.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
--------------------------------------------
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.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.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
--------------------------------------------
32
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.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.
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
December 31, 2001 December 31, 2000
----------------- -----------------
(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)
33
NOTE 18 -- MARKETABLE SECURITIES AND INVESTMENTS HELD FOR SALE
At December 31, 2001, marketable securities available-for-sale were as
follows (in thousands):
Cost Gross Gross Estimated
---- Unrealized Unrealized Fair Value
Gains Losses ----------
----- ------
U.S. Government and agencies................ $147,106 $230 $(217) $147,119
Non-US government securities and other fixed 22,350 - -- 22,350
Term obligations..........................
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):
Cost Gross Gross Estimated
---- Unrealized Unrealized Fair Value
Gains Losses ----------
----- ------
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.
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
-----------------------------
34
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.
2001 2000
----------- ----------
AS OF AND FOR THE
YEARS ENDED
DECEMBER 31,
------------------------
(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.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999
------ ------ ------
YEARS ENDED DECEMBER 31,
-------------------------
(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
2001 2000
------- ---------
DECEMBER 31,
---------------
(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
35
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 common stock and
Class B common stock paid on February 24, 2000. All share numbers give effect to
such stock split.
2001 2000 1999
------- ------- ------
YEARS ENDED DECEMBER 31,
------------------------
(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............. -- -- --
----------- --------- ---------
374,101 359,688 367,927
Diluted weighted average shares.........................
Basic earnings (loss) per share......................... $(.33) $(.25) $.05
Diluted earnings (loss) per share....................... $(.33) $(.25) $.04
36
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
-----------------------
(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)
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
-----------------------
(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
37
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.
As of and for the Year Ended December 31, 2001
USAI Holdco Usani Wholly Non-guarantor Eliminations
---- ------ LLC Owned Subsidiaries ------------
--- Subsidiary ------------
Guarantors
-----------
Current assets ..................... $ 585,212 $ -- $ 749,559 $ 932,651 $ 708,810 $ --
Property and equipment net ......... -- -- 24,755 198,971 210,389 --
Goodwill and other intangible ...... 71,598 -- 2,260 4,751,722 2,410,703 --
assets, net
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)
------------ ------------ ------------ ------------ ------------ ------------
Total assets ....................... $ 4,668,071 $ 1,319,505 $ 7,938,805 $ 6,693,514 $ 4,290,072 $(13,206,915)
------------ ------------ ------------ ------------ ------------ ------------
Current liabilities ................ $ 238,934 $ -- $ (15,540) $ 836,754 $ 535,148 $ --
Long-term debt, less current portion -- -- 498,515 606 45,546 --
Other liabilities .................. 483,636 -- 1,057,543 426,245 604,437 (1,922,642)
Minority interest .................. -- -- (141,390) (108,769) 442,450 4,776,078
Interdivisional equity ............. -- -- -- 5,538,678 2,662,491 (8,201,169)
Stockholders' equity ............... 3,945,501 1,319,505 6,539,677 -- -- (7,859,182)
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity ............. $ 4,668,071 $ 1,319,505 $ 7,938,805 $ 6,693,514 $ 4,290,072 $(13,206,915)
------------ ------------ ------------ ------------ ------------ ------------
Revenue ............................ $ -- $ -- $ -- $ 3,288,286 $ 2,013,601 $ (17,080)
Operating expenses ................. (10,725) -- (34,154) (2,745,705) (2,277,478) 17,080
Interest expense, net .............. (21,757) -- 4,650 (33,297) 1,966 --
Other income (expense), net ........ (92,570) 64,557 367,373 (4,399) (38,284) (348,900)
Provision for income taxes ......... -- -- -- (95,560) (13,317) --
Minority interest .................. -- -- -- (211,471) 62,132 --
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income from continuing
operations ....................... $ (125,052) $ 64,557 $ 337,869 $ 197,854 $ (251,380) $ (348,900)
