As filed with the Securities and Exchange Commission on March 16, 200513, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THETHE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20042005
Commission File No. 0-20570
IAC/INTERACTIVECORP
(Exact name of registrant as specified in its charter)
Commission File No. 0-20570
Delaware (State or other jurisdiction of incorporation or organization) | 59-2712887 ( | |
152 West 57th Street, New York, New York (Address of Registrant's principal executive offices) | 10019 (Zip Code) | |
(212) 314-7300 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01$.001 par value
Warrants to Acquire OneOne-half of a Share of Common Stock
Warrants to Acquire 1.93875 Shares0.969375 of a Share of Common Stock
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer o Non-accelerated filer o.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act). Yes ýo No oý
As of February 10, 2005,3, 2006, the following shares of the Registrant's Common Stock were outstanding:
Common Stock, including | |||
Class B Common Stock | |||
Total | |||
The aggregate market value of the voting common equitystock held by non-affiliates of the Registrant as of February 10,June 30, 2005 was $11,888,050,303.$10,856,207,116. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant are assumed to be affiliates of the Registrant.
Documents Incorporated By Reference:
Portions of the Registrant's proxy statement for its 20052006 Annual Meeting of Stockholders are incorporated by reference into Part III herein.
| | Page Number | ||
---|---|---|---|---|
PART I | ||||
Item 1. | Business | 1 | ||
Item | Risk Factors | 17 | ||
Item 1B. | Unresolved Staff Comments | 28 | ||
Item 2. | Properties | 28 | ||
Item 3. | Legal Proceedings | 28 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 30 | ||
PART II | ||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||
Item 6. | Selected Financial Data | 33 | ||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 36 | ||
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 70 | ||
Item 8. | Consolidated Financial Statements and Supplementary Data | 74 | ||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 159 | ||
Item 9A. | Controls and Procedures | 159 | ||
Item 9B. | Other Information | 161 | ||
PART III | ||||
Item 10. | Directors and Executive Officers of the Registrant | |||
Item 11. | Executive Compensation | 161 | ||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 161 | ||
Item 13. | Certain Relationships and Related Transactions | 161 | ||
Item 14. | Principal Accounting Fees and Services | 161 | ||
PART IV | ||||
Item 15. | Exhibits and Financial Statement Schedules |
IAC Brands and Businesses
IAC/InterActiveCorpIAC operates leading and diversified businesses in sectors being transformed by the internet, online and offline... our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. IAC currently operates a diversified portfolio of specialized and global brands in the travel, retailing, ticketing, personals, media, financial services, real estatefollowing sectors:
IAC enables billions of dollars of consumer-direct transactions and advertising for products and services via interactive distribution channels. All references to "IAC," the internet and telephone."Company," "we," "our" or "us" in this report are to IAC/InterActiveCorp is referred to herein as either IAC or the Company.InterActiveCorp.
IAC consists of the following segments:
For information regarding the results of operations of these sectors and segments, as well as their respective contributions to IAC's consolidated results of operations, see "Management's"Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 4236 and the "Item 8—Consolidated Financial Statements and related notesSupplementary Data" beginning on page 84.
On December 21, 2004, IAC announced its plan to separate into two independent public companies in order to better achieve certain strategic objectives of its various businesses. In this report, we refer to this transaction as the "Spin-Off" and to the new company that will hold the travel and travel-related businesses of IAC as "New Expedia." For additional information, see "—Spin-Off."74.
History
Since its inception, the CompanyIAC has transformed itself from a hybrid media/electronic retailing company into an interactive commerce company. The CompanyIAC was incorporated in July 1986 in Delaware under the name Silver King Broadcasting Company, Inc., or Silver King, as a subsidiary of Home Shopping Network, Inc., or Home Shopping Network. On December 28, 1992, Home Shopping Network distributed the capital stock of Silver King to its stockholders. In December 1996, the Company completed mergers with Savoy Pictures Entertainment, Inc., or Savoy, and Home Shopping Network, with Savoy and Home Shopping Network becoming subsidiaries of Silver King. In connection
with these mergers, the Company changed its name from Silver King Broadcasting Company, Inc. to HSN, Inc.
The Company acquired a controlling interest in Ticketmaster Group, Inc. in 1997 (and the remaining interest in 1998). In 1998, upon the purchase of USA Networks and Studios USA from Universal Studios, Inc., or Universal, the Company becamewas renamed USA Networks, Inc. From 1999 through 2001, the Company invested inacquired Hotel Reservations Network (later renamed Hotels.com), Match.com and other smaller e-commerce companies. In 2001, the Company sold USA Broadcasting to Univision Communications, Inc.
In February 2002, the Company acquired a controlling stake in Expedia.Expedia.com. In May 2002, after contributing its entertainment assets to Vivendi Universal Entertainment LLLP, or VUE, a joint venture then controlled by Vivendi, Universal, S.A., or Vivendi, the Company was renamedchanged its name to USA Interactive. In
September 2002, the Company acquired Interval International.
In 2003, the Company acquired the minority interests in its formerly public subsidiaries, Expedia,Expedia.com, Hotels.com and Ticketmaster, and acquired a number of other companies, including Entertainment Publications, Inc., LendingTree and Hotwire. The Company was renamedchanged its name to InterActiveCorp in June 2003 and to IAC/InterActiveCorp in July 2004.
On December 21, 2004, IAC announced its plans relating Prior to the Spin-Off. Followingcommencement of trading on August 9, 2005, IAC completed the completionseparation of its travel businesses into an independent public company. In this report, we refer to this transaction as the Spin-Off:
For a more detailed discussion concerning certain of the transactions described below, see Notes 3 and 4 to the Notes to the Consolidated Financial Statements.
IAC Travel
Expedia
Hotels.com
Hotwire
Interval International
Ticketing
Electronic Retailing
leisure and casual apparel. This acquisitionCornerstone Brands is expected to close, subject toreported in the receiptU.S. segment of the requisite regulatory approvals and the satisfactionour Retailing sector.
For additional information concerning some of customary closing conditions,these transactions, as well as certain other transactions completed during the second quarterfiscal years ended December 31, 2003 and 2004, see "Item 7—Management's Discussion and Analysis of 2005.
Personals
IAC LocalOperations" and Media Services
"Item 8—Consolidated Financial ServicesStatements and Real EstateSupplementary Data—Note 3."
EQUITY OWNERSHIP AND VOTING CONTROL
As of February 10, 2005,3, 2006, Liberty Media Corporation, or Liberty, through companies owned by Liberty and companies owned jointly by Liberty and Mr.Barry Diller, Chairman and CEO of IAC, owned approximately 13.8%14.8% of IAC's outstanding Common Stockcommon stock and approximately 79.2%100% of IAC's outstanding Class B Common Stock, and NBC Universal, Inc., or NBC Universal (successor in interest to Vivendi), through its subsidiaries, owned approximately 6.8% of IAC's outstanding Common Stock and 20.8% of IAC's outstanding Class B Common Stock.common stock. Assuming conversion of all of the outstanding shares of Class B Common Stockcommon stock to Common Stock,common stock, as of February 10, 2005,3, 2006, Liberty would have owned approximately 19.8% of IAC's outstanding Common Stock and NBC Universal would have owned approximately 8.1%21.6% of IAC's outstanding Common Stock.
As of February 10, 2005, Mr. Diller (through companies owned jointly by Liberty and Mr. Diller, his own holdings and holdings of NBC Universal and Liberty, over which Mr. Diller generally has voting control pursuant to a shareholders agreement described below) controlled approximately 59.6% of the outstanding total voting power of IAC. As of February 10, 2005, there were 634,246,558 shares of IAC Common Stock, 64,629,996 shares of IAC Class B Common Stock and 13,118,182 shares of IAC Preferred Stock outstanding.
Subject to the terms of the Amendedan amended and Restated Stockholders Agreement,restated stockholders agreement, dated as of December 16, 2001, among Universal,August 9, 2005, between Liberty and Mr. Diller, Mr. Diller has an irrevocable proxy to vote shares of IAC common stock and Vivendi,IAC Class B common stock held by Liberty. Accordingly, Mr. Diller is effectively able to control the outcome of nearly all matters submitted to a vote or for the consent of IAC's stockholders (other than with respect to the election by the holders of IAC Common Stockcommon stock of 25% of the members of IAC's Board of Directors and certain matters as to which Delaware law requires a separate class vote of the holders of IAC Common Stock or IAC Preferred Stock is required under Delaware law)vote). In addition, pursuant to the Amendedan amended and Restated Governance Agreement,restated governance agreement, dated as of December 16, 2001,August 9, 2005, among IAC, Vivendi, Universal, Liberty and Mr. Diller, each of Mr. Diller and Liberty generally has the right to consent to
certain significant corporate actions transactions limited matters in the event that IAC's ratio of total debt to EBITDA as(as defined therein,in the amended and restated governance agreement) equals or exceeds four to one over a continuous 12-month period.
SubsequentAs of February 3, 2006, Mr. Diller (through companies owned jointly by Liberty and Mr. Diller, his own holdings and holdings of Liberty, over which Mr. Diller generally has voting control pursuant to the dateamended and restated stockholders agreement) controlled approximately 55.4% of the governanceoutstanding total voting power of IAC. As of February 3, 2006, there were 294,691,637 shares of IAC common stock and stockholders agreements described above, General Electric25,599,998 shares of IAC Class B common stock outstanding. Total voting power is based on one vote for each share of IAC common stock and Vivendi created NBC Universal, and Vivendi contributed to NBC Universal Vivendi's ownership interests in Universal and in certain non-U.S. affiliatesten votes for each share of Universal. As a result of that transaction, NBC Universal now controls Universal and is subject to the provisions of these agreements.Class B common stock.
DESCRIPTION OF BUSINESSESBUSINESS
The following disclosure regarding IAC's businesses reflects the organization, operationRetailing
Retailing U.S.
Overview. Retailing U.S. markets and management of these businesses through December 31, 2004. Assells a result, this disclosure does not reflect how IAC's businesses will be organized, operated and managed following the completion of the Spin-Off. See "—Spin-Off."
IAC Travel
Overview
IAC Travel is among the world's leading travel services companies, making travel products and services available to leisure and corporate travelers in the United States and abroad through a diversified portfolio of brands, including Expedia, Hotels.com, Hotwire, Expedia Corporate Travel, Classic Custom Vacations and awide range of other domesticthird party and international brands and businesses.
IAC Travel brands and businesses make available a wide selection of travel products and services, from simple, discounted travel to more complex, luxury travel. IAC Travel's various brands and businesses target the needs of different consumers, including those who are focused exclusively on price and those who are focused on the breadth of product selection and quality of services. Through its differentiated brands and businesses, IAC Travel helps a broad range of leisure and corporate travelers research, plan and book travel.
IAC Travel makes available travel products and services primarily through its wholly-owned, branded websites, as well as through branded websites owned and operated by joint ventures and other companies in which IAC Travel has made investments. IAC Travel also makes available travel products and services through its private label program, through which it indirectly makes available travel products and services to customers through third party websites, as well as through traditional offline channels, including full service telephone booking agents, onsite travel agents working at various corporate customer locations and in-destination Expedia!fun travel desks. IAC Travel also includes Interval International, a leading membership services company providing timeshare exchange and other value-added programs to its timeshare-owning members worldwide.
IAC Travel makes its travel products and services available on a stand-alone and package basis primarily through two separate business models, the merchant model and agency model. See "—Merchant and Agency Business Models." In 2004, merchant gross bookings and agency gross bookings were approximately $5.7 billion and $7.5 billion, respectively. IAC Travel also derives revenue from fees paid by members in connection with exchange and rental transactions and memberships through Interval International, as well as from advertising and promotional activities across its branded websites.
To ensure the success of its leisure and corporate travel businesses, IAC Travel has made substantial investments in technology and believes that innovation is a long-term competitive advantage, both in consumer- and supplier-oriented technology.
Portfolio of Brands and Businesses
IAC Travel has created an easily accessible global travel marketplace that is used by a broad range of leisure and corporate consumers and travel agents. This marketplace allows customers to research, plan and book travel products and services from travel suppliers and allows these travel suppliers to efficiently reach and provide their products and services to IAC Travel customers. Through its diversified portfolio of domestic and international brands and businesses, IAC Travel makes available, on a stand-alone and package basis, travel products and services provided by numerous airlines, lodging properties, car rental companies, cruise lines and destination service providers, such as attractions and tours. Using a portfolio approach for IAC Travel's brands and businesses allows it to target a broad range of customers looking for different value propositions. A description of IAC Travel's principal brands and businesses appears below.
Expedia.com makes a large variety of travel products and services availablemerchandise directly to consumers through its U.S.-based website,www.expedia.com, as well as through localized versions of its website in Canada, France, Germany, Italy, the Netherlands and the United Kingdom, many of which are leading online travel service companies in their respective country. IAC Travel also operateswww.anyway.com, a leading online travel company in France. The Expedia-branded websites also serve as the travel channel on MSN.com, Microsoft's online services network in the United States, as well as certain international MSN sites. See "—Marketing." Expedia-branded websites target many different types of consumers, from families booking a summer vacation to individual travelers arranging a quick weekend getaway, in order to provide the vast majority of travelers with the ability to research, plan and obtain their travel needs. Consumers can search for, compare information (including pricing and availability) and book travel products and services on Expedia-branded websites, including airline tickets, lodging, car rentals, cruises and many destination services, such as attractions and tours, from a large number of suppliers, on a stand-alone and package basis.
Hotels.com makes available a large variety of lodging options to customers, who can plan, shop for and book lodging accommodations, from traditional hotels to vacation rentals, at over 15,000 properties worldwide. Hotels.com seeks to provide customers with premium content through its US-based website,www.hotels.com (as well as localized versions in the Americas, Europe, Asia-Pacific and South Africa), its vacation rentals website atwww.vacationspot.com and its toll-free call centers. Hotels.com is pursuing a strategy focused on differentiating its service offerings by positioning itself as a hotel expert with premium content about lodging properties, while simultaneously moving away from its historical focus solely on discount pricing.
Hotwire.com is a leading discount travel website that makes available airline tickets, hotel rooms, rental cars, cruises and vacation packages. Hotwire's opaque approach matches the needs of two groups: price-sensitive consumers willing to be flexible to save money; and suppliers who have excess seats, rooms and cars they wish to fill without affecting the public's perception of their brands. Hotwire customers enjoy significant discounts by electing to book travel services "opaquely," without knowing certain itinerary details such as brand, time of departure and exact hotel location, while suppliers create value from excess inventory without diluting their core brand-loyal customer base. Hotwire works with many domestic and international airlines, including the U.S. full-service major network airlines, top hotels in hundreds of cities and resort destinations in the U.S., Europe, Canada, Mexico and the Caribbean and major car rental companies nationwide.
Interval International,or Interval, is a leading membership-services company providing timeshare exchange and other value-added programs to its timeshare-owning members and resort developers worldwide. As of December 31, 2004, Interval had established contractual affiliations with over 2,000 resorts located in 76 countries and provided timeshare exchange services to nearly 1.7 million timeshare owners. Interval's revenues are generated primarily from fees paid by members in connection with exchange and rental transactions and membership fees. Through December 31, 2004, Interval was operated and managed through IAC Travel. Following the completion of the Spin-Off, Interval will remain part of IAC.
Interval typically enters into multi-year contracts with developers of timeshare resorts, pursuant to which the developers agree to enroll all purchasers of timeshare accommodations at the applicable resort as members of Interval's network on an exclusive basis. In return, Interval provides the timeshare purchasers with the ability to exchange their timeshare accommodations for comparable accommodations at resorts participating in Interval's exchange network.
Developers generally remit Interval's initial basic membership fee on behalf of its timeshare owners for membership periods of one to three years at the time the timeshare interests are sold. Some developers have incorporated Interval's annual membership fee into their annual assessments and these owners' memberships are renewed annually by the developer during the period of the resort's participation in the Interval exchange network. However, in most cases, timeshare owners are responsible for renewing their memberships and paying related fees.
As an upgrade to its basic membership program, for an additional annual fee, exchange members can participate in the Interval Gold Program, a value-added, membership enhancement program. The Interval Gold Program provides exchange members with year-round benefits and services, such as hotel, dining and leisure discounts, a concierge service and access to special exchange options, including a golf, spa and cruise exchanges. As of December 31, 2004, approximately 35% of Interval's timeshare exchange members were enrolled in the Interval Gold Program.
Interval uses advanced telecommunications systems and technologies to deliver exchange and membership services to its members through call centers and through its website,www.intervalworld.com. Interval also makes travel-related products and services available to its members directly and through third party providers, as well as additional services through its website to select exchange members. Exchange members also receive regular publications highlighting Interval's exchange network and specific exchange opportunities and membership benefits and services and, upon confirmation of an exchange, an exchange information pack, which contains details regarding the relevant resort, on-site services and nearby attractions. Interval also provides a comprehensive array of services to the developers of resorts participating in its network, such as sales and marketing support, consulting services and back-office servicing solutions.
WWTE, IAC Travel's private label program, is used to make travel products and services available to consumers through third party company-branded websites using IAC Travel's industry leading technology platform. The private label program, which is a low risk, cost-effective way for IAC Travel to enter new markets in the United States and abroad, enables IAC Travel to cover many more markets than is possible by setting up full-scale websites, which requires significant investment in technology and personnel. The products and services made available through WWTE websites are a subset of those made available on IAC Travel's Expedia-branded websites. IAC Travel pays participants in the WWTE private label program on a revenue-share basis. IAC Travel also has a growing international private label business.
Classic Customs Vacations, or CCV, makes premium custom Hawaiian, Mexican, Caribbean and European travel packages available principally to a network of travel agents throughout the United
States. Travel agentstelevision home shopping for premium custom vacation packages for their customers can obtain such packages through the CCV team of telesales professionals. Customers can preview these packages directly through CCV's websites,www.classiccustomvacations.com andwww.classicvacations.com.
Expedia!fun is a network of in-destination travel desks located at hotels and resorts in Florida, Hawaii and Mexico that offer travelers the opportunity to obtain tours, attractions, airport transfer services and other travel-related services. IAC Travel entered the destination services market through its acquisition of Activity World, a Hawaiian destination service provider, in 2004 and recently expanded its travel desk business with the 2005 acquisition of Premier Getaways, a destination service provider in Florida.
Expedia Corporate Travel is a full-service travel management company that makes travel products and services available to corporate customers in the U.S. and in Europe. Expedia Corporate Travel is growing globally, and in 2004 established Expedia Corporate Travel Europe, which includeswww.egencia.com, acquired by the Company through IAC Travel in March 2004 and World Travel Management, acquired by the Company through IAC Travel in August 2004. Expedia Corporate Travel provides, among other things, centralized booking tools for employees of its corporate customers, support of negotiated airfares and consolidated reporting aimed at small- and mid-sized businesses. Expedia Corporate Travel charges corporate client companies sign-up and set-up fees as well as transactional fees for making or changing bookings. In addition, Expedia Corporate Travel provides on-site agents to some corporate clients in order to support the related account.
International Opportunities and Investments
IAC Travel leverages its established brands and businesses to enter markets with large existing travel markets and established consumer behavior for planning and purchasing travel. IAC Travel reaches many customers in several countries and multiple continents through the brands and businesses described above. IAC Travel typically customizes international points of sale to reflect local language, currency, customs, traveler behavior and preferences and local hotel markets, all of which may vary from country to country.
IAC Travel believes that Europe presents an especially large opportunity for its brands and businesses. Europe is more populous than the U.S. and, with more generous vacation policies by employers, Europeans generally take more frequent and longer vacations than do Americans. European hotel markets are more fragmented than U.S. hotel markets, and therefore, IAC Travel believes that it is more difficult for European hotels to reach their customers through traditional marketing initiatives than for U.S. hotels. IAC Travel believes that its ability to deliver the targeted marketing characteristics of the Internet increases the value it can bring to travel suppliers in Europe and elsewhere.
In addition to expanding its brands and businesses into foreign markets, IAC Travel also makes investments in travel and travel-related businesses abroad. For example, IAC Travel is party to a joint venture with Société Nationale des Chemins de Fer Français (SNCF), the state-owned railway group in France, which operateswww.voyages-sncf.com, a leading online site for e-tourism in France. SNCF and IAC Travel (through Expedia) own 50.1% and 49.9% of the joint venture, respectively.
IAC Travel has also expanded into the Asia-Pacific region, where travel markets are growing. As part of its expansion into Asia-Pacific, the Company, through IAC Travel, currently holds approximately 52% of the outstanding capital stock (on a fully diluted basis) of eLong, Inc. (NASDAQ:LONG), or eLong. This stake represents approximately 96% of the total voting power of eLong. eLong is an independent travel service company headquartered in Beijing with a national presence across China. eLong uses web-based distribution technologies and a 24-hour nationwide call center to provide consumers with consolidated travel information and the ability to access hotel reservations at discounted rates at over 2,600 hotels in major cities across China. eLong offers air ticketing and other travel related services, such as rental cars, vacation packages and corporate travel services.
IAC Travel intends to continue to expand its international presence. In order to achieve widespread acceptance in the countries and markets it enters, IAC Travel must continue to successfully tailor its services to the unique customs and cultures of such countries and markets. Learning the customs and cultures of various countries, particularly with respect to travel patterns and practices, can be difficult and costly and IAC Travel's failure to do so could slow its international growth. In addition, IAC Travel faces, and expects to continue to face, additional risks associated with its international operations. These risks include unexpected changes in regulatory requirements, increased risk and limits on its ability to enforce intellectual property rights, exchange rate fluctuations, potential delays in the development of the Internet as an advertising and commerce medium in international markets and difficulties in managing operations due to distance, language and cultural differences, including issues associated with establishing management systems and infrastructures and staffing and managing foreign operations.