------------ ------------ ------------ ------------ ------------ ------------
Gain on disposal of Broadcasting
Stations ......................... 517,847 -- -- -- -- --
Net income (loss) from cumulative
effect of accounting change ...... (9,187) 1,901 6,470 2,438 (11,625) 816
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) .................. $ 383,608 $ 66,458 $ 344,339 $ 200,292 $ (263,005) $ (348,084)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from operations ......... $ (36,116) $ -- $ (25,770) $ 590,779 $ 141,039 $ --
Cash flows used in investing
activities ....................... 31,993 -- (7,774) (65,279) 92,995 --
Cash flows from financing
activities ....................... 4,123 -- 745,346 (458,247) (227,214) --
Net Cash used by discontinued
operations ....................... -- -- -- (48,058) -- --
Effect of exchange rate ............ -- -- (417) 269 (3,515) --
Cash at the beginning of
the period ....................... -- -- 78,079 (28,949) 195,093 --
------------ ------------ ------------ ------------ ------------ ------------
Cash at the end of the period ...... $ -- $ -- $ 789,464 $ (9,485) $ 198,398 $ --
------------ ------------ ------------ ------------ ------------ ------------
USAi
Consolidated
------------
Current assets ..................... $ 2,976,232
Property and equipment net ......... 434,115
Goodwill and other intangible ...... 7,236,283
assets, net
Investment in subsidiaries ......... --
Other assets ....................... 1,056,422
------------
Total assets ....................... $ 11,703,052
------------
Current liabilities ................ $ 1,595,296
Long-term debt, less current portion 544,667
Other liabilities .................. 649,219
Minority interest .................. 4,968,369
Interdivisional equity ............. --
Stockholders' equity ............... 3,945,501
------------
Total liabilities and
shareholders' equity ............. $ 11,703,052
------------
Revenue ............................ $ 5,284,807
Operating expenses ................. (5,050,982)
Interest expense, net .............. (48,438)
Other income (expense), net ........ (52,223)
Provision for income taxes ......... (108,877)
Minority interest .................. (149,339)
------------
Net (loss) income from continuing
operations ....................... $ (125,052)
------------
Gain on disposal of Broadcasting
Stations ......................... 517,847
Net income (loss) from cumulative
effect of accounting change ...... (9,187)
------------
Net income (loss) .................. $ 383,608
------------
Cash flows from operations ......... $ 669,932
Cash flows used in investing
activities ....................... 51,935
Cash flows from financing
activities ....................... 64,008
Net Cash used by discontinued
operations ....................... (48,058)
Effect of exchange rate ............ (3,663)
Cash at the beginning of
the period ....................... 244,223
------------
Cash at the end of the period ...... $ 978,377
------------
38
As of and for the Year Ended December 31, 2000
USAI Holdco Usani Wholly Non-guarantor Eliminations
---- ------ LLC Owned Subsidiaries ------------
--- Subsidiary ------------
Guarantors
-----------
Current assets ..................... $ 356,726 $ -- $ 14,159 $ 899,892 $ 606,565 $ (356,726)
Property and equipment net ......... -- -- 24,203 205,895 213,896 --
Goodwill and other intangible
assets, net ...................... 73,693 -- -- 5,004,332 2,383,837 --
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)
Net current assets of discontinued
operations ....................... -- -- -- 3,766 4,022 --
Net non current assets on
discontinued operations .......... -- -- -- (240,346) 54,091 314,336
------------ -------- ------------ ------------ ------------ ------------
Total assets ....................... $ 3,808,379 $ 1,284,166 $ 6,941,649 $ 6,670,859 $ 3,398,443 $(11,629,626)
------------ -------- ------------ ------------ ------------ ------------
Current liabilities ................ $ 12,406 $ -- $ -- $ 884,874 $ 427,365 $ (151,398)
Long-term debt, less current portion -- -- 498,212 4,645 49,644 --
Other liabilities .................. 356,102 -- 243,333 270,824 487,301 (866,446)
Minority interest .................. -- -- 60,373 177,184 439,699 4,139,881
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)
------------ -------- ------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity ........................... $ 3,808,379 $ 1,284,166 $ 6,941,649 $ 6,670,859 $ 3,398,443 $(11,629,626)
------------ -------- ------------ ------------ ------------ ------------
Revenue ............................ $ -- $ -- $ -- $ 3,108,099 $ 1,489,123 $ (1,070)
Operating expenses ................. (15,184) -- (37,369) (2,614,506) (1,873,837) 1,070
Interest expense, net .............. (26,195) -- 22,208 (28,263) (1,970) 2
Other income (expense), net ........ (48,551) 65,026 372,389 (112,323) (20,831) (206,413)