Merchant and Agency Business Models
IAC Travel, through its various brands and businesses, makes travel products and services available on a stand-alone and package basis primarily through two separate business models: the merchant model and the agency model. Under the merchant model, IAC Travel facilitates the booking of hotel rooms, airline seats, car rentals and destination services from its travel suppliers and is, for such bookings, the merchant of record. Acting as the merchant of record enables IAC Travel to achieve a higher level of net revenues per transaction, promote additional services for its travel suppliers and generally provide lower prices to consumers as compared to those provided through the agency model. Merchant revenues are recognized when the customer uses the travel product or service, as opposed to when the travel product or service is booked. In the case of merchant transactions, IAC Travel has certain latitude to establish and change prices charged to customers (as compared to agency transactions). The merchant model provides travel suppliers a cost-efficient way (as compared to traditional marketing initiatives) to increase the marketing and promotion of their brands. Merchant revenues are derived from the difference between amounts paid to the travel suppliers and the amounts paid by the consumer.
Under the agency model, IAC Travel acts as an agent in the transaction, passing reservations booked by its customers to the relevant airline, hotel, car rental company or cruise line. IAC Travel receives a commission or ticketing fee from the travel supplier for its services under the agency model. In the case of agency airline transactions, IAC Travel also receives fees from global distribution systems, or GDSs, which control the computer systems through which air travel reservations are booked, in addition to any commissions or ticketing fees paid by travel suppliers. See "—Relationships with Travel Suppliers and Distribution Partners—Travel Supplier and Distribution Partner Revenues." In agency transactions, the travel supplier sets the price paid by the consumer and the travel supplier appears as the merchant of record for the transaction. Agency revenues are derived primarily from commissions and ticketing fees from travel suppliers, revenues from GDSs and fees from leisure and corporate customers and are recognized at the time the reservation is booked. Fees from leisure and corporate customers include (i) service fees, which are charged in connection with most bookings on
U.S. and some international websites, (ii) fees for processing and delivery of paper airline tickets via express mail and (iii) corporate transaction service fees for travel booking services provided to corporate customers.
Through IAC Travel-branded websites, customers can dynamically assemble multiple component travel packages in a single transaction at a savings as compared to booking each component separately. Packages assembled by customers through the dynamic packaging model on IAC Travel-branded websites include at least one major merchant air, car or hotel component. Customers select packages based on the total package price, without being provided component pricing. The use of the merchant travel components in packages enables IAC Travel to make certain travel products available at prices lower than those charged on a per component basis by travel suppliers without impacting their established pricing and positioning models.
Relationships with Travel Suppliers and Distribution Partners
Overview. IAC Travel makes travel products and services available from a variety of large and small commercial and charter airlines, lodging properties, major car rental companies and cruise lines and in-destination service providers. IAC Travel seeks to build and maintain long-term, strategic relationships with these travel suppliers that have the mutual objective of shared success, as well as build additional strategic relationships with other travel suppliers and GDS distribution partners. An important component of the success of IAC Travel's business depends on its ability to maintain its existing, as well as build new, relationships with travel suppliers and GDS distribution partners.
Adverse changes in existing relationships, or IAC Travel's inability to enter into new arrangements on favorable terms or if at all, could reduce the amount, quality and breadth of attractively priced travel products and services that IAC Travel is able to make available through its brands and businesses, which could adversely affect its business, financial condition and results of operations.
Benefits to Travel Suppliers. IAC Travel strives to deliver value to its travel suppliers through a wide range of innovative, targeted merchandising and promotional strategies designed to increase their revenues, while simultaneously reducing their marketing transaction and customer service costs. IAC Travel maintains a supplier relations team,programming, which consists of a staffthe HSN and America's Store television networks; catalog services, which consist primarily of account executivesthe Cornerstone Brands portfolio of leading print catalogs; and market managers who work directly with travel suppliers to increase the marketing of their travel products through IAC Travel's brands and businesses.
In addition, IAC Travel has developed proprietary, supplier-oriented technology that streamlines the interaction between some of its websites and hotel property management systems, making it easier and more cost-effective for hotels to manage reservations made through certain IAC Travel brands and businesses. Through "direct connect" technology, hotels can upload information about available products and services and rates directly from their central reservation systems into certain IAC Travel websites, as well as automatically confirm hotel reservations made by IAC Travel customers. In the absence of direct connect technology, both of these processes are generally completed manually. There are currently more than one thousand hotels in North America that have adopted direct connect technology and IAC Travel expects that this number will increase in the future.
Travel Supplier and Distribution Partner Revenues. A portion of IAC Travel's agency revenues are derived from compensation paid by travel suppliers and GDS distribution partners for bookings made through IAC Travel's websites. IAC Travel generally negotiates these commissions and fees with its travel suppliers and GDS distribution partners. Over the last several years travel suppliers have generally reduced or eliminated commissions to travel agents and other travel intermediaries. No assurances can be given that airlines, GDS distribution partners or other travel suppliers will not reduce current industry compensation or IAC Travel's compensation, either of which could reduce IAC Travel's agency revenues and margins and adversely affect its business, financial condition and results of operations.
Industry and Competition
IAC Travel's brands and businesses compete in rapidly evolving and intensely competitive markets. According to industry sources, combined global travel sales (for the United States, Europe and the Asia Pacific region) in 2004 were approximately $875 billion, approximately $90 billion of which were transacted online. Combined travel sales for Europe and the Asia Pacific region in 2004 were approximately $529 billion, approximately $33 billion of which were transacted online. Industry sources predict that online travel sales in Europe and the Asia Pacific region will grow by as much as approximately 40% over the next several years. The relatively low percentage of total travel sales transacted online in international markets indicates that these markets represent especially large opportunities for IAC Travel and those of its competitors who wish to expand their brands and businesses abroad.
IAC Travel's competitors include online and offline travel companies that target leisure and corporate travelers, travel supplier direct websites and other channels, consolidators and wholesalers of travel products and services and other companies offering travel search engines, content or advice, in each case, on a local, regional, national and/or international basis.
IAC Travel believes that maintaining and enhancing its brands is a critical component of its efforts to compete with its competitors. IAC Travel's brands and businesses differentiate themselves from competitors primarily on the basis of quality and breadth of travel products made available, channel features and usability, price, customer service and quality of travel planning content and advice. The emphasis on one or more of these factors varies, depending on the brand or business and the related target demographic.
IAC Travel's brands and businesses face competition from travel supplier direct websites. In some cases, supplier direct channels offer advantages to customers, such as loyalty programs or lower transaction fees. To the extent that consumers increase the percentage of their travel purchases through travel direct supplier websites, IAC Travel's business may suffer. IAC Travel believes that its websites, which feature travel productsconsist primarily of HSN.com and services from numerous (as opposed to a single) travel brands, have greater appeal in the case of brand-agnostic customers, a much larger demographic than brand-loyal customers.
IAC Travel's business is generally sensitive to changes in the competitive landscape, including the emergence of new competitors, most recently, the travel meta-search engine. Travel meta-search engines aggregate pricing and other information from other travel websites, and present this information in the form of consolidated, comparative search results to their users. Consumers can purchase travel products and services directly from travel suppliers by clicking-through to their branded websites through search results or links posted on the travel meta-search engine.
Some of IAC Travel's competitors may be able to make products and services from travel suppliers available on more favorable terms based on a variety of factors, including their willingness to accept lower revenues, better relationships with suppliers and their vertical integration with GDSs and/or travel suppliers. IAC Travel expects its current and future competitors to continually revise and improve their business models. Travel product and service providers that work with IAC Travel and its online competitors may introduce pricing or other business changes that could adversely affect IAC Travel's attractiveness to travel suppliers.
Interval faces competition primarily from Resort Condominiums International, LLC, a subsidiary of Cendant Corporation, as well as several other companies that perform exchanges on a smaller, often more regional, basis. A number of management companies also compete with Intervaloperated by offering exchange opportunities among resorts that they manage as a component of their management services. In addition, a wide variety of vacation clubs and large resort developers, some of which participate in
Interval's exchange network, are creating and operating their own internal reservation and exchange systems to facilitate alternative accommodations for timeshare owners at their resorts.
IAC Travel's business, financial condition and results of operations are also affected by the health of the worldwide travel industry. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Accordingly, IAC Travel's business is sensitive to downturns or weaknesses in the travel industry, which could adversely affect the growth of its business. Additionally, IAC Travel's business is sensitive to safety concerns, and thus may decline after incidents of terrorism, during periods of geopolitical conflict in which travelers become concerned about safety issues or when travel might involve health-related risks, one or more of which could result in a protracted decrease in demand for its travel services. This decrease in demand, depending on its scope and duration, together with any future issues impacting travel safety, could significantly and adversely impact IAC Travel's business, financial condition and results of operations over the short and long term. In addition, the disruption of the existing travel plans of a significant number of customers upon the occurrence of certain events, such as terrorist activity or war, could result in the incurrence of significant additional costs if IAC Travel provides relief to affected customers by not charging cancellation fees or by refunding the price of otherwise non-refundable unused tickets.
Marketing
IAC Travel's marketing programs, initiatives and related spending accrue to the primary goals of building and maintaining individual brand propositions across its portfolio of brands, driving traffic and conversion through its various brands and businesses, lowering ongoing customer acquisition costs, increasing market share and strategically positioning its various brands and businesses in relation to each other.
IAC Travel's marketing programs and initiatives primarily include direct and/or personalized customer communications, search engine marketing and online and offline advertising. In addition, IAC Travel's Expedia-branded websites operate the travel channel on the MSN.com website in the U.S. and MSN websites in Canada, the United Kingdom, Italy, France and Germany. The related MSN contract continues through June 2005. IAC Travel is currently negotiating the renewal of this agreement with Microsoft. However, no assurances can be provided that IAC Travel will be able to renew the agreement on acceptable terms, if at all.
IAC Travel also makes use of affiliate marketing. IAC Travel's Expedia and Hotels.com-branded websites receive bookings from consumers who have clicked-through to the respective websites through links posted on affiliate partner websites through affiliate programs, including the Interactive Affiliate Network, orIAN.com. As of December 31, 2004, IAC Travel had affiliation agreements with thousands of third party affiliate partners, including a number of leading travel companies, pursuant to which it pays affiliate partners a commission for bookings originated from their websites. Affiliate partners can make travel products and services available through an IAC Travel-branded website, a co-branded website or their own private label website. IAC Travel also provides its affiliates with industry-leading technology and access to a wide range of products and services.
The long term success of IAC Travel depends on its continued ability to increase the overall number of customer transactions in a cost-effective manner. In order to increase the number of customer transactions, IAC Travel must attract new visitors to its websites and other distribution channels, convert these visitors into paying customers and capture repeat business from existing customers. Similarly, IAC Travel's corporate travel business is dependent on enlisting new corporate customers and attracting their travel booking activity online to Expedia Corporate Travel. One of the principal ways in which IAC Travel attracts customers to its websites in a cost-effective manner is through its affiliate programs, as described above. If the number of affiliates participating in these programs were to decrease significantly, costs relating to IAC Travel's sales and marketing
commitments could increase. In addition, IAC Travel believes that rates for desirable advertising and marketing placements, both online and offline, are likely to increase in the foreseeable future. No assurances can be provided that IAC Travel will be successful in acquiring new customers in a cost-effective manner.
Regulation
IAC Travel must comply with laws and regulations relating to the travel industry and the provision of travel services. These include registration in various states as "sellers of travel" and/or vacation clubs and compliance with certain disclosure requirements and participation in state restitution funds. In addition, IAC Travel businesses are subject to regulation by the U.S. Department of Transportation and must comply with various rules and regulations governing the provision of air transportation, including those relating to advertising and accessibility.
IAC Travel is currently subject and, as IAC Travel continues to expand the reach of its brands and businesses into the European, Asia-Pacific and other international markets, will become increasingly subject, to laws and regulations applicable to travel agents in those markets, including laws regulating the provision of travel packages and industry specific value-added tax regimes. For example, the EEC Council Directive on Package Travel Package Holidays and Package Tours imposes various obligations upon marketers of travel packages, such as disclosure obligations to consumers and liability to consumers for improper performance of the package, including supplier failure. Laws applicable to travel agents in these markets are subject to change at any time and authorities in these markets are regularly considering new legislation, as well as changes in the application of existing laws and regimes applicable to travel agents and the travel industry.
In the case of Interval, a number of states require Interval to prepare and file annual disclosure documents regarding its exchange services. In addition, the development of timeshare resorts and the sale of timeshare interests is a heavily regulated industry in the U.S. on a state level, as well as in various jurisdictions abroad. This regulation directly affects the resorts and members that participate in Interval's exchange network which may affect Interval's business and, in turn, IAC Travel's business. These regulatory regimes are routinely under review and are often the subject of legislation. While Interval closely monitors the content and progress of all such legislation, it is unable to predict whether such legislation will be adopted, when and in what form and, if so, what the impact may be on the members and resorts that participate in Interval's exchange network and/or Interval's business.
Electronic Retailing
Cornerstone Brands. HSN U.S.
Overview. HSN U.S. sells a variety of consumer products, primarily throughoperates the HSN and America's Store television networks and HSN.com, and Cornerstone Brands operates its portfolio of leading print catalogs and related websites, as well as througha limited number of retail outlets. IAC acquired Cornerstone Brands in April 2005.
Merchandise. HSN features over 25,000 consumer catalog servicesproducts, including jewelry, computers and infomercials.electronics, home fashions, cookware and kitchen aids and health, beauty and fitness products, among others. Featured products include exclusive, third party-branded products, as well as HSN-branded products.
Cornerstone Brands merchandise consists primarily of home furnishings, products and accessories, and casual and leisure apparel, with the nature and mix of products varying by brand. In the case of Frontgate, Ballard Designs, Garnet Hill and The Territory Ahead, featured products include exclusive, third party-branded products, as well as proprietary products that carry Cornerstone Brand labels, and in the case of Smith+Noble and TravelSmith, featured products consist exclusively of proprietary products that carry Cornerstone Brand labels.
Frontgate features premium, high quality bed, bath and kitchen accessories, as well as outdoor, patio, garden and pool furnishings and accessories. Ballard Designs features European-inspired bed, bath, dining and office furnishings and accessories, as well as rugs, shelving and architectural accents for the home. Garnet Hill offers bed and bath furnishings and soft goods, as well as apparel and accessories for women and children, and Smith+Noble offers custom home furnishings and window treatments. The Territory Ahead offers casual apparel for men and women and TravelSmith offers travel wear for men and women and related accessories.
HSN and Cornerstone Brands purchase merchandise made to their respective specifications, as well as merchandise from name brand vendors and other third party lines, typically under certain exclusive rights, and, in the case of HSN, some overstock inventories from wholesalers. The mix and source of merchandise generally depends upon a variety of factors, including price and availability. While HSN and Cornerstone Brands generally do not enter into long-term supply arrangements with any of their respective vendors, given that there are generally a variety of sources of supply available for most merchandise, some Cornerstone Brands businesses have entered into long-term arrangements with certain vendors in the case of custom merchandise.
HSN and Cornerstone Brands provide customers with a number of convenient options in connection with the purchase, payment and shipping of merchandise, which vary by product. In the case of HSN, these options include the AutoShip program, pursuant to which customers can arrange to have purchases automatically sent and billed to them on a regularly scheduled basis, and the Flexpay option, which allows customers to pay for merchandise in 2-6 interest free payments. In the case of certain Cornerstone Brands businesses, these options include the Bill Me Later program for merchandise with a value of $250 or more, pursuant to which customers are not required to make (but may make) any payments for the 90-day period following the relevant purchase. Customers who do not pay for merchandise in full following the expiration of the 90-day period are billed finance charges from the date of purchase. Standard and express shipping options are available and customers may generally return most merchandise (within 30 days of receipt in the case of HSN merchandise) for a full refund or exchange, subject in some cases to restocking fees and exceptions for custom merchandise in the case of Cornerstone Brands merchandise.
Television Programming
Programming produced by HSN U.S. This programming is intended to promote sales and customer loyalty through a combination of product quality, price and value, coupled with product information and entertainment. Programming on the HSN and America's Store television networks is divided into separately televised segments, each of which has a host who presents and conveys information regarding the featured product, sometimes with the assistance of a representative from the product vendor.
The HSN Merchandise.television network also broadcasts nationwide infomercial campaigns for select products, which it produces and manages, on pay television networks on a limited basis from time to time.
operates, to two satellite transponders leased by HSN U.S. provides viewers with a number of convenient options in connection with the purchase, payment and shipping of merchandise, which vary by product, including the AutoShip program, pursuant to which customers can arrange to have purchases automatically sent and billed to them on a regularly scheduledfull-time basis through May 2019 and the Flexpay option, which allows customers to pay for purchases in up to five monthly, interest-free installments. Standard and express shipping options are available and customers may generally return most merchandise within 30 days of receipt for a full refund or exchange.
HSN U.S. purchases merchandise made to its specifications, as well as merchandise from name brand vendors and other third party lines, typically under certain exclusive rights, and overstock inventories from wholesalers, the mix and source of which depends upon a variety of factors, including price and availability. HSN U.S. generally does not enter into long-term supply arrangements with any of its vendors, given that there are a variety of sources of supply available.
Reach.As of December 31, 20032004 and 2004,2005, the HSN television network reached approximately 81.185.5 million and 85.589.0 million of the approximately 108.4109.6 million and 109.6110.2 million homes in the United States with a television set, respectively. Television households reached by the HSN television network as of December 31, 20032004 and 20042005 primarily include approximately 61.962.6 million and 62.664.1 million households capable of receiving cable and/or broadcast transmissions and approximately 18.622.6 million and 22.624.7 million direct broadcast satellite system, or DBS, households, respectively.
As of December 31, 20032004 and 2004,2005, the America's Store television network reached approximately 10.413.0 and 13.014.2 million DBS households and approximately 7.16.2 million and 6.26.8 million cable television households, of which approximately 3.54.3 million and 4.34.4 million were distributed on a digital tier, respectively. Of the total number of cable television households that received the America's Store television network as of December 31, 20032004 and 2004,2005, approximately 6.96.0 and 6.06.4 million, respectively, also received the HSN television network.
HSN U.S. produces live programming for the HSN and America's Store television networks in its studios in St. Petersburg, Florida. HSN U.S. distributes its programming by means of its satellite uplink facilities, which it owns and operates, to two satellite transponders leased by HSN U.S. on a full-time basis through May 2019 and November 2019. While HSN U.S. has designed business continuity and disaster recovery plans to ensure its continued satellite transmission capability on a temporary basis in the event of a natural or other disaster, the prolonged or permanent interruption of its satellite transmission capability for any reason and/or related costs incurred by HSN U.S. could have a material adverse affect on the business, financial condition and results of operations of HSN U.S. and/or IAC.
carriage and related promotional and other efforts, including commitments to deliver pre-determined numbers of subscribers over specified time periods, HSN U.S. generally pays these pay television operators a commission, based on a percentage of the net merchandise sales to their subscriber bases. In certainsome cases, pay television operators receive additional compensation in the form of the purchase of advertising insertion time on other programmingthe HSN and/or America's Store television networks, commission guarantees and/or upfrontdistribution payments in exchange for their commitments to deliver subscribers.
From Distribution and affiliation agreements with major pay television operators expire from time to time pending the renewal of an existing affiliation agreement or the negotiation of a new affiliation agreement, the HSN and/or America's Store television networks will be carried by one or more pay television operators without an effective affiliation agreement in place. Renewal and negotiation processes with pay television operators are typically protracted. Existing affiliation agreements with certain major cable operators and DBSpay television operators are scheduled to expire over the course of 2005. Some, but not all of these agreements, contain renewal provisions. While HSN2006. See "Item 1A—Risk Factors—Third Party Relationships—Retailing—Retailing U.S."
intends to pursue the renewal of, or negotiate new, cable and DBS affiliation agreements to carry the HSN television network, no assurances can be given that it will be able to do so on acceptable terms, if at all. While the cessation of carriage of the HSN and/or America's Store television networks by a major cable operator, a DBS operator or a significant number of smaller cable operators could have a significant adverse effect on the business, financial condition and results of operations of HSN U.S. and the Company, the Company believes that it will be able to continue to successfully manage the distribution process in the future.
Catalog Services. Catalog services consist primarily of the Cornerstone Brands portfolio of leading print and certain other catalogs. For a description of the merchandise featured in each of these catalogs, see "—Merchandise." Cornerstone Brand catalog presentations generally incorporate on-site photography and real-life settings, coupled with related editorial content describing the merchandise and depicting situations in which it may be used. Cornerstone Brand catalogs are designed and produced in house, which enables each individual brand to control the production process and reduces the amount of lead time required to produce a given catalog. Cornerstone Brands negotiates contracts for paper and printing services for all of its brands, which generally reduces catalog-related costs for each individual brand.
Catalog services also include three HSN-branded consumer catalogs operated and managed as part of Cornerstone Brands, which feature thousands of home, yard and automotive products. New editions of full-color Cornerstone Brands' and HSN-branded catalogs are mailed to customers several (generally six to ten) times each year, with a total annual circulation in 2005 of approximately 336 million catalogs (including Cornerstone Brands' catalogs circulated since April 2005). The timing and frequency of catalog circulation varies by 27 low power television stations pursuant tobrand and depends upon a long term affiliation agreement between HSN U.S.number of factors, including the timing of the introduction of new merchandise, marketing campaigns and Ventana Television, Inc., a wholly-owned subsidiary of IAC.promotions and inventory levels, among other factors.
HSN.com.Online Distribution. HSN U.S. operatesHSN.com, a transactional e-commerce site that serves as an alternativeanother storefront for merchandise featured on the HSN and/or America's Store television networks, as well as a significant amount of additional inventory available only through HSN.com. HSN.com also providesCornerstone Brands operatesFrontgate.com,BallardDesigns.com,GarnetHill.com,SmithandNoble.com,TheTerritoryAhead.com andTravelSmith.com, which serve as other storefronts for merchandise featured in the corresponding print catalogs, and certain other websites.