Provision for income taxes ......... 1,342 -- (27,351) (27,761) (59,099) --
Minority interest .................. -- -- -- 6,992 154,459 (208,575)
------------ -------- ------------ ------------ ------------ ------------
Net (loss) income from continuing
operations ....................... $ (88,588) $ 65,026 $ 329,877 $ 332,238 $ (312,155) $ (414,986)
------------ -------- ------------ ------------ ------------ ------------
Net (loss) income from discontinued
operations ....................... (59,395) -- -- (59,334) (61) 59,395
------------ -------- ------------ ------------ ------------ ------------
Cash flows from operations ......... $ (34,654) $ -- $ (9,403) $ 402,056 $ 14,508 $ --
Cash flows used in investing
activities ....................... $ 18,711 $ -- $ (63,754) $ (207,548) $ (271,965) $ --
Cash flows from financing activities $ 15,943 $ -- $ (125,442) $ (112,456) $ 280,301 $ --
Net Cash used by discontinued
operations ....................... -- -- -- (84,771) 2,208 --
Effect of exchange rate ............ -- -- -- 3,352 (6,039) --
Cash at the beginning of the period -- -- 276,678 (27,067) 173,565 --
------------ -------- ------------ ------------ ------------ ------------
Cash at the end of the period ...... $ -- $ -- $ 78,079 $ (26,434) $ 192,578 $ --
------------ -------- ------------ ------------ ------------ ------------
USAi
Consolidated
------------
Current assets ..................... $ 1,520,616
Property and equipment net ......... 443,994
Goodwill and other intangible
assets, net ...................... 7,461,862
Investment in subsidiaries ......... --
Other assets ....................... 911,529
Net current assets of discontinued
operations ....................... 7,788
Net non current assets on
discontinued operations .......... 128,081
------------
Total assets ....................... $ 10,473,870
------------
Current liabilities ................ $ 1,173,247
Long-term debt, less current portion 552,501
Other liabilities .................. 491,114
Minority interest .................. 4,817,137
Interdivisional equity ............. --
Stockholders' equity ............... 3,439,871
------------
Total liabilities and shareholders'
equity ........................... $ 10,473,870
------------
Revenue ............................ $ 4,596,152
Operating expenses ................. (4,539,826)
Interest expense, net .............. (34,218)
Other income (expense), net ........ 49,297
Provision for income taxes ......... (112,869)
Minority interest .................. (47,124)
------------
Net (loss) income from continuing
operations ....................... $ (88,588)
------------
Net (loss) income from discontinued
operations ....................... (59,395)
------------
Cash flows from operations ......... $ 372,507
Cash flows used in investing
activities ....................... $ (524,556)
Cash flows from financing activities $ 58,346
Net Cash used by discontinued
operations ....................... (82,563)
Effect of exchange rate ............ (2,687)
Cash at the beginning of the period 423,176
------------
Cash at the end of the period ...... $ 244,223
------------
As of and for the Year Ended December 31, 1999
USAI Holdco Usani Wholly Non-guarantor Eliminations
---- ------ LLC Owned Subsidiaries ------------
--- Subsidiary ------------
Guarantors
-----------
Revenue ........................... $ -- $ -- $ -- $ 2,668,239 $ 703,506 $ --
Operating expenses ................ (10,074) -- (27,171) (2,266,186) (798,400) --
Interest expense, net ............. (10,713) -- (11,837) (22,157) (3,837) --
Gain on sale of subsidiary stock .. -- -- -- 89,721 -- --
Other income (expense), net ....... 29,437 85,199 433,996 49,599 21,026 (613,486)
Provision for income taxes ........ 7,865 -- -- (81,882) (29,033) --
Minority interest ................. -- -- -- 91 56,650 (254,038)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income from continuing
operations ...................... $ 16,515 $ 85,199 $ 394,988 $ 437,425 $ (50,088) $ (867,524)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income from discontinued
operations ........................ $ (44,146) $ -- $ -- $ (44,968) $ 822 $ 44,146
----------- ----------- ----------- ----------- ----------- -----------
USAi
Consolidated
------------
Revenue ........................... $ 3,371,745
Operating expenses ................ (3,101,831)
Interest expense, net ............. (48,544)
Gain on sale of subsidiary stock .. 89,721
Other income (expense), net ....... 5,771
Provision for income taxes ........ (103,050)
Minority interest ................. (197,297)
-----------
Net (loss) income from continuing
operations ...................... $ 16,515
-----------
Net (loss) income from discontinued
operations ........................ $ (44,146)
-----------
39
Exhibit 99.2
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.