These websites provide consumers with additional content to support and enhance HSN television programming includingor the corresponding print catalog, as applicable. For example, HSN.com provides users with an online program guide, a 24 hour24-hour product review through which consumersthey can find and view products previously featured on the HSN television network, live streaming video of the HSN television network and additional information about HSN show hosts and guest personalities. Additional content provided by Cornerstone Brands websites, which differs across the various websites, includes decorating tips and
measuring and installation information, a feature that allows consumers to browse the corresponding catalog on line and online design centers, gift registries and travel centers.
Consumers can also track the status of their online orders through these websites, confirm information regarding shipping and, in some cases, confirm the availability of inventory and establish and manage personal accounts. Consumers may communicate directly with customer service via e-mail and manage their account information through HSN.com. HSN.com generated approximately 15.9% of HSN U.S. sales in 2004.
Catalog Services and Infomercials. HSN U.S. catalog services consists of three consumer catalogs and related websites that feature thousands of home, yard and automotive products. New editions of the full-color catalogs are mailed to customers several times each year for a total annual circulation of over 80 million catalogs. The Company recently agreed to acquire Cornerstone Brands, a portfolio of leading print catalogs and related online retailing sites that sell home products and leisure and casual apparel. Cornerstone Brands' portfolio includes Frontgate, Ballard Designs, Garnet Hill, Smith and Noble, The Territory Ahead and TravelSmith. Upon completion of this acquisition, which is expected to occur during the second quarter of 2005 (subject to the receipt of the requisite regulatory approvals and the satisfaction of customary closing conditions), the existing catalog services of HSN U.S. will become part of Cornerstone Brands. HSN U.S. also offers select products through nationwide infomercial campaigns, which it produces and manages, on pay television networks on a limited basis.
HSN International
As of December 31, 2004, HSN International consisted of HSE-Germany, EUVÍA and Quiz TV (which operates an interactive game and quiz show television channel based in London, England), as well as minority interests in home shopping businesses in Italy, China and Japan.
HSE-Germany. As of December 31, 2004, HSN International owned approximately 90% of HSE-Germany. HSE-Germany operates a German-language home shopping business that is broadcast 24 hours a day,or by telephone, with call center representatives available seven days a week,week. Websites owned and operated by Retailing U.S. generated approximately 23.2% of U.S. demand, excluding liquidations and services, in Germany, Austria2005 (including Cornerstone Brands websites since April 2005).
Competition. The television networks, catalogs and Switzerland and also generates sales on its own website. HSN International acquired the remaining 10% interest in HSE-Germanywebsites that it did not already own on February 9, 2005. As of December 31, 2004, HSE-Germany had approximately 19.9 million cable and 9.8 million satellite subscribers in Germany, approximately 943,000 cable and
1.0 million satellite subscribers in Austria and approximately 1.3 million cable and 220,000 satellite subscribers in Switzerland.
HSE-Germany does not need a license from German state media authorities to broadcast its programming over-the-air, via cable or via satellite. However, HSE-Germany generally must still obtain the right to broadcast its programming in a given state on a given cable channel from state media authorities in each of Germany's 16 states on a periodic basis, generally every 18 to 24 months. HSE-Germany enters into affiliation agreements with local cable operators in each of Germany, Austria and Switzerland, as well as with one principal DBS operator for carriage in all of these countries. No assurances can be given that HSE-Germany will be able to maintain its existing rights to broadcast its programming over the cable networks of each of Germany's 16 states and/or negotiate affiliation agreements with pay television operators on acceptable terms, if at all.
EUVÍA. HSN International owns, through a German subsidiary, 48.6% of EUVÍA, a German limited partnership that operates two television broadcasting businesses in Germany. ProSiebenSat.1 Media AG, the second largest German television group, owns 48.4% of EUVÍA. The remaining 3% of EUVÍA, over which HSN International also has voting control, is owned by EUVÍA's CEO.
EUVÍA operates two television channels, 9Live, an interactive game and quiz show-oriented television channel, and Sonnenklar, a travel-oriented television channel. EUVÍA also sells package travel tours through Sonnenklar and its related website. While Sonnenklar does not need a broadcast license from German state media authorities, it must obtain rights to broadcast its programming on cable channels in each of Germany's 16 states on a periodic basis. 9Live broadcasts its programming pursuant to a license granted by the German state media authorities that expires in 2011. Sonnenklar and 9Live both enter into affiliation agreements with local cable operators, as well as with one principal DBS operator, for carriage in Germany. 9Live is distributed throughout Germany via satellite, cable and terrestrial antenna, and as of December 31, 2004, reached approximately 29.9 million households. Sonnenklar is distributed throughout Germany via digital and analogue satellites and cable, and as of December 31, 2004, reached approximately 28.4 million households.
Competition
HSNcomprise Retailing U.S.operates operate in a highly competitive environment. The HSN and America's Store television networksThese businesses are in direct competition for consumers with traditional offline and online retailers, ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, such as mail order and catalog companies, and discount retailers. The HSN and America's Store television networks compete with, and HSN U.S. expects to face increasing competition from, other companies that market merchandise by means of live television. TheIn addition, the HSN and America's Store television networks also compete for access to customers and audience share with other conventional forms of entertainment and content. The price and availability of programming for pay television systems affect the availability of distribution for programming produced by HSN U.S. programming and the compensation that must be paid to pay television operators for related carriage.
In addition,carriage and competition for channel capacity has increased. While the advent of digital cable may decrease this competition, this additional capacity may encourage competitorsand placement continues to enter the marketplace, which could adversely affect the ability of HSN U.S. to attract viewersincrease. See "Item 1A—Risk Factors—Adverse Events and customers. No prediction can be made with respect to the extent to which digital technology will ultimately impact the availability of channel capacity or the ability of new competitors to enter the marketplace. Also, certain broadcast television stations can demand carriage on local cable systems pursuant to "must-carry" rights, which may apply to digital television in the future. HSN U.S. is and will continue to be affected by these mandatory carriage rights to the extent that they decrease the number of available cable channels. No assurances can be provided that HSN U.S. will be able to secure well-positioned channel capacity on attractive terms and its inability to do so could have a material adverse effect on its business, financial condition and results of operations.
HSN.com competes with numerous brick-and-mortar retailers, other online and offline retailers, catalog merchants and television shopping channels. A number of HSN.com's online competitors have a larger user base and greater expertise in developing online commerce. HSN U.S. believes that the principalTrends—Retailing" Principal competitive factors in this market arefor the businesses that comprise Retailing U.S. include selection of goods, customer service, reliability of fulfillment and delivery services, brand recognition, convenience and accessibility and price and, in the case of websites, quality of search tools and system reliability.
HSN International.Retailing International
Overview. As of December 31, 2005, Retailing International consisted of HSE-Germany, which operates a German-language television home shopping business that is broadcast 24 hours a day, seven days a week, in Germany, Austria and Switzerland, as well as minority interests in home shopping businesses in Japan and China. Retailing International also included a 48.6% interest in EUVÍA, a German limited partnership that operates two television broadcasting businesses in Germany, through the date of the sale by IAC of its interest in EUVÍA in June 2005.
HSE-Germany. As of December 31, 2005, Retailing International owned 100% of HSE-Germany. Retailing International acquired the remaining 10% interest in HSE-Germany that it did not already own in February 2005. As of December 31, 2005, HSE-Germany had approximately 19.9 million cable and 14.7 million satellite subscribers in Germany, approximately 943,000 cable and 1.6 million satellite subscribers in Austria and approximately 1.3 million cable and 300,000 satellite subscribers in Switzerland. In addition to its television home shopping business, HSE-Germany generates sales on its website.
HSE-Germany enters into affiliation agreements with local cable operators in each of Germany, Austria and Switzerland, as well as with one principal DBS operator for carriage in all of these countries, which agreements expire from time to time. HSE-Germany must also negotiate with German state media authorities for broadcast rights. See "Item 1A—Risk Factors—Compliance."
Other. Retailing International also includes minority ownership interests in television shopping ventures in Japan and China. Retailing International has a 30% minority stake in Jupiter Shop Channel Co. Ltd., a venture based in Tokyo, Japan, which broadcasts televised shopping 24 hours a day, with the
substantial majority of this time devoted to live broadcasts. Retailing International also has a 21% minority stake in TVSN Asia Pacific Holdings Ltd., which owns a television shopping business broadcasting in Mandarin Chinese from facilities in Shanghai, People's Republic of China.
Competition. HSE-Germany competesand the Japanese and Chinese television shopping businesses in Germanywhich IAC holds minority interests compete with traditional retailers, direct marketing retailers and other electronic retailers, some of which offer 24-hour electronic retailing programming and/or use infomercials and a small amount of live programming. Sonnenklar faces competition from traditional travel agencies, tour operators, which are increasingly selling directly to consumers, and online travel service providers. 9Live competes for access to participants and audience share with other conventional forms
Services
Ticketing
Overview. Ticketing consists primarily of entertainment and content, as well as other formsTicketmaster, a leading provider of game show content, both online and offline.
Regulation
Congress, the FCC and federal courts currently are reviewing certain existing cable, newspaper and media ownership restrictions. Depending on the outcome of FCC proceedings and of any subsequent court review, individual cable operators might acquire control over larger segments of the nation's cable customers and channels, in which case HSN U.S. could be required to negotiate with fewer cable operators that would control larger portions of the market for the terms of and opportunity to secure carriage. Regardless of the outcome of these FCC proceedings, the antitrust laws could impose independent limitations on the concentration of cable ownership. HSN U.S. cannot predict the outcome of these FCC proceedings, any subsequent court challenges, or future applications of the antitrust laws. No assurances can be made that the outcome of these FCC proceedings and subsequent marketplace activity would not materially affect HSN U.S. or the Company.
HSN U.S. is subject to a variety of consumer protection laws and regulations relating to the accuracy of its product claims.
Ticketing
Overview.offline ticketing services. Ticketmaster and its affiliated brands and businesses provide online and offline ticketing services through Ticketmaster-owned and affiliated websites, operator-staffed call centers and independent retail outlets, serving many of the foremost venues, entertainment facilities, promoters and professional sports franchises in the United States and abroad, including inAustralia, Canada, Denmark, Finland, Germany, Ireland, the Netherlands, New Zealand, Norway, Sweden and the United Kingdom. Ticketmaster hasis also entered intoa party to a joint venturesventure with a third partiesparty to provide ticket distribution services in AustraliaMexico and Mexico.
licenses its technology in Mexico and other Latin American countries. Ticketmaster has continuedseeks to further expand its ticketing operations into territories outside of the United States. Ticketing also includes ReserveAmerica, a leading provider of campground reservation services and software to United States federal and continues to experience growth in these markets. Ticketmaster sold approximately 26.1 million tickets in 2003 as compared to approximately 29.3 million in 2004 in these markets (excluding sales by unconsolidated international joint ventures).state agencies.
Ticketmaster also continuesseeks to expand its ticket distribution capabilities through the continued development of its website,www.ticketmaster.com, and related domestic and international websites, which are designed to promote ticket sales for live events and disseminate event information. Ticketmaster's primary ticketing website, wwww.ticketmaster.comww.ticketmaster.com, is a leading online ticketing service that enables consumers to purchase tickets over the Internetinternet for live music, sports, arts and family entertainment events presented by Ticketmaster's clients. Consumers can accesswww.ticketmaster.com directly, or from the websites of Ticketmaster's affiliates, including Citysearch,IAC affiliated businesses, and through numerous direct links from banners and event profiles hosted by approved third party websites. In addition,www.ticketmaster.com and related international websites provide local information and original content regarding live events for Ticketmaster clients throughout the United States and abroad. In 2005, a majority of the tickets sold by Ticketmaster
has experienced growth in ticket sales through its websites in recent years were sold online and Ticketmaster expects that this trend will continue duringto be the next several fiscal years, although at a slower pace. As of December 31, 2004, online ticket sales throughwww.ticketmaster.com and related websites accounted for more than one-half of Ticketmaster's ticketing volume.
Ticketmaster provides the public with convenient access to tickets and information regarding live entertainment, sporting and leisure events and activities. As a result, its business is sensitive to fluctuationscase in the number of entertainment, sportingfuture. Ticketmaster continues to develop and leisure eventsintroduce new initiatives to help its clients sell more tickets, such as auctions, fan clubs and activities offered by promoters and facilities, as well as general economic and business conditions in these industries. Adverse trends in the entertainment, sporting and leisure events and activities could have a material adverse effect on Ticketmaster's business, financial condition and results of operations.ticket exchanges.
Ticketmaster System. Ticketmaster believes that its core proprietary operating system and software, generally referred to as the Ticketmaster System, as well as its extensive distribution capabilities, provide its clients with a number of benefits.benefits, including the ability to reach a wider audience of potential ticket purchasers as well as to handle complex ticketing transactions and sell large volumes of tickets more quickly, efficiently and reliably than would be possible if tickets were sold independently. In addition, the Tickemaster System makes it possible for clients to continuously adapt to emerging and changing trends in the live entertainment industry in a more efficient and cost-effective manner than they could do on their own. The Ticketmaster System, which includes both hardware and software, is typically located in aone of the multiple data center that iscenters managed by Ticketmaster staff. The entire Ticketmaster distribution network, including the Ticketmaster System, provides a single, centralized inventory control and management system capable of tracking total ticket inventory for all events, whether sales are made on a season, subscription, group or individual ticket basis. All necessary The
hardware and software required for the use of the Ticketmaster System is installed in a client'sclients' facility box office,offices, call centers orand remote sales outlets. The versatility of the Ticketmaster System allows it to be customized to satisfy a full range of client requirements. In areas of Europe outside of the United Kingdom and Ireland, Ticketmaster's operating businesses generally use localized versions of Ticketmaster's proprietary operating system and software, or their own separate, local operating systems and software, all of which are also proprietary to Ticketmaster.
Client Relationships. Ticketmaster generally enters into written agreements with its clients pursuant to which it agrees to providelicense the Ticketmaster System and related systems purchased by the client,to clients, and to serve as the client'sclients' exclusive ticket sales agent for all sales of individual tickets sold to the general public outside of the facility'sfacility box office,offices, including any tickets sold at remote sales outlets, over the internet, by phone or via the Internet,and at independent retail locations, for specified multi-year periods. Pursuant to an agreement with a facility, Ticketmaster generally is granted the right to sell tickets for all events presented at that facility for which tickets are publicly available to the general public, and as part of such arrangement, Ticketmaster installs the necessary ticketing equipment in the facility's box office. An agreement with a promoter generally grants Ticketmaster the right to sell tickets for all events presented by that promoter at any facility for which tickets are publicly available, unless the facility is covered by an exclusive agreement with Ticketmaster or another automated ticketing service company. Small allotments of tickets for events are generally reserved for sale through fan or other similar clubs and/or other standard industry practices and exceptions.
Ticketmaster generally does not buy tickets from its clients for resale to the public and typically assumes no financial risk for unsold tickets. All ticket prices are determined by Ticketmaster's clients.clients or by consumers (e.g., in an auction of tickets available on the Ticketmaster System). Ticketmaster's clients also generally determine the scheduling of when tickets go on sale to the public and what tickets will be available for sale through Ticketmaster. Facilities and promoters, for example, often handle group sales and season tickets in-house.in-house and certain tickets may be sold through fan or other similar clubs. Ticketmaster only sells a portion of its clients' tickets, the amount of which varies from client to client and varies as to any single client from year to year.
Ticketmaster is dependent upon its clients for ticketing supply. The ability to secure tickets depends, in part, on Ticketmaster's ability to enter into and maintain client contracts on favorable terms. No assurances can be provided that Ticketmaster will continue to be able to enter into or maintain client contracts on acceptable terms, if at all, and its inability to do so could have a material adverse effect on its business, financial condition and results of operations.
Revenues. Ticketing revenue is generated principallyprimarily from convenience charges and order processing fees received by Ticketmaster for each ticket sold by Ticketmaster on behalf of its clients. These charges are negotiated and included in Ticketmaster's contracts with its clients. Pursuant to its
contracts with clients, Ticketmaster is granted the right to collect from ticket purchasers a per ticket convenience charge on all tickets sold throughwww.ticketmaster.com, by telephone and through remoteretail sales outlets and other media. There is an additional per order "order processing" fee on all ticket orders sold by Ticketmaster, other than at remoteretail sales outlets. Generally, the amount of the convenience charge is determined during the contract negotiation process, and typically varies based upon numerous factors, including the services to be rendered to the client, the amount and cost of equipment to be installed at the client's box office and the amount of advertising and/or promotional allowances to be provided, as well as the type of event and whether the ticket is purchased throughwww.ticketmaster.com, by telephone, through a remote sales outlet or other media. Any deviations from those amounts for any event are negotiated and agreed upon by Ticketmaster and its client prior to the commencement of ticket sales. Generally, the agreement between Ticketmaster and a client will also establish the amounts and frequency of any increases in the convenience charge and order processing fees during the term of the agreement. In certainmany cases, clients may participate in the convenience charges and/or order processing fees paid by ticket purchasers for tickets bought through Ticketmaster for their events. The amount of such participation, if any, is determined by negotiation between Ticketmaster and the client. In some cases, maximum charges on tickets are established and regulated by state and local law. See "Item 1A—Risk Factors—Changing Laws, Rules and Regulations."
ReserveAmerica, an outdoor recreation reservation services company, is a leading provider of camping and ticketing services and software to United States federal and state agencies. Specific areas include services for outdoor recreation point-of-sale systems, tour ticketing management, camping reservations and general recreation ticketing to public land attractions. The ReserveAmerica system permits the general public to make camping reservations and obtain access to public recreation attractions over the Internet, by telephone and in person. ReserveAmerica's websites,www.reserveamerica.com,www.reserveusa.com., hearst.reserveamerica.com andwww.bwcaw.org service up to 1,500,000 visitors monthly. ReserveAmerica also maintains four telephone call centers in New York, California, Florida and Wisconsin.
Competition. Ticketmaster's ticketing business faces competition in the United States and abroad from other national, regional and local ticketing service companies and entertainment organizations with ticketing distribution capabilities, as well as from its clients and aggregations of its clients, such as major league sports leagues, which increasingly have the capability to fulfill ticketing distribution and management functions through their own systems. Not all facilities, promoters and other potential clients use the services of an automated ticketing company, choosing instead to distribute their tickets through their own internal box offices or other distribution channels. The increasedIn addition, Ticketmaster faces competition in the secondary market from ticket brokers and continued useother resellers, as the advent of direct systems or newthe internet has enabled these parties to increase their distribution channels by Ticketmaster's clients could have a material adverse effect on Ticketmaster's business, financial condition and results of operations.capabilities.
Other companies compete with Ticketmaster by selling stand-alone automated ticketing systems to enable facilities to do their own ticketing. Several of Ticketmaster's competitors have operations in multiple locations, while others compete principally in one specific geographic location. Ticketmaster experiences substantial competition for potential client accounts and renewals of contracts on a regular basis. Accordingly, there can be no assurance that prospective or renewal clients will enter into contracts with Ticketmaster rather than Ticketmaster's competitors (including clients that choose to self-distribute with or without the assistance of the numerous companies that support self-distribution).See "Item 1A—Risk Factors—Third Party Relationships—Services—Ticketing." Ticketmaster competes on the basis of products and serviceservices provided, capability of theits ticketing system itsand distribution network, reliability and price.
As an alternative to purchasing tickets through Ticketmaster, ticket purchasers generally may purchase tickets from the facility's box office at which an event will be held or by season, subscription or group sales directly from the venue or promoter of the event. Although Ticketmaster's clients may process sales of these tickets through the Ticketmaster System, Ticketmaster generally derives no convenience charge or other processing revenue from the ticket purchasers with respect to those ticket purchases.
Regulation.Lending
Overview. TicketmasterLending consists of businesses that offer lending and lending-related products and services through online exchanges that connect consumers and service providers in the lending industry, other Lending-owned and affiliated websites and the telephone.
Services offered through Lending's online exchanges primarily encompass home mortgages (in connection with refinancings and purchases) and home equity loans, as well many other consumer credit categories, including automobile loans and personal loans and credit cards. Consumers seeking loan products through an exchange channel generally begin the process by completing a simple request, known as a qualification form, online or over the telephone. After the qualification form has been completed, Lending's online exchanges automatically retrieve the consumer credit information and compare this information to the underwriting criteria of participating lenders. Qualified consumers can receive multiple conditional loan offers, generally up to five, from participating lenders or LendingTree Loans (as described below) in response to a single request and then compare, review and accept the offer that best suits their needs.
Through Lending's online exchanges, participating lenders can generate new business that meets their specific underwriting criteria, generally at a lower cost of acquisition than through traditional marketing channels. Due to the volume and diversity of consumer leads generated by Lending's online exchanges, IAC believes that these exchanges will continue to deliver value to participating lenders as a cost-effective distribution channel.
Lending's businesses also originate, process, approve and fund various residential real estate loans under two brand names, LendingTree Loans and Home Loan Center, which brand names are collectively referred to in this report as "LendingTree Loans." For these purposes, Lending maintains staffs of loan officers in California and, to a lesser extent, North Carolina, and is able to provide a broad range of real estate loan products to consumers in all 50 states, including conforming and non-conforming loans, prime and sub-prime loans, adjustable loans and fixed rate loans. A portion of the consumer leads generated by Lending's online exchanges are closed in the name of LendingTree
Loans. Consumer leads are also sourced, to a lesser extent, from a variety of channels, including online lead aggregators (other than Lending's online exchanges) and direct mail campaigns. When the Lending business closes loans in its own name to consumers through the exchange, it offers those consumers a choice among various loan alternatives based on different wholesale offers made to us by the secondary investors who purchase the loans we close, thus maintaining the choice element inherent in the LendingTree model.
Lending's businesses fund and close loans using proceeds from borrowings under available warehouse lines of credit. Substantially all of the loans funded are sold to investors in the secondary market on a servicing released basis, generally within 30 days of funding, with the proceeds from such sales being used to repay borrowings under the warehouse lines of credit. See "Item 1A—Risk Factors—Adverse Events and Trends—Lending and Real Estate" and "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Position, Liquidity and Capital Resources."
Services available through Lending's businesses are subject to certainextensive regulation by various federal, state and in some instances, local, regulations,governmental authorities. See "Item 1A—Risk Factors—Compliance."
Revenues. Revenues from Lending's online exchanges principally represent transmission fees and closed-loan fees paid by lenders that received a transmitted loan request or, in certain cases, closed a loan for a consumer that originated through one of LendingTree's websites or affiliates. Since a given qualification form can be transmitted to more than one participating lender, multiple transmission fees are generated from the same qualification form. Revenues from direct lending are derived primarily from the sale, and to a lesser extent,the origination of loans.
Competition. Lending's businesses compete with traditional offline lending institutions and financial service companies, as well as with local mortgage brokers. Lending's businesses also compete with online lenders (including traditional offline lending institutions that have developed their own stand-alone online lending channels) that originate the bulk of their loans through their own websites or the telephone. These companies typically operate branded websites and attract consumers via online banner ads, key word placement on search engines, partnering with affiliates and business development arrangements with other properties, including laws in several states establishing maximum conveniencemajor portals.
Real Estate
Overview. Real Estate primarily consists of RealEstate.com, an online network that connects consumers with real estate agents and processing charges on tickets for certain live eventsbrokerages around the country, as well as iNest, an online provider of real estate services in the case of newly constructed homes. Consumers interested in working with a real estate professional in connection with the purchase or sale of an existing or newly-constructed home can access online real estate-related services offered by Real Estate's businesses and complete a simple form. In the case of consumers looking to be matched with a real estate broker or agent, upon completion of the form the consumer will be provided with a choice of local real estate professionals from a nationwide network. Upon selection of a real estate professional, the consumer's information will be forwarded to the real estate professional via web-based technology. In the case of consumers looking to find newly-constructed homes, iNest provides consumers with a coupon that is presented to their new homebuilder, registering iNest as the real estate broker of record. In all cases, if the consumer and the real estate professional agree to work together, the remainder of the transaction is completed locally and in certain cases, the consumer may be eligible for rebates and promotional incentives.
Real Estate earns revenue from subscription and cooperative brokerage fees paid by real estate professionals participating on its exchange. Real Estate generates revenues from cooperative brokerage fees when the transmission of consumer information to the real estate professional results in the purchase or sale of a home, upon the transmission of consumer information to a participating real
estate professional or in advance for the right to receive leads on a recurring basis over pre-determined time periods. In the case of consumers that have used the services of iNest to find a newly constructed home, Real Estate earns a commission when the consumer closes a transaction with the builder.
Services available through Real Estate's businesses are subject to extensive regulation by various federal, state and in some instances, local, governmental authorities. See "Item 1A—Risk Factors—Compliance."
In addition to services described above, Real Estate provides the following services and content throughwww.RealEstate.com and affiliated websites:
Competition. Real Estate's businesses compete with traditional offline real estate companies, as well as websites that provide online real estate referral services for a fee and websites that offer real estate broker lists without related services and customer support.
Teleservices
Overview. Teleservices consists of PRC, LLC, a leading provider of contact center outsourcing services, managing customer relationships for brand-focused corporations through its global network of centers. PRC uses its industry-specific business process expertise and enabling technologies to support the brand experience and customer relationship management strategies of its clients. The company is organized into two operating units: Business-to-Consumer solutions and Business-to-Business solutions. PRC's clients include large, multi-national companies in a wide variety of industries, as well as IAC affiliates.
PRC's Business-to-Consumer unit interacts directly with the customers of its various clients to solicit customer information requested by its clients. Consumer interactions include product inquiries, customer support, product sales, customer acquisition, loyalty programs and other customer initiated requests. PRC's Business-to-Business unit works with clients to create and implement strategies to acquire and retain customers, as well as develop and support related sales and marketing efforts.
PRC's primary source of revenue is the customer care activities conducted by its Business-to-Consumer unit, with the majority of these revenues derived from inbound customer care services, which consists of longer-term customer care and customer service programs that tend to be more predictable than other revenues in the contact center outsourcing industry. PRC works closely with its clients and their advisors to develop scripts used by PRC personnel in making customer contacts and to comply with any state qualification and/or licensing requirements for eligibility to perform services for clients. PRC generally requires its clients to indemnify PRC against claims and expenses arising out of their respective customer service activities conducted through PRC.
Competition. The customer care industry is very competitive and highly fragmented. PRC's competitors range in size from very small firms offering specialized applications and short-term projects to large independent, international firms, including technology and consulting firms. PRC's competitors also include the in-house operations of many of it existing and potential clients, which operations comprise the largest segment of the customer care industry.
Home Services
Overview. Home Services consists primarily of ServiceMagic, a leading online marketplace that connects consumers with pre-screened, customer-rated home service professionals by way of its various patent-pending, proprietary technologies. When consumers submit a home service request through the ServiceMagic marketplace, ServiceMagic matches them with home service professionals from its network of pre-screened, customer-rated home service professionals. ServiceMagic's home service professionals collectively provide coverage for a wide variety of different home service categories, ranging from simple home repairs and maintenance to complete home remodeling projects.
ServiceMagic also offers its patent-pending Exact Match service, which creates a one-to-one connection between consumers and member businesses. With Exact Match, ServiceMagic optimizes the placement of the member web pages within the search results of local search engines and online directories. Exact Match provides a way for home service professionals to get broad internet exposure without having to pay huge up-front fees, build and maintain complex web sites or become internet marketing or search engine experts.
ServiceMagic earns revenue primarily from fees paid to ServiceMagic by member businesses for consumer leads, regardless of whether the member business that received the lead ultimately provides the requested service, as well as from one time fees charged to member businesses upon their enrollment in the ServiceMagic network.
Competition. ServiceMagic currently competes with other home service-related lead generation services, as well as with internet directories and local advertising, including radio, direct marketing campaigns, yellow pages, newspapers and other offline directories.
Media & Advertising
Overview. Media & Advertising consists of IAC Search & Media, formerly known as Ask Jeeves, Inc., a provider of information search and related services, and Citysearch, a network of local city guide websites. IAC Search & Media:
Ask-Global. Search services are offered throughwww.ask.com and other Ask destination search websites, as well as through consumer applications, including toolbars and search boxes, and portals. See "—IAC Consumer Applications and Portals." Search services fall into two main categories, destination search services and convenience search services. Destination searches occur when an internet user navigates directly to an Ask destination search website to submit his or her search query directly to that particular website. Convenience searches, by contrast, occur when search queries are submitted through any search box made available to the user, for example, through a search box located within a previously downloaded consumer application, as opposed to directly accessing an Ask destination search website.
Ask's primary destination search websites are accessible in the U.S., the U.K. and Spain throughwww.ask.com, and in Japan throughwww.ask.jp (a joint venture). Ask has recently launched beta sites in Germany, France, Italy and the Netherlands, each of which is accessible throughwww.ask.com in the applicable country. These websites utilize proprietary algorithmic search technology to generate search results. Ask-Global seeks to differentiate these websites from other search engines in a number of ways, including by offering the following features:
IAC Consumer Applications and Portals. The IAC Consumer Applications and Portals business offers several free downloadable applications that include search functionality, such asFunWebProducts, which are applications with features that are designed to make online activities more personal, interesting and fun. These features includeSmiley Central, which allows users to add emoticons to e-mails and instant messages, andPopular Screensavers, which allows users to display their own images or videos as screensavers.
IAC Consumer Applications and Portals offers other branded search toolbars, including theMyWebSearch andMySearch toolbars. These toolbars enable users to run search queries from any website using one of several popular search algorithms, including those of Ask destination search websites. Many of these toolbars offer additional benefits, such as pop-up blocking and quick access to personalized portal content. These toolbars can be downloaded from Ask websites and installed free of charge, with theMyWebSearch toolbar being promoted by distribution through theFunWebProducts described above. In addition, distribution arrangements are in place with several third parties to bundle theMySearch toolbar with their downloadable applications, in which cases related revenues are generally shared (net of amounts retained by paid listing providers) with these third parties.
Distribution agreements are also entered into with third parties and IAC affiliated companies to permit or require these parties to add an Ask-powered search box to their websites or applications. Search boxes make these websites or applications more attractive to their users and are relatively simple to implement, as users who enter search queries are taken to a results page serviced and controlled by Ask. Related revenues are generally shared (net of amounts retained by paid listing providers) with third party websites and application providers, with flat fees paid in some cases.
This business also operates the following content-rich portals, all of which have search functionality and offer internet services, such as e-mail, portfolio tracking and message boards:www.iWon.com, an entertainment portal with a user loyalty program built around cash and other sweepstakes prizes;www.MyWay.com, a portal that is free from banner, pop-up and rich-media ads; andwww.Excite.com, a content-rich portal that aggregates news, sports, weather and entertainment content. Portal content, including news, weather, shopping comparisons and horoscopes, among other content, is generally licensed from third party content providers. In addition, this business offers co-branded portals to third parties, with related revenues generally shared (net of amounts retained by paid listing providers) with such third parties, with flat fees paid in some cases.
Since January 2006, IAC Consumer Applications and Portals has operated and managed Evite, which offers a free online invitation service and has listings for restaurants, bars and clubs powered by Citysearch. Evite also hosts a live event database through relationships with leading ticketing and event services, including Ticketmaster, and recently redesigned its site to add a number of party planning content, features and tools.
IAC Advertising Solutions. IAC Advertising Solutions provides advertisers with the ability to run their online advertisements on IAC Search & Media's proprietary portals,www.iWon.com andwww.excite.com, the Evite portal and other IAC properties. IAC Advertising Solutions also offers Ask Sponsored Listings, an online marketing product pursuant to which advertisers may purchase online traffic by bidding for placement in Ask search result pages. IAC Advertising Solutions also includes the MaxOnline advertising network, which provides advertisers with the ability to run their online advertisements across the third party websites participating in this network. Websites participating in the MaxOnline network are classified into 10 subject-groupings or channels (e.g., automotive, business and lifestyle, etc.) and advertisers select one or more channels on which to run their advertisements or designate specific network sites on which their advertisements will appear.
Some portals, meta-search providers and other third party websites seek to incorporate search results from Ask destination search websites and paid listings (both third party paid listings and Ask Sponsored Listings) into other content on their websites. In these cases, syndication agreements are entered into with these third party websites to deliver, or "syndicate," search results and paid listings to results pages they control. Related revenues are generally shared (net of amounts retained by paid listing providers) with these third party websites, and in some cases, third party publishers may also be charged a fee for algorithmic results.
Citysearch. Citysearch is a network of local city guide websites that offer primarily original local content for major cities in the U.S. and abroad. Citysearch city guides provide up-to-date, locally produced information about a given city's arts and entertainment events, bars and restaurants, recreations, community activities and businesses (shopping and professional services), as well as real-estate related and travel information. Citysearch offers local and national advertising. Local advertising is offered through a Pay-For-Performance model, where local businesses pay for the number of consumer connections made. Consumer connections consist of visits to the respective Citysearch profile pages of these businesses or to their own websites through Citysearch, as well as telephone calls. Citysearch city guides also support online local transactions, including hotel reservations and matchmaking, ticketing and travel-related services through affiliations with leading e-commerce websites, some of which are IAC affiliated businesses. These affiliate partners generally pay Citysearch fees (on a per click or revenue sharing basis, as applicable) for consumer leads sent to their respective websites.
Revenues. Media & Advertising revenues consist primarily of advertising revenues. Advertising revenues are generated primarily through the display of paid listings in response to destination and convenience searches, as well as from advertisements appearing on IAC Search & Media and third party websites and the syndication of results generated by Ask destination search websites. The substantial majority of advertising revenues are attributable to a paid listing supply agreement with Google, which expires, unless renewed by mutual agreement, on December 31, 2007. See "Item 1A—Risk Factors—Third Party Relationships—Media & Advertising." Citysearch's revenues are generated primarily through the sale of online advertising, both local and national, and to a smaller extent, from transaction fees from affiliate partners. Citysearch also derives revenues from self-enrollment, enhanced listing in search results and targeted e-mail and sponsorship packages.
Competition. In its efforts to attract search engine users, syndicate search technologies, distribute downloadable applications and attract partners and advertisers, IAC Search & Media's businesses compete against operators of destination search sites and search-centric portals, search technology and convenience search service providers and online advertising networks. IAC Search & Media believes that its ability to compete effectively with other search engines and portals for web traffic depends upon, among other things, the relevance and authority of its search results, the ease of use of its search services, the quality of its content, the utility of new and existing features on its websites (and the frequency with which users utilize them) and the speed with which it matches others' innovations. Evite competes with a number of online and offline invitation and party planning services, including providers
primary and/or secondary ticketing markets. Other legislation that could affect the way Ticketmaster does business, including legislation that would further regulate convenience chargesof online greeting cards, web-based invitation services, paper-based invitation services and order- processing fees, is introduced from time to time in federal, stateparty planning services, as well as with online and offline social networking services and providers of live event listing information and restaurant, bar and nightlife content.
The markets for local content, local services and local legislative bodiesadvertising are highly competitive and diverse. Citysearch's primary competitors include online providers of local content, numerous search engines and other site aggregation companies, as well as media, telecommunications and cable companies, internet service providers and niche competitors that focus on a specific category or geography and compete with specific content offerings provided by Citysearch.
Membership & Subscriptions
Vacations
Overview. Vacations consists of Interval International, or Interval, a leading membership-services company providing timeshare exchange and other value-added programs to its timeshare-owning members and resort developers worldwide. As of December 31, 2005, Interval had established contractual affiliations with over 2,000 resorts located in 76 countries and provided timeshare exchange services to 1.8 million timeshare owners. Interval's revenues are generated primarily from fees paid by members in connection with exchange and rental transactions and membership fees.
Interval typically enters into multi-year contracts with developers of timeshare resorts, pursuant to which the developers agree to enroll all purchasers of timeshare accommodations at the applicable resort as members of Interval's exchange network on an exclusive basis. In return, Interval provides the timeshare purchasers with the ability to exchange their timeshare accommodations for comparable accommodations at resorts participating in Interval's exchange network.
Developers generally remit Interval's initial basic membership fee on behalf of their respective timeshare owners for membership periods ranging from one to three years at the time the timeshare interests are sold. Some developers have incorporated Interval's annual membership fee into their annual assessments and these owners' memberships are renewed annually by the developer during the period of the resort's participation in the United StatesInterval exchange network. However, in most cases, timeshare owners are responsible for renewing their memberships and abroad. Ticketmaster is unablepaying related fees.
As an upgrade to predict whether anyits basic membership program, for an additional annual fee, exchange members can participate in the Interval Gold Program, a value-added, membership enhancement program. The Interval Gold Program provides exchange members with year-round benefits and services, such legislation will be adoptedas hotel, dining and if so,leisure discounts, a concierge service and access to special exchange options, including golf, spa and cruise exchanges. As of December 31, 2005, approximately 36% of Interval's timeshare exchange members were enrolled in the impact onInterval Gold Program.
Interval uses advanced telecommunications systems and technologies to deliver exchange and membership services to its business.
members through call centers and through its website,Personalswww.intervalworld.com. Interval also makes travel-related products and services available to its members and others directly and through third party providers, as well as additional services through its website to select exchange members.
Competition. Interval faces competition primarily from Resort Condominiums International, LLC, as well as several other companies that perform exchanges on a smaller, often more regional, basis. A number of management companies also compete with Interval by offering exchange opportunities among resorts that they manage as a component of their management services. Also, a wide variety of vacation clubs and large resort developers, some of which participate in Interval's exchange network, are creating and operating their own internal reservation and exchange systems for timeshare owners at their resorts. In addition, because Interval makes available travel services and the rental of timeshare accommodations to its members, Interval faces competition from other suppliers of other travel products and services.
Personals
Overview. Personals consists primarily of Match.com, as well as uDate.com and related brands. These brands, and their networks serviced approximately 983,000 subscribers asall of December 31, 2004 andwhich offer single adults a private and convenient environment for meeting other singles through their respective websites, as well as through Match.com's affiliated networks. As of December 31, 2005, these brands and their networks serviced approximately 1.2 million paid subscribers, with Match.com operating 30 localized international dating sites in 18 languages. Match.com launchedChemistry.com, a premium relationship service, in the third quarter of 2005, andMindFindBind, a Web-based program that aims to help Match.com subscribers design a dating action plan, in January 2006.
Match.com provides users with access to other users' personal profiles and also enables a user interested in meeting another user to send e-mail messages to that user through Match.com's double-blinddoubleblind anonymous e-mail system. E-mail recipients respond depending on their interest in the sender. It is free to post a profile on Match.com and to use any of the searching and matching tools available on the site. Match.com charges a subscription fee to users who wish to initiate, review or respond to e-mails from Match.com members,subscribers, starting with a single-month term, with discounts for longer term subscriptions.
Match.com has entered into partnerships and strategic alliances with third parties including the AOL and MSN portals, in order to increase subscriptions in general, as well as to target particular segments of its potential subscriber base and a broader and more diverse online audience. Typically, these partners earn a commission on each customer subscription they sell into the Match.com service. Some, but not all, of the related agreements with third parties contain renewal provisions.
In April 2002, IAC acquired Soulmates Technology Pty Ltd., or Soulmates, a global online personals group providing dating and matchmaking services in approximately 30 countries worldwide. Using the Soulmates technology platform, Match.com operates 30 localized international dating sites in 18 languages. IAC acquired uDate.com, Inc., a global online personals group that owns and operateswww.udate.com, in April 2003.
Competition. The personals business is very competitive and highly fragmented.fragmented in the United States and abroad. Primary competitors of the various brands that comprise Personals include numerous online and offline dating and matchmaking services (both free and paid), some of which operate nationwide and some of which operate locally, and the personals sections of newspapers and magazines. In addition to broad-based personals services, there arethe various brands that comprise Personals compete with numerous niche websites and offline personals services that cater to specific demographic groups.
Regulation.Discounts
Overview. Several state legislatures have introduced bills that, if passed into law, would require online dating services such as Match.com to either perform criminal background checks on their subscribers or prominently disclose that they do not perform such background checks. IAC is unable to predict whether any such legislation will be adopted and, if so, the impact such legislation will have on its Personals business. Adverse publicity resulting from and relating to the introductionDiscounts consists of these bills could harm the reputation and credibility of the personals industry and service providers within the industry. This could discourage consumers from using online personals services and could have a material adverse effect on the business, financial condition and results of operations of IAC's Personals business.
IAC Local and Media Services
As of December 31, 2004, IAC Local and Media Services consisted of Citysearch, Entertainment Publications, Evite, ServiceMagic and TripAdvisor. Following the completion of the Spin-Off, TripAdvisor will be part of New Expedia.
Overview
Citysearch is a network of local city guide websites that offer primarily original local content for major cities in the United States and abroad, as well as practical transactional tools. Citysearch city guides provide up-to-date, locally produced information about a given city's arts and entertainment events, bars and restaurants, recreation, community activities and businesses (shopping and professional services)Inc., as well as real estate-related and travel information. Citysearch city guides also support online local transactions, including ticketing, hotel reservations, travel and matchmaking through affiliations with leading e-commerce websites, including some operated by IAC brands and businesses. These affiliate partners generally pay Citysearch fees (on a per click or revenue sharing basis, as applicable) for consumer leads sent to their respective websites.
Citysearch revenues are generated primarily through the sale of online advertising, both local and national, and to a smaller extent, from transaction fees from affiliate partners. Local advertising revenues are derived primarily from the sale of advertising through the Pay-For-Performance model, where businesses pay for the number of click-throughs to their respective profile pages on the Citysearch website or their own websites, subject to monthly maximums determined by the business. Citysearch also derives revenues from self-enrollment enhanced listings in search results, targeted electronic mail promotions and targeted sponsorship packages.
Entertainment Publications isEPI, a leading marketer of coupon books, discounts, merchant promotions and Sally FosterFoster® Gift Wrap. As of December 31, 2005, EPI serves more thanserved approximately 160 major markets and doesdid business with approximately 70,00065,000 local merchants and national retailers representing 225,000230,000 North American locations. EPI's Entertainment® Book contains discount offers from local and national restaurants and hotels, leading national retailers and other merchants specializing in leisure activities. Information regarding updated offerings is also available through EPI's website. A unique feature of thewebsite,www.entertainment.com.
EPI's Entertainment® Book is that it is typically sold in connection with fund-raising events, with a percentage of the sale proceeds from these events retained by schools, community groups and other non-profit organizations. EPI also markets discount membership and packages in published and online formats to consumers via online commerce, direct marketing, corporate and retail channels.
Evite is primarily EPI also offer discounts via a free online invitation service,monthly subscription product, Entertainment Rewards, which currently sends an average of more than 7 million invitations per month. In October 2004, Evite expanded its service offerings to include user specific recommendation platforms (based upon recommendations from a network of people with whom the user has shared an event) for restaurants, bars and clubs and a searchable database of over 50,000 live events, in each case, powered by Citysearch. The event database is provided through relationships with leading ticketing and event services, including Ticketmaster and Active.com. Evite revenues are generated primarily through online advertising and transaction fees generated from sponsorship partners integrated throughout the Evite service.
ServiceMagic is a leading online marketplace that connectprovides consumers with pre-screened, customer-rated home service professionals. IAC acquired ServiceMagic in September 2004. When consumers submit a home service request through the ServiceMagic marketplace, ServiceMagic connects them with home service professionals from its network of over 28,000 customer-rated home service professionals, which collectively provide more than 500 different categories of home service needs, ranging from simple home repairs and maintenanceonline access to complete home remodeling projects. ServiceMagic earns revenue primarily from fees paid to ServiceMagic by home service professionals for consumer leads, regardless of whether the home service professional that received the lead ultimately provides the requested service, as well as from one time fees charged to home service professionals upon their enrollment in the ServiceMagic network.