1
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
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
2
they will not 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 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 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
BUSINESS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: MATERIAL ADVERSE
CHANGES IN ECONOMIC CONDITIONS GENERALLY OR IN THE MARKETS SERVED BY THE
3
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 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.
4
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 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
5
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.
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
6
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
$17.9 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 $16.3 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 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
7
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.
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
8
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.
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
9
$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.
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
10
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.
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 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,
11
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.
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
12
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.
13
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.
(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.
14
(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 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.
15
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 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.
16
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest
rates relates primarily to the Company's short-term investment portfolio and
issuance of debt. The Company does not use derivative financial instruments in
its investment portfolio. The Company has a prescribed methodology whereby it
invests its excess cash in debt instruments of government agencies and high
quality corporate issuers.. 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.
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.
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:
o 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
17
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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
18
Exhibit 99.3
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
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
Net revenues ......................................................... $ 3,622,918 $ 3,354,792 $ 2,686,479
Operating costs and expenses:
Cost of sales ........................................................ 1,304,453 1,184,729 905,342
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.
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2001 2000
---- ----
December 31,
------------
(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.
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.
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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.
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 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.
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 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.
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.
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. 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 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, including all
amounts charged to customers for shipping and handling, which are now presented
as revenue.
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.
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.
2000 1999
---- ----
Year Ended December 31,
-----------------------
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.
NOTE 5 - LONG-TERM OBLIGATIONS
2001 2000
---- ----
December 31,
------------
(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 498,515 498,213
November 15 commencing May 15, 1999. Interest rate at December 31, 2001 was 6.75%....................
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
-----------
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:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(In thousands)
Income tax expense at the federal statutory $119,427 $155,017 $140,064
rate of 35%.........................................................
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:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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. 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.
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
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
December 31, December 31,
2001 2000
---- ----
(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.
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:
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------ ------
RANGE RANGE RANGE
----- ----- -----
2001 2000 1999
---- ---- ----
DECEMBER 31,
(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.
Range of Exercise Price Outstanding At Weighted Weighted Exercisable At Weighted
- ----------------------- December 31, 2000 Average Average December 31, Average
----------------- Remaining Exercise 2000 Exercise
Contractual Price ---- Price
Life ----- -----
----
Options Outstanding Options Exercisable
------------------- -------------------
(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:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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.
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.
In 1999, the Company acquired post-production equipment through a
capital lease totaling $2.5 millSupplemental disclosure of cash flow
information:
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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.
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.
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.
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
------------------------------------------
2001 2000 1999
---- ---- ----
Years Ended December 31,
------------------------
(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
---------------------------------------------
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.
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.
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
December 31, 2001 December 31, 2000
---------------------- --------------------------
(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.
2001 2000
---- ----
As of and for the
-----------------
Years Ended
-----------
December 31,
------------
(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.
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.