TripAdvisorprint, click-through or code-based discounts at is a comprehensive online travel search engine and directory that aggregates unbiased articles, guidebook reviews and user comments on cities, hotels and activities in a variety of given destinations from a number of online sources. IAC acquired TripAdvisor in April 2004. In addition to travel-related information, TripAdvisor's destination-specific search results provide links to the websiteswww.entertainmentrewardsclub.com
of TripAdvisor's travel partners (travel service providers and marketers) through which consumers can make related travel arrangements. TripAdvisor generates substantially all of its revenues from advertising fees paid by its travel partners for consumer leads sent to their websites.
TripAdvisor also operates DigitalAdvisor, a comprehensive online directory of electronic products, from digital cameras to notebook computers, online electronic retailers and detailed owner and professional product reviews. When consumers find products that fit their needs, they can quickly compare prices at multiple stores. DigitalAdvisor generates revenues from merchants and merchant aggregators who pay DigitalAdvisor for sales and/or consumer leads sent to their websites.
Competition.
Citysearch.Competition. The markets for local content, local services and local advertising are highly competitive and diverse. Citysearch's primary competitors include online providers of local content, numerous search engines and other site aggregation companies, media, telecommunications and cable companies, Internet service providers and niche competitors that focus on a specific category or geography and compete with specific content offerings provided by Citysearch. Many of Citysearch's competitors have greater financial and marketing resources than it has and may have significant competitive advantages through other lines of business and existing business relationships.
Entertainment PublicationsEPI currently competes on a national level with other providers of dining and other discounts, and on a local level with a variety of discount programs distributed via traditional fundraising channels. EPI also competes with, and expects to face increasing competition from, companies that use traditional fundraising channels to distribute products other than local discount or coupon books, such as gift wrap, magazines and chocolates.
Evite competes with a number of online and offline invitation and party planning services, including providers of online greeting cards, web-based invitation services, paper-based invitation services and party planning services. Evite also competes with online and offline social networking services and providers of live event listing information and restaurant, bar and nightlife content.
ServiceMagic currently competes with other home service-related lead generation services,chocolates, as well as with Internet directories, local advertising, including radio, direct marketing campaigns, yellow pages, newspapers and other offline directories.
TripAdvisor competes with other travel search enginefrom companies and traditional offline travel directories. DigitalAdvisor competes primarily with information web sites that cover consumer electronics products and refer consumers to online merchants.
Financial Services and Real Estate
Overview. Financial Services and Real Estate consists of LendingTree and the brands and businesses it operates, collectively referred to in this report as LendingTree. As of December 31, 2004, LendingTree's primary businesses were online exchanges that connect consumers and service providers in the lending and real estate industries and offer related services and products. Consumers can access LendingTree's services and products through three channels: LendingTree websites, third party websites and by telephone.
Financial Services. LendingTree's lending exchange services encompass most consumer credit categories, including mortgages (in connection with purchases and refinancings), home equity, automobile loans, personal and debt consolidation loans and credit cards. Consumers seeking loan products through a LendingTree channel generally begin the process by completing a simple online request, or qualification form. Consumer information is then automatically compared to the underwriting criteria of participating lenders. Qualified consumers can receive multiple loan offers from participating lenders or LendingTree Loans (as described below) in response to a single request and then compare, review and accept the offer that best suits their needs.
LendingTree generates financial services revenues from fees paid by participating lenders for the transmission of qualification forms that meet their underwriting criteria. Since a given qualification form can be transmitted to more than one participating lender (generally, up to five), LendingTree typically generates multiple transmission fees from the same qualification form. In certain cases, fees are paid to LendingTree when the participating lender who received the qualification form closes a loan with the consumer. LendingTree also generates fees from the sale of loans into secondary markets and borrowers.
In December 2004, LendingTree acquired Home Loan Center, a consumer direct lender now known as LendingTree Loans, which originates, processes, approves and funds mortgage, home equity, refinancing and debt consolidation loans in its own name. LendingTree Loans generally sells closed loans that it funds to investors in the secondary mortgage market. Consumer leads generated by LendingTree's exchanges are directed either to participating lenders or LendingTree Loans. Due to the volume and diversity of consumer leads generated by LendingTree's exchanges, LendingTree believes that it will continue to deliver value to its participating lenders as a cost-effective distribution channel.
LendingTree's ability to provide its services (including real estate services, as described below) depends, in significant part, on the quality and pricing of services provided by its participating lenders and real estate professionals, as wellnew, non-traditional fundraising options, such as the continued online migrationhosting of financial and real estate services. The failure of a significant number of participating lenders and real estate professionals to participate on LendingTree exchanges for any reason and/or provide quality services on competitive terms, as well as any slowing or stagnation in the rates at which financial and real estate services migrate online, could have a material adverse effect on LendingTree's business, financial condition and results of operations.
LendingTree's results are impacted by fluctuations in interest rates, as well as the number of homes listed for sale (which is impacted by construction ratesfundraising events and related costs), both of which impact demand for LendingTree's services (including real estate services). While LendingTree's broad mix of financial and real estate products and services partially mitigates the impact of these fluctuations, such fluctuations could have a material adverse effect on LendingTree's business, financial condition and results of operations.
Real Estate Services. Consumers interested in working with a real estate professional in connection with the purchase or sale of an existing or newly-constructed home can access LendingTree's real estate-related services online and complete a simple form. In the case of existing home transactions, upon completion of the form the consumer is provided with a choice of local real estate professionals from a nationwide network. Upon selection of a real estate professional, the consumer's information is forwarded to the real estate professional via web-based technology. In the case of newly- constructed homes, LendingTree provides consumers with a coupon that is presented to their new homebuilder, registering a LendingTree brand as the real estate broker of record. In all cases, if the consumer and the real estate professional agree to work together, the remainder of the transaction is completed locally and in certain cases, the consumer may be eligible for rebates and promotional incentives.
LendingTree generates real estate revenues from cooperative brokerage fees when the transmission of consumer information to the real estate professional results in the purchase or sale of a home, upon the transmission of consumer information to a participating real estate professional or in advance for the right to receive leads on a recurring basis over pre-determined time periods. In the case of consumer leads provided to new homebuilders, LendingTree earns a real estate commission when the consumer and the builder close a transaction.
Competition. In the case of lending-related services, LendingTree competes with traditional offline lending institutions and financial service companies, as well as with online lenders (including traditional offline lending institutions that have developed their own, stand-alone online lending channels) that originate the bulk of their loans through their own websites or the telephone. These companiesservices.
typically operate branded websites and attract consumers via online banner ads, key word placement on search engines, partnering with affiliates and business development arrangements with other properties, including major portals. In the case of real estate-related services, LendingTree competes with traditional offline real estate companies, as well as websites that provide online real estate referral services for a fee and websites that offer real estate broker lists without related services and customer support.
Regulation. Services available through LendingTree's brands and businesses are subject to extensive regulation by various federal, state and in some instances, local, governmental authorities.
Most states require licenses to solicit, broker or make loans secured by residential mortgages and other consumer loans to residents of those states. In addition, LendingTree is required to obtain real estate broker licenses in numerous states to operate its real estate referral services.
Some states have regulations that prohibit real estate brokers from providing consumers with a rebate or other incentives in connection with a real estate transaction. Additional states could promulgate similar regulations or interpret existing regulations in a way that limits the ability of LendingTrees's real estate exchanges to offer consumer incentives, thereby limiting the attractiveness of this service to consumers.
Federal law, such as the Real Estate Settlement Procedures Act, or RESPA, generally prohibits the payment or receipt of referral fees and fee shares or splits in connection with residential mortgage loan transactions. The applicability of referral fee and fee sharing prohibitions to the lender, realty services, advertising, marketing, distribution and cyberspace rental arrangements used by online companies like LendingTree may have the effect of reducing the types and amounts of fees that LendingTree may charge or pay in connection with real estate-secured loan products, including mortgage brokerage, lending services and real estate brokerage. Notwithstanding these prohibitions, RESPA permits payments for facilities furnished or for services actually performed, so long as the total of those payments bears a reasonable relationship to the market value of such facilities or services. A separate exception exists for cooperative brokerage fees exchanged between real estate brokers. Although LendingTree believes that it has structured its mortgage and real estate referral operations to comply with RESPA, there can be no assurances that the relevant regulatory agency will not take a contrary position.
Teleservices
Overview. PRC provides outsourced customer lifecycle management solutions, both domestically and internationally, to a diversified portfolio of companies. PRC uses its industry-specific business process expertise and enabling technologies to support the brand experience and customer relationship management strategies of its clients. PRC's integrated solutions include inbound (customer-initiated) and outbound teleservices, e-commerce customer care services, information technology (including its proprietary Customer Relationship Management technology), database marketing and management and fulfillment services. PRC provides its clients with a cost-effective and efficient method for managing their growing customer service and marketing needs. PRC also offers a wide variety of information technology services, including the formulation and design of teleservicing and electronic applications, programming and demographic profiling, in each case, on a customized basis.
PRC's primary source of revenue is its customer care activities, which consist primarily of inbound and outbound teleservicing, as well as other activities, such as direct community with customers via e-mail, fax, letter and online chat/IP telephony, all of which involve direct communication with consumers. The majority of PRC's revenues are derived from inbound teleservicing, which consists of longer-term customer care and customer service programs that tend to be more predictable than other teleservicing revenues.
Competition. The customer care industry is very competitive and highly fragmented. Competitors range in size from very small firms offering specialized applications and short-term projects, to large independent and international firms and the in-house operations of many clients and potential clients, which comprises the largest segment of the teleservices industry. In addition, PRC competes with large technology and consulting firms.
Regulation. The industries served by PRC are subject to varying degrees of government regulation, including state qualification and licensing requirements. PRC works closely with its clients and their advisors to develop the scripts to be used by PRC personnel in making customer contacts and to comply with any state qualification and/or licensing requirements for eligibility to perform services for clients. PRC generally requires its clients to indemnify PRC against claims and expenses arising out of the client's business activities.
PRC's customer care activities involve direct communication with consumers and are subject to extensive regulation by federal and state regulatory authorities including, the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Telephone Consumer Protection Act. Regulations promulgated pursuant to this legislation prohibit the use of automatic telephone dialing systems, artificial and prerecorded messages and telephone facsimile machines to send unsolicited advertisements, as well as deceptive and abusive telemarketing practices. These regulations also regulate the timing of telemarketing calls and require that certain disclosures be made to consumers at both the outset of telemarketing transactions and prior to obtaining payment information. These regulations also authorized the creation and enforcement of a National Do Not Call Registry. Telemarketers are prohibited from calling consumers who place their number on the National Do Not Call Registry unless there is a pre-existing business relationship between the seller and the consumer.
IAC Regulation
IAC's businesses market and provide a broad range of goods and services through a number of different online and offline channels. As a result, IAC is subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions in the United States and abroad, which are subject to change at any time. While many of these statutes, rules, regulations, policies and procedures are applicable to several IAC businesses, such as consumer protection and privacy laws (among others), certain of these statutes, rules, regulations, policies and procedures are industry-specific or more relevant to a particular IAC business, and as such, are as described above.
IAC businesses with an online component must comply with laws and regulations applicable to the Internet and businesses engaged in online commerce. An increasing number of existing and proposed laws and regulations apply directly to the Internet and commercial online services. For example, e-mail activities are subject to the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act. The CAN-SPAM Act regulates the sending of unsolicited, commercial electronic mail by requiring the sender to: (i) include an identifier that the message is an advertisement or solicitation if the recipient did not expressly agree to receive electronic mail messages from the sender, (ii) provide the recipient with an online opportunity to decline to receive further commercial electronic mail messages from the sender and (iii) list a valid physical postal address of the sender. The CAN-SPAM Act also prohibits predatory and abusive electronic mail practices and electronic mail with deceptive headings or subject lines.
In addition, there is currently uncertainty whether or how existing laws governing issues such as sales and other taxes, libel and privacy apply to the Internet and commercial online services. It is possible that existing laws and regulations may be amended, or new laws and regulations may be adopted to, address these and other issues. IAC cannot predict whether applicable jurisdictions will amend or enact such laws or regulations and what effect, if any, such laws or regulations would have on its business, financial condition or results of operations. For example, the issue of consumer privacy has received substantial attention from federal, state and foreign governments. This attention has resulted
in the enactment of certain laws and regulations, and the consideration of many other proposals, to safeguard consumer privacy. Pending proposals vary substantially, and it is uncertain which, if any, may become law. Some proposals would require companies that sell the same product both online and offline to treat customer information obtained in such transactions differently depending upon the sales medium used. Some proposals would allow companies to use customer information for various purposes, provided that consumers are given a choice and do not "opt out" of such uses, while other proposals would prohibit such uses unless consumers are given a choice and explicitly authorize such uses by "opting in."
IAC Intellectual Property Rights
IAC and its businesses regard their intellectual property rights, including their service marks, trademarks and domain names, copyrights, trade secrets and similar intellectual property, as critical to IAC's success. IAC's businesses also rely heavily upon software codes, informational databases and other components that make up their products and services.
IAC and its businesses rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use trade secret or copyrighted intellectual property of IAC or any of its businesses without authorization which, if discovered, might require the uncertainty of legal action to correct. In addition, there can be no assurance that others will not independently and lawfully develop substantially similar intellectual properties.
IAC and its businesses have registered and continue to apply to register, or secure by contract when appropriate, their respective trademarks and service marks as they are developed and used, and reserve and register domain names as they deem appropriate. While IAC and its businesses vigorously protect their respective trade and service marks and domain names, effective trademark protection may not be available or may not be sought in every country in which products and services are made available, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available. The failure to protect the intellectual property of IAC's businesses in a meaningful manner or challenges to related contractual rights could materially adversely affect IAC's business, result in erosion of brand names and limit the ability of IAC and its businesses to control marketing on or through the Internet using their various domain names.
IAC and its businesses have considered, and will continue to consider, the appropriateness of filing for patents to protect future inventions, as circumstances may warrant. However, many patents protect only specific inventions and there can be no assurance that others may not create new products or methods that achieve similar results without infringing upon patents owned by IAC and its businesses.
From time to time, IAC and its businesses may be subject to legal proceedings and claims in the ordinary course of its business, including claims of alleged infringement of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce the intellectual property rights of IAC and its businesses, protect their respective trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any such litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm IAC's business. Patent litigation tends to be particularly protracted and expensive.
Employees
As of December 31, 2004,2005, IAC and its subsidiaries employed approximately 26,00028,000 full-time employees across its various businesses. IAC believes that it generally has good employee relationships, including relationships with employees represented by unions or other similar organizations.
Additional Information
Company Website and Public Filings. The Company maintains a website atwww.iac.com. TheNeither the information on the Company's website, as well asnor the websitesinformation on the website of its various businesses,any IAC business, is not incorporated by reference in this Annual Report on Form 10-K, or in any other filings with, or in any information furnished or submitted to, the Securities and Exchange Commission, or the SEC.
The Company makes available, free of charge through its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including related amendments) as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.
Code of Ethics. The Company's code of ethics, which applies to all employees, including all executive officers and senior financial officers (including IAC's Chief Financial Officer and IAC's Controller) and directors, is posted on the Company's website atwww.iac.comwww.iac.com/new_iaccodeofethics.pdf. The code of ethics complies with Item 406 of SEC Regulation S-K and the rules of the Nasdaq National Market. Any changes to the code of ethics that affect the provisions required by Item 406 of Regulation S-K, and any waivers of the code of ethics for IAC's executive officers, directors or senior financial officers, will also be disclosed on IAC's website.
Item 1A.Risk Factors
Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-K contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: IAC's future financial performance, IAC's business prospects and strategy, anticipated trends and prospects in the various industries in which IAC's businesses operate, new products, services and related strategies and other similar matters. These forward looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward looking statements included in this report for a variety of reasons, including, among others, the risk factors set forth below. Other unknown or unpredictable factors that could also adversely affect IAC's business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of IAC management as of the date of this report. IAC does not undertake to update these forward-looking statements.
Risk Factors
You should carefully consider each of the following risks and uncertainties associated with IAC and the ownership of IAC securities. In addition, for more information you should review the specific description of IAC's businesses under the caption "Item 1—Business," "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations" and Consolidated Financial Statements and the Notes thereto.
Management—IAC depends on its key personnel.
The future success of IAC will depend upon the continued contributions of its senior management, particularly Barry Diller, the Chairman and Chief Executive Officer of IAC. If Mr. Diller no longer serves in, or serves in some lesser capacity than, his current role, IAC's business, financial condition and results of operations, as well as the market price of IAC's securities, could be adversely affected. While IAC has established programs to provide incentives for and retain its senior management, IAC cannot assure you that it will be able to retain the services of Mr. Diller, any other member of its senior management or any other key employees in the future. Mr. Diller does not have an employment agreement with IAC, though he owns approximately 5.4 million shares of IAC common stock, and holds options to purchase a substantial number of shares of IAC common stock, 70% of which expire in October 2007.
Control of IAC—Mr. Diller currently controls IAC. If Mr. Diller ceases to control IAC, Liberty Media Corporation may effectively control IAC.
Subject to the terms of an amended and restated stockholders agreement between Mr. Diller and Liberty, Mr. Diller has an irrevocable proxy to vote shares of IAC common stock and IAC Class B common stock held by Liberty. Accordingly, Mr. Diller effectively controls the outcome of all matters submitted to a vote or for the consent of IAC's stockholders (other than with respect to the election by the holders of IAC's common stock of 25% of the members of IAC's Board of Directors and matters as to which Delaware law requires a separate class vote). Upon Mr. Diller's permanent departure from IAC, the irrevocable proxy terminates and, depending upon the capitalization of IAC at such time, Liberty may effectively control the voting power of the capital stock of IAC through its ownership of IAC common stock and IAC Class B common stock. For a detailed description of Mr. Diller's and Liberty's ownership interests in, and voting power with respect to, IAC common stock and IAC Class B common stock, see "Item 1—Business—Equity Ownership and Voting Control."
In addition, under an amended and restated governance agreement among IAC, Liberty and Mr. Diller, each of Mr. Diller and Liberty generally has the right to consent to limited matters in the event that IAC's ratio of total debt to EBITDA, as defined in the governance agreement, equals or exceeds 4:1 over a continuous 12-month period. While neither of Mr. Diller nor Liberty may currently exercise this right, no assurances can be given that this right will not be triggered in the future, and if so, that Mr. Diller and Liberty will consent to any of the limited matters at such time, in which case IAC would not be able to engage in such transactions or take such actions.
As a result of Mr. Diller's ownership interests and voting power, and Liberty's ownership interests and voting power upon Mr. Diller's permanent departure from IAC, Mr. Diller is currently, and in the future Liberty may be, in a position to control or influence significant corporate actions, including without limitation, corporate transactions such as mergers, business combinations or dispositions of assets and determinations with respect to IAC's significant business direction and policies. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to IAC, which could adversely affect the market price of IAC securities.
Third Party Relationships—IAC's businesses depend on their relationships with third party distribution channels, suppliers and advertisers and any adverse changes in these relationships could adversely affect IAC's business, financial condition and results of operations.
An important component of the success of IAC's various businesses depends on their ability to maintain their existing, as well as build new, relationships with third party distribution channels, suppliers and advertisers, among other parties. Any adverse changes in these relationships could adversely affect IAC's business, financial condition and results of operations.
Retailing
Retailing U.S. Retailing U.S. is dependent upon the pay television operators with whom HSN enters into distribution and affiliation agreements to carry the HSN and America's Store television networks. See "Item 1—Business—Description of Business—Retailing—Retailing U.S.—Television Programming—Pay Television Distribution." Distribution and affiliation agreements with major pay television operators expire from time to time and agreements with certain major pay television operators are scheduled to expire over the course of 2006. Sometimes renewals are not agreed upon prior to the expiration of a given agreement and the HSN and/or America's Store television networks continue to be carried by pay television operators without an effective affiliation agreement in place. In the case of distribution and affiliation agreements expiring over the course of 2006, HSN is currently engaged or intends to engage in the renewal and/or negotiation processes with the relevant pay television providers. No assurances can be given that HSN will be able to successfully pursue the renewal of, or negotiate new, distribution and affiliation agreements with pay television providers to carry the HSN and/or America's Store television networks on acceptable terms, if at all.
While the cessation of carriage of the HSN and/or America's Store television networks by a major pay television operator or a significant number of smaller pay television operators could adversely affect IAC's business, financial condition and results of operations, IAC believes that it will be able to continue to successfully manage the distribution process in the future, although certain changes in distribution levels could occur notwithstanding these efforts.
Services
Ticketing. Ticketing is dependent upon its clients for ticketing supply. Securing tickets depends, in part, on the ability of Ticketing to enter into and maintain client contracts on favorable terms. No assurances can be provided that Ticketing will continue to be able to enter into or maintain client contracts on acceptable terms, if at all, and its failure to do so could adversely affect its business, financial condition and results of operations. In addition, some facilities, promoters and other potential clients elect to distribute some of their tickets through supplier direct or other new channels. The increased and continued use of supplier direct and/or new distribution channels by clients could adversely affect the business, financial condition and results of operations of Ticketing. See "Item 1—Business—Description of Business—Services—Ticketing."
Lending and Real Estate. The ability of IAC's Lending and Real Estate businesses to provide lending, real estate and related services depends, in significant part, on the quality and pricing of services provided by participating lenders and real estate professionals and access to real estate listings. The failure of a significant number of participating lenders and/or real estate professionals to participate on the exchanges operated by, or otherwise enter into relationships with or provide real estate listings to, IAC's Lending and Real Estates businesses for any reason and/or provide quality services on competitive terms, could adversely affect the business, financial condition and results of operations of these businesses. See "Item 1—Business—Description of Business—Services—Lending" and "—Real Estate."
Media & Advertising
A material portion of the revenues of the Media & Advertising sector is derived from advertising. In the case of IAC Search & Media, the substantial majority of its advertising revenues are attributable to a paid listing supply agreement with Google, which expires, unless renewed by mutual agreement, on December 31, 2007. Pursuant to this agreement, paid listings appear on search results generated on Ask websites in response to keywords selected by advertisers with which Google has entered into contracts. While IAC believes that, in the absence of the renewal of this paid listing agreement, IAC Search & Media could enter into similar arrangements with alternative paid listing providers, as well as continue to contract with advertisers directly through the introduction of new advertising products and services, no assurances can be given that this will be the case in the future, or if so, that these arrangements will be on equally favorable terms. The failure of IAC Search & Media or any of the other businesses within the Media & Advertising sector to retain existing, or attract new, advertisers and/or distribution partners, as well as generate traffic to their respective websites, could adversely affect the business, financial condition and results of operations of the Media & Advertising sector. See "Item 1—Business—Description of Business—Media & Advertising."
Memberships & Subscriptions
Vacations. Interval is dependent upon timeshare developers for new members. Interval's failure to maintain existing or negotiate new arrangements with timeshare developers, as well as the continued creation and operation by timeshare developers of their own internal reservation and exchange systems, could result in decreases in Interval's membership base, timeshare supply and/or related transactions, which could adversely affect IAC's business, financial condition and results of operations. See "Item 1—Business—Description of Business—Membership & Subscriptions—Vacations."
Adverse Events and Trends—Adverse events or trends in the various industries in which IAC's businesses operate could harm IAC's business, financial condition and results of operations.
IAC's businesses in general are sensitive to trends or events that are outside of IAC's control. Adverse events and trends, including general economic downturns, decreases in consumer spending and borrowing and natural or other disasters, as well as adverse events or trends in the various industries in which IAC's businesses operate, among other adverse events and trends, could adversely affect IAC's business, financial condition and results of operations.
Retailing
Retailing U.S. is dependent upon the continued ability of HSN to transmit the HSN and America's Store television networks to broadcast and pay television operators from its satellite uplink facilities. See "Item 1—Business—Description of Business—Retailing—Retailing U.S.—Television Programming—Reach." While HSN has designed business continuity and disaster recovery plans to ensure its continued satellite transmission capability on a temporary basis in the event of inclement weather or a natural or other disaster, the prolonged or permanent interruption of its satellite transmission capability for any reason and/or related costs incurred by HSN could adversely affect IAC's business, financial condition and results of operations.
Retailing U.S. is also dependent upon the continued ability of HSN to secure channel capacity and placement for the HSN and/or America's Store television networks. While the advent of digital cable has resulted in increased channel capacity, this additional capacity has encouraged, and could continue to encourage, competitors to enter the marketplace. Changing laws, rules and regulations and legal uncertainties could also adversely affect of ability of HSN to secure channel capacity and placement for the HSN and/or America's Store television networks. For example, the Federal Communications Commission is considering the adoption of a modified cable television ownership rules and limits that could result in individual cable operators acquiring control over larger segments of U.S. cable
customers and channels, in which case, HSN could be required to negotiate with fewer cable operators that would control larger portions of the market for the terms of and opportunity to secure channel capacity and placement. No assurances can be given that HSN will be able to secure channel capacity and/or placement for the HSN and/or America's Store television networks on attractive terms and its failure to do so could adversely affect IAC's business, financial condition and results of operations.
Retailing is also dependent, in part, upon the ability of the businesses within this sector to predict or respond to changes in consumer preferences and fashion and other trends in a timely manner. Accordingly, these businesses are continuously developing new retail concepts and adjusting its product mix in an effort to satisfy customer demand. The failure of the businesses within the Retailing segment to identify and respond to emerging trends that impact their respective business could adversely affect IAC's business, financial condition and results of operations.
Services
Ticketing. Ticketing is sensitive to fluctuations in the number and pricing of entertainment, sporting and leisure events and activities offered by promoters and facilities, as well as general economic and business conditions generally and in these industries. Entertainment-related expenditures are sensitive to business and personal discretionary spending levels, which tend to decline during general economic downturns. Accordingly, adverse trends in the entertainment, sporting and leisure events industries or general economic or business conditions could adversely affect the business, financial condition and results of operations of Ticketing.
Lending and Real Estate. The results of IAC's Lending and Real Estate businesses are impacted by fluctuations in interest rates, as well as the number of homes available and/or listed for sale and the pricing of these homes (which is impacted by construction rates and related costs), as well as the reactions of consumers, lenders and others to these and other trends in the lending and real estate industries. See "Item 1—Business—Description of Business—Lending—Overview," "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" and "Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk."
Media & Advertising
A material portion of the revenues of the Media & Advertising sector is derived from advertising. Accordingly, these businesses are sensitive to general economic downturns and decreases in consumer spending, among other events and trends, which generally result in decreased advertising expenditures, as well as the continued growth and/or acceptance of online advertising as an effective alternative to offline advertising media and its business model. See "Item 1—Business—Description of Business—Media & Advertising."
Membership & Subscriptions
Vacations. Interval's business depends, in significant part, upon the health of the timeshare and travel industries. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Also, inclement weather and/or natural disasters may result in the inability to travel to and vacation in certain regions in which Interval's participating resorts operate, as well as significant damage to participating resorts, which would result in a decrease in timeshare accommodations and related travel. In addition, Interval's business is sensitive to travel safety concerns related to terrorism and/or geopolitical conflicts. Accordingly, downturns or weaknesses in the travel industry, as well as inclement weather, natural disasters, terrorism and/or geopolitical conflicts could adversely affect IAC's business, financial condition and results of operations.
Marketing—The failure of IAC's businesses to attract and retain customers in a cost-effective manner could adversely affect IAC's business, financial condition and results of operations.
The long-term success of IAC depends on its continued ability to attract new visitors to its websites and other distribution channels, convert these visitors into paying customers and capture repeat business from existing customers, which involves the expenditure of considerable money and resources for advertising, marketing, infrastructure and other related efforts. Some of IAC's businesses have spent and expect to continue to spend increasing amounts of money on, and devote greater resources to, these efforts, which may not be successful or cost-effective. The failure of IAC's businesses to attract and acquire new, and retain existing, customers in a cost-effective manner could adversely affect IAC's business, financial condition and results of operations.
Changing Customer Requirements and Industry Standards—IAC's businesses may not be able to adapt quickly enough to changing customer requirements and industry standards.
The e-commerce industry is characterized by evolving industry standards, frequent new service and product introductions and enhancements, and changing customer demands. IAC's businesses may not be able to adapt quickly enough and/or in a cost-effective manner to changes in industry standards and customer requirements and preferences, and their failure to do so could adversely affect the business, financial condition and results of operations of IAC. In addition, the widespread adoption of new internet or telecommunications technologies or other technological changes could require IAC's businesses to make substantial expenditures to modify or adapt their respective services or infrastructure. The failure of IAC's businesses to do so could render their existing websites, services and proprietary technologies obsolete, which could adversely affect IAC's business, financial condition and results of operations.
Internet Usage and Online Migration—IAC's future success depends upon the continued and widespread use and acceptance of the internet as a medium for commerce.
IAC's future success depends on the continued and widespread use and acceptance of the internet as a medium for commerce. While the practice of transacting business online in some of the industries in which IAC's businesses operate, such as the retailing industry, is established and continuing to grow, use and acceptance of this practice in some other industries in which IAC's businesses operate, such as the lending and real estate industries, are in early stages of development or have only recently begun. A number of factors may inhibit internet use and acceptance by consumers, including general privacy and security concerns regarding their personal information, as well as the acceptance of a new way of conducting business and exchanging information, particularly in the case of IAC's Lending and Real Estate businesses, where consumers, more so than in other industries in which IAC's business operate, continue to seek lending and real estate services through traditional offline methods. If consumer use and acceptance of online markets does not continue to increase, IAC's business, financial condition and results of operations could be adversely affected.
Acquisitions—IAC may experience operational and financial risks in connection with acquisitions. In addition, some of the businesses acquired by IAC may incur significant losses from operations or experience impairment of carrying value.
IAC's future growth may depend, in part, on acquisitions. IAC may experience operational and financial risks in connection with acquisitions. To the extent that IAC grows through acquisitions, it will need to:
IAC may not be successful in addressing these challenges or any other problems encountered in connection with historical and future acquisitions and the failure to do so could adversely affect IAC's business, financial condition and results of operations. In addition, the anticipated benefits of one or more acquisitions may not be realized and future acquisitions could result in potentially dilutive issuances of equity securities, contingent liabilities or the impairment of goodwill and/or other intangible assets, any of which could adversely affect IAC's business, financial condition and results of operations.
International Presence—Some IAC businesses operate in international markets in which they have limited experience and are faced with additional risks.
Some of IAC's businesses operate in various jurisdictions abroad and may continue to expand their international presence. Some of these businesses have limited experience, and are faced with additional risks, in the international markets in which they operate. In order to achieve widespread acceptance in the countries and markets in which they have a presence, these businesses must continue to successfully tailor their services to the unique customs and cultures of such countries and markets. Learning the customs and cultures of various countries can be difficult and costly and the failure of these businesses to do so could slow their respective international growth.
These businesses face, and expect to continue to face, additional risks in the case of their existing and future international operations. These risks include changes in regulatory requirements, increased risk and limits on its ability to enforce intellectual property rights, exchange rate fluctuations, potential delays in the development of the internet as an advertising and commerce medium in international markets and difficulties in managing operations due to distance, language and cultural differences, including issues associated with establishing management systems and infrastructures, and staffing and managing foreign operations.
Compliance—The failure of IAC's businesses to comply with existing laws, rules and regulations, or to obtain required licenses and rights, could adversely affect IAC's business, financial condition and results of operations.
The failure of IAC's businesses to comply with existing laws, rules and regulations, or to obtain required licenses or rights, could adversely affect IAC's business, financial condition and results of operations. IAC's businesses market and provide a broad range of goods and services through a number of different online and offline channels. As a result, IAC's businesses are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions in the U.S. and abroad, which are subject to change at any time. IAC businesses with an online component must comply with laws and regulations applicable to the internet and businesses engaged in online commerce, including those regulating the sending of unsolicited, commercial electronic mail. Moreover, there are federal, state and international laws regarding privacy and protection of user data. The privacy policies and practices concerning the use and disclosure of user data of IAC businesses are posted on the websites of these businesses. The failure of IAC and/or any of its businesses to comply with posted privacy policies, Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings against IAC and/or its businesses by governmental agencies, which could adversely affect IAC's business, financial condition and results of operations.
Many of IAC's businesses require licenses from various federal, state and/or local regulatory authorities in order to conduct their respective businesses and operations. For example, HSN must have
a broadcast license from the Federal Communications Commission in order to broadcast its programming and HSE-Germany generally must obtain the right to broadcast its programming in a given state on a given cable channel from state media authorities in each of Germany's 16 states on a periodic basis. In the case of IAC's Lending and Real Estate businesses, most states require licenses to solicit, broker or make loans secured by residential mortgages and other consumer loans to residents of those states, as well as to operate real estate referral and brokerage services. No assurances can be given that any of the licenses or rights currently held by IAC's businesses will not be revoked prior to, or will be renewed upon, their expiration. In addition, no assurances can be given that IAC's businesses will be granted new licenses or rights for which they may required to apply from time to time in the future.
Many of IAC's businesses are also subject to various state, federal and/or local laws, rules and regulations that regulate the amount and nature of fees that may be charged for their products and services and related incentives, such as rebates, that may be offered to consumers, as well as the manner in which they may offer their products or services, including advertising and other consumer disclosures. For example, in the case of IAC's Lending and Real Estate businesses, federal law, such as the Real Estate Settlement Procedures Act, or RESPA, generally prohibits the payment or receipt of referral fees and fee shares or splits in connection with residential mortgage loan transactions, subject to certain exceptions. The applicability of referral fee and fee sharing prohibitions to lenders, including online exchanges, and real estate services and related initiatives, may have the effect of reducing the types and amounts of fees that may be charged or paid in connection with real estate-secured loan products, including mortgage brokerage, lending and real estate brokerage services. Although IAC believes that its mortgage, lending and real estate referral operations have been structured in such a way so as to comply with RESPA, there can be no assurances that the relevant regulatory agency will not take a contrary position.
In addition, some states have regulations that prohibit real estate brokers from providing consumers with rebates or other incentives in connection with real estate transactions. Additional states could promulgate similar regulations or interpret existing regulations in a way that limits the ability of online exchanges to offer consumer incentives in connection with real estate services, thereby limiting the attractiveness of the services offered by IAC's Real Estate businesses to consumers.
Additional federal, state and in some instances, local, laws regulate residential lending and real estate brokerage activities. These laws generally regulate the manner in which lending, lending-related and real estate brokerage services are made available, including advertising and other consumer disclosures, payments for services and record keeping requirements, and include the Fair Credit Reporting Act, the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Housing Act. Although IAC believes that its mortgage and real estate referral operations have been structured in such a way so as to generally comply with these federal laws, there can be no assurances that the relevant regulatory agency will not take a contrary position.
Federal, state and in some instances, local, laws also prohibit predatory lending practices, unfair and deceptive trade practices and require companies to adopt appropriate policies and practices to protect consumer privacy. The failure of IAC's Lending and Real Estate business to comply with applicable laws and regulatory requirements may result in, among other things, revocation of required licenses or registrations, loss of approval status, termination of contracts without compensation, administrative enforcement actions and fines, class action lawsuits, cease and desist orders and civil and criminal liability, any of which could adversely affect the business, financial condition and results of operations of these businesses.
Changing Laws, Rules and Regulations—Changing laws, rules and regulations and legal uncertainties could adversely affect IAC's business, financial condition and results of operations.
Unfavorable changes in existing, or the promulgation of new, laws, rules and regulations applicable to IAC and its businesses, including those relating to the internet, online commerce, the regulation of adware and other downloadable applications, broadband and telephony services, consumer protection and privacy, including requirements for criminal background checks for subscribers to online dating services, and sales, use, value-added and other taxes, could decrease demand for products and services, increase costs and/or subject IAC to additional liabilities, which could adversely affect its business. There is, and will likely continue to be, an increasing number of laws and regulations pertaining to the internet, online commerce and broadband and telephony services, which may relate to carriage and distribution of online content over broadband networks, liability for information retrieved from or transmitted over the internet, user privacy, taxation and the quality of products and services.
Broadband network operators are not currently subject to common carrier regulations, which prohibit the discriminatory operation of communications networks generally, including broadband networks. Broadband network discrimination involves the interference by broadband network operators with customer access to, and the distribution of content and provision of services over, the internet, all of which involve the access and use of their networks. While broadband network operators have generally operated their networks in a non-discriminatory manner to date, certain operators have engaged in discriminatory practices in limited instances, and absent changes to the existing regulatory regime, these and other broadband network operators could engage in discriminatory practices in the future.
Interference with customer access to the internet could result in the loss of existing customers and impair the ability of IAC's various businesses to attract new customers, which could adversely affect IAC's business, financial condition and results of operations. In addition, if broadband network operators were to charge third parties for distribution and carriage over their networks, this would result in increased costs for IAC's various businesses, which could adversely affect IAC's business, financial condition and results of operations. The U.S. Congress is currently considering changes to the existing regulatory regime, including bills to prohibit broadband network discrimination. This proposed legislation would prevent broadband network operators from interfering with the ability of consumers to access the internet, as well as from charging businesses for the distribution and carriage of online content and services over their networks. No assurances can be given that this or any other legislation prohibiting or otherwise limiting broadband network discrimination will be adopted.
There are also legislative proposals pending before the U.S. Congress and various state legislative bodies regarding online privacy, data security and regulation of adware and other downloadable applications, and the continued growth and development of online commerce may continue to prompt calls for more stringent consumer protection laws, which may impose additional burdens on IAC and online businesses generally.
In addition, the application of various domestic and international sales, use, value-added and other tax laws, rules and regulations to the historical and new products and services of IAC is subject to interpretation by the applicable taxing authorities. While IAC believes that it is compliant with these tax provisions, there can be no assurances that taxing authorities will not take a contrary position, or that such positions will not adversely affect IAC's business, financial condition and results of operations.
Lastly, some of IAC's businesses have structured their business, operations and relationships with third parties in ways to ensure compliance with various state, federal and/or local laws, rules and regulations that regulate the amount and nature of fees that may be charged for their products or services. For example, Ticketmaster has structured its business, operations and client relationships in ways to ensure compliance with certain state and local regulations in several states that establish
maximum charges on tickets. Other legislation that could further regulate convenience charges and order-processing fees is introduced from time to time in federal, state and local legislative bodies in the United States and abroad. Changes in existing, or the promulgation of new, laws, rules and regulations of this nature could require Ticketmaster to change certain aspects of its business, operations and client relationships to ensure compliance. Ticketmaster is unable to predict whether any such legislation will be adopted and, if so, the effect on its business and results of operations.
Intellectual Property—IAC and its businesses may fail to adequately protect their intellectual property rights or may be accused of infringing intellectual property rights of third parties.
IAC and its businesses may fail to adequately protect their intellectual property rights or may be accused of infringing intellectual property rights of third parties. IAC and its businesses regard their intellectual property rights, including their patents, service marks, trademarks and domain names, copyrights, trade secrets and similar intellectual property, as critical to IAC's success. IAC's businesses also rely heavily upon software codes, informational databases and other components that make up their products and services.
IAC and its businesses rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use trade secret or copyrighted intellectual property of IAC or any of its businesses without authorization which, if discovered, might require the uncertainty of legal action to correct. In addition, no assurances can be given that third parties will not independently and lawfully develop substantially similar intellectual properties.
IAC and its businesses have registered and continue to apply to register, or secure by contract when appropriate, their respective trademarks and service marks as they are developed and used, and reserve and register domain names as they deem appropriate. While IAC and its businesses vigorously protect their respective trade and service marks and domain names, effective trademark protection may not be available or may not be sought in every country in which products and services are made available, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available. The failure of IAC and its businesses to protect their intellectual property rights in a meaningful manner or challenges to related contractual rights could result in erosion of brand names and limit the ability of IAC and its businesses to control marketing on or through the internet using their various domain names, which could adversely affect IAC's business, financial condition and results of operations.
Some of IAC's businesses have been granted United States patents and/or have patent applications pending with the United States Patent and Trademark Office for various proprietary technologies and other inventions. IAC and its businesses generally seek to apply for patents or for other appropriate statutory protection when they develop valuable new or improved proprietary technologies or inventions, and will continue to consider the appropriateness of filing for patents to protect future proprietary technologies and inventions as circumstances may warrant. The status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, no assurances can be given that any patent application filed by IAC and/or its businesses will result in a patent being issued, or that any existing or future patents will afford adequate protection against competitors with similar technology. In addition, no assurances can be given that third parties will not create new products or methods that achieve similar result without infringing upon patents owned by IAC and its businesses.
From time to time, IAC and its businesses are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce the intellectual property rights of IAC and its businesses, protect their respective
trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect IAC's business, financial condition and results of operations. Patent litigation tends to be particularly protracted and expensive.
Maintenance of Systems and Infrastructure—The success of IAC will depend on maintaining the integrity of its systems and infrastructure. System interruption and the lack of integration and redundancy in IAC's information systems may affect its businesses.
The success of IAC will depend on maintaining the integrity of its systems and infrastructure. System interruption and the lack of integration and redundancy in IAC's information systems may affect its businesses. A fundamental requirement for online commerce and communications is the secure transmission of confidential information, such as credit card numbers or other personal information, over public networks in a timely manner. IAC's security measures may prove to be inadequate and, if any compromise of security were to occur, it could have a detrimental effect on IAC's reputation and adversely affect its ability to attract customers. At times, IAC's businesses may experience occasional system interruptions that make some or all of their respective systems unavailable or prevent these businesses from efficiently fulfilling orders or providing services to third parties. IAC and its businesses rely on affiliate and third party computer systems and service providers to facilitate and process a portion of their transactions. Any interruptions, outages or delays in the systems of IAC, its affiliates and/or third party providers, or a deterioration in the performance of these systems, could impair the ability of IAC's businesses to process transactions for its customers and the quality of service offered to these customers. Fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses and similar events or disruptions may damage or interrupt computer or communications systems at any time. Any of these events could cause system interruption, delays and loss of critical data, and could prevent IAC's businesses from providing services to third parties. While IAC has backup systems for certain aspects of operations, the systems are not fully redundant and disaster recovery planning is not sufficient for all eventualities. In addition, IAC may not have adequate insurance coverage to compensate for losses from a major interruption. If any of these adverse events were to occur, it could damage the reputation of IAC and be costly to remedy.
Item 1B. Unresolved Staff Comments
Not applicable.
IAC believes that the facilities for its management and operations are generally adequate for its current and anticipatednear-term future needs. IAC's facilities, most of which are leased by IAC's domestic and international businesses in various cities and locations in the United States and jurisdictions abroad, generally consist of executive and administrative offices, fulfillment facilities, warehouses, operations centers, call centers, data centers, television production and distributionbroadcast facilities satellite transponder sites and sales offices.
All of IAC's leases are at prevailing market, or "most favorable," rates. IAC believes that the duration of each lease is adequate. IAC believes that its principal properties, whether owned or leased, are currently adequate for the purposes for which they are used and are suitably maintained for these purposes. IAC does not anticipate any future problems renewing or obtaining suitable leases for its principal properties.