Exhibit 99.4
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
1
USANi LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2001 2000 1999
----------- ----------- -----------
Years Ended December 31,
-----------------------------------------
Net revenues ....................................................................... $ 3,622,918 $ 3,354,792 $ 2,686,479
Operating costs and expenses:
Cost of sales .................................................................... 1,304,453 1,184,729 905,342
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.
2
USANI LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2001 2000
---------- ----------
December 31,
------------
(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 ...
3
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Total Class A LLC Class B LLC Class C LLC Retained Accumulated Unearned
Shares Shares Shares Earnings Other Compensation
Comprehensive
Income
---------- ----------- ----------- ------------ ---------- -------------- -----------
(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.
4
USANI LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
----------- ----------- -----------
Years Ended December 31,
-----------------------------------------
(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 .
5
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, 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
6
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.
REVENUES
CABLE AND STUDIOS
7
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 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.
8
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.
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.
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
9
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.
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.
10
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, SOP 00-2 requires development costs for
abandoned projects and certain indirect overhead costs to be charged directly to
expense, instead of those costs being capitalized to film costs, which was
required under the previous accounting rules. SOP 00-2 also requires all film
costs to be classified in the balance sheet as non-current assets. Provisions of
SOP 00-2 in other areas, such as revenue recognition, generally are consistent
with the Company's existing accounting policies.
SOP 00-2 was adopted as of January 1, 2001, and the Company recorded a
one-time, non-cash benefit of $6.5 million. The benefit is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the 2001 presentation, including all
amounts charged to customers for shipping and handling, which are now presented
as revenue.
NOTE 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.
11
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.
2000 1999
---- ----
YEAR ENDED DECEMBER 31,
-----------------------
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.
12
NOTE 5- LONG-TERM OBLIGATIONS
2001 2000
-----------------
December 31,
------------
(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
----------
13
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.
14
NOTE 8-INVENTORIES
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
DECEMBER 31, DECEMBER 31,
2001 2000
---- ----
(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.
In 1999, USA acquired 7,277,290 Class A LLC shares in exchange for
$120.3 million. In addition, USA acquired
15
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.
16
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 changes in outstanding options under the stock option plans following
the Company's two-for-one stock split, is as follows:
17
SHARES PRICE SHARES PRICE SHARES PRICE
------ RANGE ------ RANGE ------ RANGE
----- ----- -----
2001 2000 1999
---- ---- ----
DECEMBER 31,
-------------
(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.
RANGE OF EXERCISE PRICE OUTSTANDING AT WEIGHTED WEIGHTED EXERCISABLE AT WEIGHTED
- ----------------------- DECEMBER 31, 2000 AVERAGE AVERAGE DECEMBER 31, AVERAGE
----------------- REMAINING EXERCISE 2000 EXERCISE
CONTRACTUAL PRICE ---- PRICE
LIFE ---- -----
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
(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.
18
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:
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
------------------------
(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.
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.
19
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:
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
------------------------
(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 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.
20
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 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.
21
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.
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.
22
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
---------------------------------------------
2001 2000 1999
---- ---- ----
YEARS ENDED DECEMBER 31,
------------------------
(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
----------------------------------------------
23
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
------------------------------------------------
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.
24
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.
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
(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 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.
2001 2000
---- ----
AS OF AND FOR THE
YEARS ENDED
DECEMBER 31,
------------
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.
25
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.
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:
26
As of and for the year ended December 31, 2001
USANI WHOLLY NON-GUARANTOR ELIMINATIONS LLC
LLC OWNED SUBSIDIARIES ------------ CONSOLIDATED
--- SUBSIDIARY ------------ ------------
GUARANTORS
----------
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, 2,260 4,881,063 86,936 - 4,970,259
net................................
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
------------------------------------------------------------------------------------------
27
As of and for the year ended December 31, 2000
USANI WHOLLY NON-GUARANTOR ELIMINATIONS LLC
LLC OWNED SUBSIDIARIES ------------ CONSOLIDATED
--- SUBSIDIARY ------------ ------------
GUARANTORS
----------
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, - 4,997,365 102,111 - 5,099,476
net................................
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.
28