IAC leases approximately 45,550 square feet for its principal executive offices at Carnegie Hall Tower, 152 West 57th Street, New York, New York, which lease expires on April 30, 2007. IAC's domestic businessesIAC is currently in the process of constructing a new corporate headquarters, currently intended to be approximately 202,500 square feet, at 527-37 West 18th Street and operations lease space in various cities and locations in: California, Colorado, Washington, D.C., Florida, Idaho, Illinois, Iowa, Louisiana, Massachusetts, Michigan, Missouri, Nevada, New Jersey,540 West 19th Street, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, VirginiaNew York. Construction is expected to be completed in the first quarter of 2007.
IAC owns two office buildings in West Hollywood, California, one of which is approximately 72,000 square feet and Washington.houses Ticketmaster's corporate headquarters and the other of which is approximately 48,000 square feet and houses offices for certain IAC throughbusinesses. HSN U.S., also owns warehouse facilities and an approximately 480,000 square foot facility in Florida that houses television studios,production and broadcast facilities, administrative offices and training facilities, as well as fulfillment centers in Iowa,California, Tennessee and Virginia, as well asVirginia. PRC owns one call center in Florida through PRC.
IAC's international businesses and operations lease space in various cities and locations in: Australia, Belgium, Canada, China, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom.Florida.
In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving property, personal injury, contract, and other claims. The amounts that may be recovered in such matters may be subject to insurance coverage.
Rules of the Securities and Exchange Commission require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrant's business, and advise that proceedings ordinarily need not be described if they primarily involve damages claims for amounts
(exclusive (exclusive of interest and costs) not exceeding 10% of the current assets of the registrant and its subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation matters which the Company and its subsidiaries are defending, including those described below, involves or is likely to involve amounts of that magnitude. The litigation matters described below involve issues or claims that may be of particular interest to the Company's shareholders, regardless of whether any of these matters may be material to the financial position or operations of the Company based upon the standard set forth in the SEC's rules.
Tax-Related Litigation against Vivendi
On April 15, 2003, IAC commenced an action in the Delaware Chancery Court, captionedUSA Interactive and USANi Sub LLC v. Vivendi Universal, S.A., USI Entertainment Inc., and Vivendi Universal Entertainment LLLP, No. CA-20260 (New Castle County). This lawsuit arose out of the failure of Vivendi Universal Entertainment LLLP ("VUE"), a limited-liability limited partnership controlled at the start of the lawsuit by Vivendi, to pay to IAC and its affiliates, as partners in VUE, certain cash tax distributions due to them over a period of years under the express terms of the VUE partnership agreement.
The partnership agreement provides that VUE "shall, as soon as practicable after the close of each taxable year, make cash contributions to each Partner in an amount equal to the product of (a) the amount of taxable income allocated to such Partner for such taxable year... and (b) the highest aggregate marginal statutory Federal, state, local and foreign income tax rate... applicable to any Partner." The partnership agreement also provides that taxable income of VUE is to be allocated to the partners, including IAC and its affiliates, in a specified order, including amounts corresponding to the cash and pay-in-kind distributions on IAC's and its affiliates' preferred interests in VUE, which represent a 5% annual return on those interests (the "Preferred Return"). The actual amount of cash distributions with respect to taxable income on the Preferred Return would depend on several factors, including the amount of VUE's earnings and federal, state, and local income tax rates. Assuming sufficient VUE earnings in each of the twenty years from the date of the issuance of the VUE preferred interests and a discount rate of 7%, such cash distributions would have a present value to IAC of approximately $620 million.
The complaint requests the court to declare that VUE is obligated to pay to IAC and its affiliates cash tax distributions on the Preferred Return as they become due under the VUE partnership agreement, and to order VUE to make such payments. On June 30, 2003, the defendants filed an answer denying the material allegations of the complaint and asserting various affirmative defenses, as well as certain counterclaims. The counterclaims request the court to declare that VUE is not obligated under the partnership agreement to pay to IAC and its affiliates cash tax distributions on the Preferred Return or, in the alternative, to reform the partnership agreement—on the grounds of mutual or, in the alternative, unilateral mistake—so that it no longer requires VUE to make such payments. On July 21, 2003, IAC filed a reply denying the material allegations of the defendants' counterclaims.
On January 30, 2004, IAC filed a motion for judgment on the pleadings, on the grounds that the plain and clear language of the partnership agreement entitles IAC, as a matter of law, to the relief it seeks. The defendants opposed the motion, and the Court heard oral argument on May 12, 2004. On June 30, 2004, the Chancery Court issued a memorandum opinion in IAC's favor. The court ruled that the relevant provisions of the partnership agreement requiring the payment of cash tax distributions on the Preferred Return are clear and unambiguous on their face and that the defendants had not adequately pleaded facts supporting their defenses that those provisions were the result of either the parties' mutual or the defendants' unilateral mistake. On August 5, 2004, the Chancery Court entered a final order and judgment granting IAC's motion for judgment on the pleadings, dismissing the defendants' counterclaims with prejudice, ordering VUE to pay previously unpaid distributions, and
declaring that VUE is obligated, pursuant to the terms of the partnership agreement, to make the disputed tax distribution payments in the future.
On August 23, 2004, the defendants filed a notice of appeal from the Chancery Court's judgment to the Supreme Court of Delaware. On October 7, 2004, the defendants filed their opening brief. On November 8, 2004, IAC filed its responding brief. On November 23, 2004, the defendants filed their reply brief.
A panel of the Supreme Court heard oral argument on January 19, 2005. Later that day, the Supreme Court issued an order that the appeal will be argued before and determined by the Courten banc. Oral argument before the full Court has been scheduled for April 20, 2005.
Securities Class Action Litigation against IAC
On As previously disclosed in the Company's filing on SEC Form 10-K for the fiscal year ended December 31, 2004, beginning on September 20, 2004, atwelve purported shareholder class action,Steven Malasky, on Behalf of Himself and All Others Similarly Situated v. IAC/InterActiveCorp et al., No. 04 Civ. 7447, wasactions were commenced in the United States District Court for the Southern District of New York against IAC and certain of its officers and one outside director,directors, alleging violations of the federal securities laws. Thereafter, eleven other such lawsuits containing substantially similar allegations were filed in the same court. The complaints in theseThese cases generally allege that the valuearose out of the Company's stock was artificially inflated by statements about its financial results and forecasts made prior to its August 4, 2004 announcement of its earnings for the second quarter of 2004 and generally alleged that the value of the Company's stock was artificially inflated by pre-announcement statements about its financial results and forecasts that were false and misleading due to the defendants' alleged failure to disclose various problems faced by the Company's travel businesses. The complaints purport to assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and seek damagesbusinesses
(which in an unspecified amount. The plaintiffs in most of these lawsuits seek to represent2005 were spun off into a class of shareholders who purchased IAC common stock between March 19, 2003 and August 4, 2004.
In rulings onseparate public company, Expedia, Inc.). On December 20, 2004, and March 7, 2005, the district court consolidated the twelve lawsuits, into a single action captionedappointed co-lead plaintiffs, and designated co-lead plaintiffs' counsel.See In re IAC/InterActiveCorp Securities Litigation, appointed co-lead plaintiffs, and designated co-lead counsel. A consolidated amended complaint is expected to be filed in the second quarter of 2005. The Company intends to defend vigorously against this lawsuit.No. 04-CV-7447 (S.D.N.Y.).
On October 18, 2004, a related shareholder derivative action,Stuart Garber, Derivatively on Behalf of IAC/InterActiveCorp v. Barry Diller et al., No. 04-603416, was commenced in the Supreme Court of the State of New York (New York County) against certain of IAC's directorsofficers and certain officers. The Company is a nominal defendant. This action is based on similar factual allegations as the federal securities class action described above. The complaint alleges, among other things, that the director defendants breached their fiduciary duties by failing to exercise their oversight responsibilities to ensure the integrity of the Company's business practices, financial reporting, and public statements. The complaint also purports to assert claims for misappropriation of confidential information for personal profit, contribution and indemnification. The complaint seeks damages in an unspecified amount and restitution of all remuneration paid by the Company to the individual defendants during the period of the alleged breach of duty.
directors. On November 15, 2004, a secondanother related shareholder derivative action,Lisa Butler, Derivatively on Behalf of IAC/InterActiveCorp v. Barry Diller et al., No. 04 Civ. 9067,04-CV-9067, was filed in the United States District Court for the Southern District of New York against certain of IAC's current directors and certain former directorsdirectors. On January 24, 2005, the federal district court consolidated theButler case with the securities class action for pre-trial purposes only. On February 2, 2005, the defendants in theGarber case removed it from New York state court to the United States District Court for the Southern District of New York. On April 11, 2005, the district court issued a similar consolidation order in respect of the Company. TheGarber case.
As previously disclosed by the Company, is a nominal defendant. The action is based on similar factual allegations asMay 20, 2005, the plaintiffs in the federal securities class action filed a consolidated amended complaint. Like its twelve predecessors, the amended complaint generally alleges that the value of the Company's stock was artificially inflated by pre-announcement statements about its financial results and forecasts that were false and misleading due to the other shareholder derivative suit described above.defendants' alleged failure to disclose various problems faced by the Company's then travel businesses. The plaintiffs seek to represent a class of shareholders who purchased IAC common stock between March 31, 2003 and August 3, 2004. The defendants are IAC and fourteen current or former officers or directors of the Company or its former Expedia travel business. The complaint purports to assert claims for violation of Section 14(a)under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, as well as Sections 11 and 15 of the Securities Act of 1933, and seeks damages in an unspecified amount.
On July 5, 2005, the plaintiffs in the related shareholder suits filed a consolidated shareholder derivative complaint. The defendants are IAC (as a nominal defendant) and sixteen current or former officers or directors of the Company or its former Expedia travel business. The complaint, which is based upon factual allegations similar to those in the securities class action, purports to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, violation of Section 14(a) of the Exchange Act, and unjust enrichment.contribution and indemnification. The complaint seeks an order voiding the election of the Company's current Board of Directors, as well as damages in an unspecified amount, various forms of equitable relief, restitution, and disgorgement of remuneration received by the individual defendants from the Company.
On January 24,September 15, 2005, the federal district court consolidated theButler shareholder derivative suit with the consolidated securities class action for pre-trial purposes only. On February 2, 2005, the defendants in theGarber shareholder derivative suit removed the case from New York state court to the United States District Court for the Southern District of New York.
Litigation Relating to the IAC/Hotels.com Merger Agreement
On April 10, 2003, the day of the announcement of the IAC/Hotels.com merger agreement, a purported class action on behalf of Hotels.com shareholders was filed in the Delaware Chancery Court against Hotels.com, IAC and members of the board of directors of Hotels.com.See Michael Garvey, on Behalf of Himself and All Others Similarly Situated v. Jonathan F. Miller et al., No. 20248-NC (New Castle County). Also on April 10, 2003, the plaintiff in a purported shareholder derivative action on behalf of Hotels.com against certain officers and directors of Hotels.com, which was pending in Texas state court prior to the announcement of the merger transaction and had originally asserted derivative claims relating to Hotels.com's pre-merger earnings guidance (which claims are described more fully in a separate section below), filed an amended complaint to include class allegations regarding the merger transaction.See Alex Solodovnikov, Derivatively on Behalf of Hotels.com v. Robert Diener et al., No. 03-02663 (District Court, 160th Judicial District, Dallas County). In addition, on April 17, 2003, the plaintiffs in a consolidated action pending in the Delaware Chancery Court, which had consolidated a number of purported class actions filed against Hotels.com, IAC, and members of the board of directors of Hotels.com as a result of IAC's announcement in June 2002 of its intention to enter into a Hotels.com acquisition transaction, filed a consolidated and amended class-action complaint.See In re Hotels.com Shareholders Litigation, No. 16662-NC (New Castle County). Pursuant to an agreement among the parties, the defendants' time to respond to this complaint and to the complaint in theGarvey case has been adjourned indefinitely.
The complaints in the two Delaware actions and the class allegations in the complaint in the Texas action allege, in essence, that the defendants breached their fiduciary duties to Hotels.com's public shareholders by entering into and/or approving the merger agreement, which allegedly does not reflect the true value of Hotels.com. The complaints sought to enjoin consummation of the transaction or, in the alternative, to rescind the transaction, as well as damages in an unspecified amount.
On April 18, 2003, the Texas action (Solodovnikov) was removed to the United States District Court for the Northern District of Texas. On May 2, 2003, the plaintiff in this action filed a motion to remand the case to state court. On June 3, 2003, the plaintiff withdrew his motion to remand the case to state court and filed a motion in federal court for expedited discovery in anticipation of filing a motion for a preliminary injunction against consummation of the IAC/Hotels.com merger. The defendants opposed the motion. On June 16, 2003, the district court denied the plaintiff's motion for expedited discovery. On June 23, 2003, the IAC/Hotels.com merger transaction closed.
The Company believes that the allegations in these lawsuits are without merit and will continue to defend vigorously against them.
Litigation Relating to Hotels.com's Guidance for the Fourth Quarter of 2002
Securities Class Action. On January 10, 2003, a securities class action,Daniel Taubenfeld et al., on Behalf of Themselves and All Others Similarly Situated v. Hotels.com et al., No. 3:03-CV-0069-N, was filed in the United States District Court for the Northern District of Texas, arising out of Hotels.com's downward revision of its guidance for the fourth quarter of 2002. This lawsuit alleges that the defendants, Hotels.com and three of its former executives, violated the federal securities laws during the period from October 23, 2002 to January 6, 2003 (the "Class Period"). The defendants are alleged to have knowingly (i) made certain materially false and misleading public statements with respect to the anticipated performance of Hotels.com during the fourth quarter of 2002, and (ii) concealed from the investing public certain material events and developments that were likely to render that anticipated
performance unattainable. The individual defendants are further alleged to have profited from the rise in Hotels.com's share price caused by their public statements through sales of Hotels.com stock during the Class Period. The lawsuit further alleges that as a result of Hotels.com's announcement, on January 6, 2003, of a downward revision of its guidance for the fourth quarter of 2002, its share price declined by 25%. The lawsuit seeks certification of a class of all non-defendant purchasers of Hotels.com stock during the Class Period and seeks damages in an unspecified amount. Three other substantially similar securities class actions were filed in the same court shortly thereafter and were later consolidated with theTaubenfeld case.
On August 18, 2003, the lead plaintiffs in this action filed a consolidated class-action complaint. On October 31, 2003, the defendants filed a motionmotions to dismiss the consolidated complaint. The plaintiffs opposed the motion. On September 27, 2004, the district court issued an order granting the defendants' motion to dismiss the complaint. The court's ruling was based upon a number of grounds, including that certain of the statements complained of were forward-looking statements accompanied by appropriate cautionary language and thereby protected by the "safe harbor" provisions of the Private Securities Litigation Reform Act, and that certain of the statements and omissions complained of were, as a matter of law, not material and therefore not actionable. The court dismissed all of the plaintiffs' claims with prejudice (i.e., without leave to replead them), with the exception of two claims involving statements by analysts. The plaintiffs have advised that they do not intend to attempt to replead those claims. On March 4, 2005, the plaintiffs filed a notice of appeal of the district court's ruling to the United States Court of Appeals for the Fifth Circuit.
Shareholder Derivative Suit. Two shareholder derivative actions,Anita Pomilo Wilson, Derivatively on Behalf of Nominal Defendant Hotels.com v. Elan J. Blutinger et al., No. 3:03-CV-0501-K, andAlex Solodovnikov, Derivatively on Behalf of Hotels.com v. Robert Diener et al., No. 3:03-CV-0812-K, arising out of the same events as the consolidated securities class action, were removed to the same Texas federal district court after having been filed in Texas state court on January 14, 2003 and March 14, 2003, respectively. The defendants in these shareholder derivative actions are Hotels.com (as a nominal defendant only) and a number of current or former directors of Hotels.com. These lawsuits allege that the individual defendants who, during the period from October 25, 2002 to December 3, 2002, sold Hotels.com stock breached their fiduciary duty to Hotels.com by misappropriating, and trading and profiting on the basis of, proprietary, material non-public information concerning the financial condition and growth prospects of Hotels.com. The lawsuits also allege that all of the individual defendants aided and abetted the selling defendants' breaches of fiduciary duty by concealing from the market the information on the basis of which the selling defendants allegedly traded and profited. The lawsuits seek imposition of a constructive trust in favor of Hotels.com on the profits obtained by the selling defendants on their sales of Hotels.com stock during the period referred to above, as well as unspecified damages resulting from the individual defendants' alleged breaches of fiduciary duty.
On December 16, 2003, the two shareholder derivative actions were consolidated under the caption,In re Hotels.com Derivative Litigation, No. 3:03-CV-501-K (N.D. Tex.). On April 26, 2004, the lead plaintiff filed a consolidated amended complaint. The amended complaint, which asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment against sixteen current or former directors of Hotels.com, seeks damages, restitution, and disgorgement of profits in an unspecified amount, together with the imposition of a constructive trust on those profits. The amended complaint reiterates the allegations of the two shareholder derivative actions described above and further alleges that certain of the individual defendants caused Hotels.com to enter into the IAC/Hotels.com merger transaction in order, among other self-interested reasons, to procure the dismissal of the previously filed derivative actions. In this respect, the amended complaint seeks a judicial declaration, on behalf of all pre-merger public shareholders of Hotels.com stock, that the IAC/Hotels.com merger agreement, which resulted in the IAC/Hotels.com merger transaction that closed on June 23, 2003, is unlawful and unenforceable.
On June 28, 2004, the defendants filed a motion to dismiss the consolidated amended complaint. On December 1, 2004, the plaintiff opposed the motion. On December 16, 2004, the defendants filed their reply brief.
On October 18, 2004, the district court directed the parties to engage in mediation. On December 20, 2004, the parties engaged in mediation before a retired federal district judge. The mediation did not result in a resolution of this matter. On January 10, 2005, the parties, with the concurrence of the mediator, filed a joint motion requesting the district court to stay the shareholder derivative action pending resolution of the plaintiffs' contemplated appeal from the district court's dismissal of the related securities class action.
On February 23, 2005, the district court issued an order denying the defendants' motion to dismiss as well as the parties' joint motion for a stay. On March 7, 2005, the district court issued orders vacating its denial of the parties' stay motion, staying the case until further notice and directing that the case be administratively closed pending a decision in the appeal of the related securities class action.
The Company believes that both the securities class action and the shareholder derivative suits. On November 30, 2005, the plaintiffs filed their opposition to the motions. On January 6, 2006, the defendants filed reply papers in further support of the motions. Both motions to dismiss remain pending.
The Company believes that the claims in the class action and the derivative suits lack merit and will continue to defend vigorously against them.
Consumer Class Action Litigation Relating to Hotel Occupancy Taxesagainst Ticketmaster
Hotels.com Illinois.
TheOlvera Class Action Litigation. On June 20, 2003,As previously disclosed in the Company's filing on SEC Form 10-Q for the quarter ended September 30, 2005 (the "3Q05 10-Q"), on November 22, 2002, a purported class action was filed in TexasIllinois state court, against Hotels.com.challenging Ticketmaster's charges to customers for UPS ticket delivery.See Nora J. Olvera,Mitchell B. Zaveduk, Individually and on Behalfas the Representative of All Othersa Class of Similarly Situated Persons v. Hotels.com, Inc.Ticketmaster et al., No. DC-03-259 (District02-CH-21148 (Circuit Court, 229th Judicial District, DuvalCook County). The lawsuit alleges in essence that it is unlawful for Ticketmaster not to disclose that the fee it charges to customers to have their tickets delivered by UPS contains a profit component. The complaint alleges that Hotels.com collects "excess" hotel occupancy taxes from consumers (i.e., allegedly charges consumers moreasserted claims for occupancy taxes than it paysviolation of the Illinois Consumer Fraud and Deceptive Business Practices Act and for unjust enrichment and sought
restitution to the hotels for their use in satisfying their obligations to the taxing authorities). The complaint sought certification of a nationwidepurported class of all persons who have purchased hotel accommodations from Hotels.com since Junethe difference between what Ticketmaster charged for UPS delivery and what it paid for that service.
On May 20, 1999, as well as restitution of, disgorgement of, and2003, the imposition of a constructive trust upon all "excess" occupancy taxes allegedly collected by Hotels.com.court granted Ticketmaster's motion to dismiss the common-law claim for unjust enrichment but declined to dismiss the claim under the Illinois statute. On July 14, 2003, Hotels.com filed a responsive pleading that denied the material allegations of the complaint and asserted a number of defenses, including that the allegations in the complaint are subject to mandatory arbitration.
On August 12, 2003,7, 2004, the plaintiff filed an amended complaint, containing substantially the same factual allegations and requests for relief, but naming as defendants Hotels.com, L.P., Hotels.com (the parent company of the Hotels.com, L.P. operating business), and IAC. On September 8, 2003, the defendants filed responsive pleadings that denied the material allegations of the amended complaint and asserted a number of defenses, including that the allegations in the amended complaint are subject to mandatory arbitration and, in IAC's case, that the court lacks personal jurisdiction over the Company.
On January 24, 2004, the Hotels.com defendants filed a motion to stay the class-action litigation pending the outcome of an arbitration proceeding (described below) that had been commenced by the plaintiff. On January 30, 2004, the plaintiff opposed that motion and also filed a second amended complaint containing substantially the same factual allegations and requests for relief as her prior pleadings, but slightly modifying the class allegations to take account of the class period alleged in the arbitration proceeding.
On February 4, 2004, Hotels.com, L.P. filed a motion to dismiss theOlvera lawsuit for lack of subject-matter jurisdiction, based upon the named plaintiff's not being in fact a member of the class that she purports to represent. That motion, together with the Hotels.com defendants' motion to stay the lawsuit, was denied by the court on May 20, 2004.
On May 6, 2004, the plaintiff in theOlvera lawsuit filed a third amended complaint containing substantially the same factual allegations and requests for relief as her prior pleadings, but with additional allegations in support of her position that the court has personal jurisdiction over IAC.
On December 29, 2004, following the scheduling of a class certification hearing in theCanales lawsuit (as described below), the plaintiff in theOlvera lawsuit filed a motion for class certification. On February 16, 2005, the plaintiff in theOlvera lawsuit filed a motion to withdraw her request for class certification. The Hotels.com defendants do not oppose this motion.
TheOlveraArbitration. On September 25, 2003, the plaintiff in theOlvera litigation filed with the American Arbitration Association in Dallas, Texas, a demand for arbitration against Hotels.com, L.P. The arbitration claim contained substantially the same factual allegations as in theOlvera lawsuit. The arbitration was purportedly brought on behalf of a class comprised of all persons who have purchased hotel accommodations from Hotels.com since October 31, 2001. The claimant sought a determination that the arbitration is properly maintainable as a class proceeding and an order requiring disgorgement and restitution to the class members of excess profits allegedly derived from "assessing" hotel occupancy taxes that were neither owed nor paid to any taxing authority. On October 27, 2003, Hotels.com, L.P. filed a responsive pleading that denied the material allegations of the arbitration claim and asserted a number of defenses.
On May 6, 2004, Hotels.com, L.P. filed a motion to dismiss theOlvera arbitration claim for lack of subject-matter jurisdiction, on the grounds that under Texas law the tax-based nature of the claim requires that it be adjudicated in a state administrative proceeding, not a private-party proceeding such as an arbitration. A hearing on that motion, as well as on the issue whether the governing arbitration clause permits the arbitration to be maintained as a class proceeding, was held on July 9, 2004.
On September 2, 2004, the arbitrator, accepting Hotels.com, L.P.'s position that the exclusive remedy for this type of tax-related claim is a state administrative proceeding, issued a final award dismissing Olvera's arbitration claim.
TheCanalesClass Action Litigation. On March 26, 2004, the plaintiff in a separate class action pending in Texas state court,Mary Canales, Individually and on Behalf of All Others Similarly Situated v. Hotels.com, L.P., No. DC-03-162 (District Court, 229th Judicial District, Duval County), filed a second amended complaint containing allegations that are substantially similar to allegations made in theOlvera lawsuit. On May 13, 2004, the plaintiff in theCanales lawsuit filed a third amended complaint alleging in essence (i) that Hotels.com charges customers "taxes" that exceed the amount required by or paid to the applicable taxing authorities, and (ii) that Hotels.com charges customers "fees" that do not correspond to any specific services provided. The amended pleading continues to seek nationwide class certification, asserts a claim onlyadding claims for breach of contract and seeks damages in an unspecified amount.
Also on May 13, 2004, the plaintiff filed a motion for class certification. On June 24, 2004, Hotels.com, L.P. filed its opposition to that motion.
On July 9, 2004, the plaintiffs in theOlvera lawsuit filed a petition in intervention in theCanales lawsuit and a motion to stay the proceedings in that lawsuit or, alternatively, for a continuance of the hearing on the class-certification motion. The gravamen of theOlvera plaintiffs' intervention and motion is that theCanales plaintiff has transformed her lawsuit into a "copycat" of theOlvera lawsuit, to the potential detriment of theOlvera plaintiffs. On July 13, 2004, theCanales plaintiff filed a motion to strike theOlvera plaintiffs' intervention and motion. On August 2, 2004, the court heard argument on the two motions. On August 3, 2004, the court adjourned the hearing on the class-certification motion. On September 1, 2004, the court denied theCanales plaintiff's motion to strike theOlvera plaintiffs' intervention and motion.
On February 17, 2005, the court held a hearing on the plaintiffs' motion for class certification, as well as on the defendants' request for dismissal of the action on the same jurisdictional grounds on which Olvera's arbitration claim was dismissed.
City of Los Angeles Class Action. On December 30, 2004, the city of Los Angeles filed a purported class action in California state court against a number of Internet travel companies, including Hotels.com, Expedia, and Hotwire.See City of Los Angeles, California, on Behalf of Itself and All Others Similarly Situated v. Hotels.com, L.P. et al., No. BC326693 (Superior Court, Los Angeles County). The gravamen of this lawsuit, as in the Hotels.com consumer class action litigation described above, is that the defendants are improperly charging and/or failing to pay hotel occupancy taxes. The complaint seeks certification of a statewide class of all California cities and counties that have enacted uniform transient occupancy-tax ordinances effective on or after December 30, 1990. The complaint alleges violation of those ordinances, violation of section 17200 of the California Business and Professions Code, and common-law conversion. The complaint seeks imposition of a constructive trust on all monies owed by the defendants to the government, as well as disgorgement, restitution, interest, and penalties.
Expedia. On January 10, 2005, two purported class actions were filed in Washington state court against Expedia and IAC.See C. Michael Nielsen et al. v. Expedia, Inc. et ano., No. 05-2-02060-1 (Superior Court, King County);Bruce Deaton et ano. v. Expedia, Inc. et ano., No. 05-2-02062-8 (Superior Court, King County). The gravamen of these nearly identical lawsuits, as in the Hotels.com consumer class action litigation described above, is that Expedia is improperly charging and/or failing to pay hotel occupancy taxes and engaging in other deceptive practices in charging customers for taxes and fees. The complaints seek certification of a nationwide class of all persons who were assessed a charge for "taxes/fees" when booking rooms through Expedia. The complaints allege violation of the Washington Consumer ProtectionConsumers' Legal Remedies Act and common-law conversion. The complaints seek imposition of a constructive trust on monies received from the plaintiff class, as well as damages in an unspecified amount, disgorgement, restitution, interest, and penalties.
On February 3, 2005, a third, substantially similar purported class action was filed in Washington state court against IAC and Expedia.See Jose Alba, on Behalf of Himself and All Others Similarly Situated v. IAC/InterActiveCorp et ano., No. 05-2-04533-7 (Superior Court, King County). The complaint seeks nationwide class certification, alleges violation of the Washington Consumer Protection Act, and seeks damages in an unspecified amount, disgorgement, restitution, interest, and penalties.
On February 18, 2005, theNielsen,Deaton, andAlba cases were consolidated into one action,In re Expedia Hotel Taxes and Fees Litigation, No. 05-2-02060-1 (Superior Court, King County). On March 7, 2005, Expedia removed this consolidated action from Washington state court to the United States District Court for the Western District of Washington.
Hotwire. On January 10, 2005 and January 13, 2005, respectively, two purported class actions were filed in California state court against Hotwire and IAC.See Bruce Deaton, on Behalf of Himself and All Others Similarly Situated v. Hotwire, Inc. et al., No. 05-437631 (Superior Court, San Francisco County);Jana Sneddon, on Behalf of Herself and All Others Similarly Situated v. Hotwire, Inc. et al., No. 05-437701 (Superior Court, San Francisco County). The gravamen of these nearly identical lawsuits, as in the Hotels.com and Expedia consumer class action litigation described above, is that Hotwire is improperly charging and/or failing to pay hotel occupancy taxes and engaging in other deceptive practices in charging customers for taxes and fees. The complaints seek certification of a nationwide class of all persons who were assessed a charge for "taxes/fees" when booking rooms through Hotwire. The complaints allege violation of Section 17200 of the California Business and Professions Code, violation ofCode. On August 13, 2004, the court granted Ticketmaster's motion to dismiss the claim under the California ConsumerConsumers' Legal Remedies Act,Act. On October 28, 2004, the court granted Ticketmaster's motion to dismiss the claim for breach of contract but declined again to dismiss the claim under the Illinois statute. On June 16, 2005, the court denied Ticketmaster's motions for summary judgment on the Illinois statutory claim and common-law conversion. The complaints seek imposition ofto stay the remaining California statutory claim. Discovery in the case has been inactive, and no trial date has been set.
California. As previously disclosed in the 3Q05 10-Q, on October 21, 2003, a constructive trust on monies received from the plaintiff class, as well as damages in an unspecified amount, disgorgement, restitution, interest, and penalties.
On February 17, 2005, a third, substantially similar purported classrepresentative action was filed in California state court, against Hotwire.challenging Ticketmaster's charges to online customers for UPS ticket delivery.See Ashley Salisbury, on Behalf of Herself and All Others Similarly Situated and the General PublicCurt Schlesinger et al. v. Hotwire, Inc. et al.Ticketmaster, No. 05-438781BC304565 (Superior Court, San FranciscoLos Angeles County). Similar to the Illinois case, this lawsuit alleges in essence that it is unlawful for Ticketmaster not to disclose on its website that the fee it charges to online customers to have their tickets delivered by UPS contains a profit component. The complaint seeks nationwide class certification, allegesasserted a claim for violation of Section 17200 of the California Business and Professions Code and, common-law conversion,like the Illinois case, sought restitution or disgorgement of the difference between the total UPS-delivery fees charged by Ticketmaster in connection with online ticket sales and seeks the imposition of a constructive trust on monies received from the plaintiff class, damages in an unspecified amount disgorgement, restitution, and injunctive relief.it paid to UPS for that service.
On March 7,January 9, 2004, the court denied Ticketmaster's motion to stay the case in favor of the earlier-filed Illinois case. On December 31, 2004, the court denied Ticketmaster's motion for summary judgment. On April 1, 2005, Hotwirethe court denied the plaintiffs' motion for leave to amend their complaint to include UPS-delivery fees charged in connection with ticket orders placed by telephone. Citing Proposition 64, a recently approved California ballot initiative that outlawed so-called "representative" actions brought on behalf of the general public, the court ruled that since the named plaintiffs did not order their tickets by telephone, they lacked standing to assert a claim based on telephone ticket sales. The plaintiffs were granted leave to file an amended complaint that would survive application of Proposition 64.
On August 31, 2005, the plaintiffs filed an amended class-action and IAC removed these three purported class actions from California state court to the United States District Courtrepresentative-action complaint alleging (i) as before, that Ticketmaster's website disclosures in respect of its charges for the Northern District of California.
Consumer Class Action against Various Internet Travel Companies. On February 17, 2005, a purported class action was filed in California state court against a number of Internet travel companies, including Expedia and Hotels.com (as well as IAC).See Ronald Bush et al. v. CheapTickets, Inc. et al., No. BC329021 (Superior Court, Los Angeles County). The gravamen of this lawsuit, as in the Hotels.com, Expedia, and Hotwire consumer class action litigation described above, is that the defendants are improperly charging and/or failing to pay hotel occupancy taxes and engaging in other deceptive practices in charging customers for taxes and fees. The complaint seeks certification of a statewide class of all California residents who were assessed a charge for "taxes/fees" when booking rooms through the defendants. The complaint alleges violation ofUPS ticket delivery violate Section 17200 of the California Business and Professions Code, and common-law conversion. The(ii), for the first time, that Ticketmaster's website disclosures in respect of its ticket order-processing fees constitute false advertising in violation of Section 17500 of the California Business and Professions Code. On this latter claim, the amended complaint seeks restitution or disgorgement of the impositionentire amount of order-processing fees charged by Ticketmaster during the applicable statute-of-limitations period.
On September 1, 2005, in light of the newly pleaded claim based upon order-processing fees, Ticketmaster removed the case to federal court pursuant to the recently enacted federal Class Action Fairness Act.See Curt Schlesinger et al. v. Ticketmaster, No. 05-CV-6515 (U.S. District Court, Central District of California). On October 3, 2005, the plaintiffs filed a constructive trustmotion to remand the case to state court, which Ticketmaster opposed. The motion was argued on monies received from the plaintiff class, as well as damages in an unspecified amount, disgorgement, restitution,November 7, 2005 and injunctive relief.remains pending.
The Company believes that the claims in all of these litigations relating to hotel occupancy taxesboth the Illinois and the California lawsuits lack merit and will continue to defend vigorously against them.
Tickets.com Antitrust Litigation
In July 1999, Ticketmaster Online—Citysearch, Inc. and Ticketmaster Corporation (together, "Ticketmaster") commenced an action in the United States District Court for the Central District of California against Tickets.com, Inc. ("Tickets.com").See Ticketmaster Corp. et ano. v. Tickets.com, Inc., No. 99-07654 (C.D. Cal.). The complaint alleged that Tickets.com was violating Ticketmaster's legal and contractual rights by, among other things, (i) providing deep-links to Ticketmaster's internal web pages without its consent, (ii) deceptively and systematically accessing Ticketmaster's computer systems and thereupon copying Ticketmaster event pages and extracting and reprinting on Tickets.com's website Ticketmaster's uniform resource locators ("URL 's") and event information, and (iii) providing false and misleading information about Ticketmaster, the availability of tickets on Ticketmaster's website, and the relationship between Ticketmaster and Tickets.com. In January 2000, Ticketmaster filed an amended complaint. In February 2000, Tickets.com filed a motion to dismiss that pleading, which was denied in part and granted in part with leave to amend. In April 2000, Ticketmaster filed a second amended complaint.
In May 2000, Tickets.com filed its answer to Ticketmaster's second amended complaint, as well as a number of counterclaims against Ticketmaster. The counterclaims alleged violations by Ticketmaster of the federal antitrust laws (Sections 1 and 2 of the Sherman Act), the California antitrust laws (the Cartwright Act), and Section 17200 of the California Business and Professions Code, sought declaratory relief, and also contained common-law claims for restraint of trade, unfair competition and unfair business practices, and interference with contract. Tickets.com alleged that Ticketmaster Corporation's exclusive agreements with Ticketmaster Online-Citysearch, Inc., venues, promoters, and others injure competition, violate antitrust laws, constitute unfair competition, and interfere with Tickets.com's prospective economic advantage. In July 2002, the district court dismissed, on consent, Tickets.com's claims that Ticketmaster had commenced litigation against Tickets.com and others for predatory and/or anticompetitive purposes. In September 2002, the court dismissed, on consent, Tickets.com's claims
allegedly brought on behalf of the public under Section 17200 of the California Business and Professions Code.
On January 22, 2003, the district court dismissed, on consent, certain of Tickets.com's counterclaims, namely those alleging: violation of Section 1 of the Sherman Act; conspiracy to monopolize; common-law restraint of trade; violation of Section 17200 of the California Business and Professions Code by reason of a contract between Ticketmaster Corporation and Ticketmaster Online—Citysearch, Inc.; interference with prospective economic advantage; and common-law unfair competition and unfair business practices. On January 28, 2003, the parties agreed to the dismissal of certain of Ticketmaster's claims, namely those alleging: unfair competition and false designation of origin; reverse passing off; false advertising; violation of Section 17200 of the California Business and Professions Code by reason of unfair business practices; and interference with prospective economic advantage. Discovery in this case was extensive and ended on January 31, 2003.
On February 3, 2003, Ticketmaster and Tickets.com each filed a motion for summary judgment. On March 3, 2003, the district court ruled on the motions, (i) granting summary judgment dismissing all of Tickets.com's antitrust counterclaims under federal and state law and (ii) granting summary judgment dismissing all of Ticketmaster's claims with the exception of its claim for breach of contract. The court's rulings left Ticketmaster with a claim for breach of contract and Tickets.com with a counterclaim for unfair business practices under Section 17200 of the California Business and Professions Code. On March 17, 2003, the court dismissed these remaining state-law claims, without prejudice, for lack of federal subject-matter jurisdiction. On March 25, 2003, the district court entered a final judgment dismissing the action in its entirety.
On April 10, 2003, Tickets.com filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit from that part of the district court's judgment dismissing Tickets.com's federal and state antitrust counterclaims against Ticketmaster. Ticketmaster elected not to cross-appeal from the district court's dismissal of its claims against Tickets.com. On August 27, 2003, Tickets.com filed its opening brief on appeal. On October 27, 2003, Ticketmaster filed its answering brief. On November 26, 2003, Tickets.com filed its reply brief. On February 16, 2005, the court of appeals heard oral argument on the appeal.
The Company continues to believe that, as reflected in the district court's ruling dismissing them, Tickets.com's antitrust claims against Ticketmaster are without merit, and will continue to defend vigorously against them on appeal.
HSN Consumer Class Action Litigations
Illinois. In November 1999, Home Shopping Network, Inc. ("HSN") was sued in a putative consumer class action filed in Illinois state court.See Bruce Tompkins et al. v. Proteva, Inc. et al., No. 99 CH 12013 (Circuit Court, Chancery Division, Cook County). The lawsuit was brought on behalf of consumers who purchased a Proteva personal computer from one of the defendants and experienced one of the following: (i) the computer was defective upon purchase or shortly thereafter; (ii) a defendant did not honor a rebate offer which had been made as part of the sale; or (iii) a defendant did not provide customer or warranty service as advertised. The complaint asserted claims for consumer fraud, breach of the implied warranty of merchantability, and unjust enrichment and sought compensatory and punitive damages, as well as attorneys' fees. HSN filed an answer denying the material allegations of the complaint as to it.
The plaintiffs subsequently filed an amended complaint that, among other things, added a claim for breach of express warranty and added four corporate defendants, including Home Shopping Club LP. In May 2000, HSN and Home Shopping Club LP (together, "HSN") filed a motion to dismiss the amended complaint. That motion resulted in an order requiring the plaintiffs to amend the complaint again. In June 2000, a second amended complaint was filed, adding claims for negligent misrepresentation and breach of contract. In December 2000, a third amended complaint was filed,
dropping the three non-HSN corporate defendants that had been added earlier and dropping the claims for negligent misrepresentation and breach of contract. In July 2001, a fourth amended complaint was filed. HSN filed answers to the second, third, and fourth amended complaints, denying their material allegations as to it.
In February 2001, the plaintiffs filed a motion for certification of a nationwide class, which HSN and the other defendants opposed. In December 2001, the court declined to certify a nationwide class and instead limited certification to a class of consumers resident in the state of Illinois.
In July 2002, HSN filed a motion for summary judgment. In March 2003, the court denied the motion. The parties have engaged in substantial discovery.
Florida. In May 2002, Home Shopping Network, Inc. and Home Shopping Club LP (together, "HSN") were sued in a putative consumer class action filed in Florida state court.See Susan DiCicco v. Home Shopping Network, Inc. et ano., No. 02-3625-CI-19 (Circuit Court, Civil Division, Pinellas County). The operative factual allegations and legal claims in the lawsuit also involve the sale and servicing of Proteva personal computers and are substantially the same as those in the Illinois lawsuit described above. The complaint asserts claims against HSN for violation of the Florida Deceptive and Unfair Trade Practices Act, breach of contract, breach of express and implied warranty, and unjust enrichment, and seeks damages, disgorgement of profits, and attorneys' fees. In August 2002, HSN filed an answer denying the material allegations of the complaint.
California. In May 2003, Home Shopping Network, Inc. and HSN Direct, Inc. (together, "HSN") were sued in a putative consumer class action filed in California state court.See Dorothy Friedmann v. HSN Direct, Inc. et al., No. BC-295766 (Superior Court, Los Angeles County). Like the Illinois and Florida lawsuits described above, this lawsuit arises out of the sale of allegedly defective Proteva personal computers. The complaint alleges that HSN, in marketing Proteva computers during the 1996-99 period, engaged in unlawful, unfair, and deceptive trade practices and false advertising, in violation of the California Business and Professions Code. The complaint seeks class certification, restitution of amounts paid, disgorgement of profits, and imposition of a constructive trust on amounts received from HSN's sale of Proteva computers. In July 2003, HSN filed an answer denying the material allegations of the complaint.
Counsel for the parties engaged in discussions concerning a possible resolution of these Illinois, Florida, and California cases and retained a mediator to facilitate those discussions. On June 10, 2004, HSN and the plaintiffs in these cases entered into a Class Action Settlement and Release Agreement (the "Agreement") resolving all of the cases on terms not material to the Company. Pursuant to the Agreement, and subject to the jurisdiction and approval of the court in the Illinois case, a nationwide settlement would be effectuated through the submission of claims by class members, who would receive cash payments in amounts based primarily upon the seriousness of the problems they encountered and their ability to substantiate those problems with documentation.
On September 10, 2004, the court in the Illinois case issued an order approving the nationwide class settlement on the terms outlined in the Agreement. The deadline for class members' submission of claims to the settlement administrator was October 11, 2004. The process of evaluating submitted claims and paying valid claims out of the available settlement fund is expected to conclude in the first quarter of 2005.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of any of the Company's security holders during the fourth quarter of 2004.2005.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity and Related Stockholder Matters
IAC Common Stockcommon stock is quoted on The Nasdaq Stock Market, or "NASDAQ," under the ticker symbol "IACI." There is no established public trading market for IAC Class B Common Stock.common stock. The following table below sets forth, for the calendar periods indicated, the high and low sales prices per share for IAC Common Stockcommon stock as reported on NASDAQ:NASDAQ. High and low sales prices per share of IAC common stock have been adjusted to reflect the impact of the one-for-two reverse stock split of IAC's common stock and Class B common stock and the Spin-Off, both of which were completed on August 9, 2005.
| High | Low | |||||
---|---|---|---|---|---|---|---|
Year Ended December 31, 2005 | |||||||
First Quarter (though March 14, 2005) | $ | 27.87 | $ | 21.70 | |||
Year Ended December 31, 2004 | |||||||
Fourth Quarter | $ | 28.91 | $ | 19.16 | |||
Third Quarter | 30.72 | 20.67 | |||||
Second Quarter | 34.62 | 28.44 | |||||
First Quarter | 34.93 | 27.46 | |||||
Year Ended December 31, 2003 | |||||||
Fourth Quarter | $ | 39.00 | $ | 28.79 | |||
Third Quarter | 42.74 | 33.18 | |||||
Second Quarter | 39.33 | 25.10 | |||||
First Quarter | 28.43 | 20.99 |
The adjusted stock prices were determined using the historical prices (pre-adjustment) divided by 0.90036. This factor is equal to the value of $25.30, the closing price on August 8, 2005 of IAC common stock, divided by $28.10, the closing price on August 8, 2005 of IAC common stock trading on a when issued basis.
| High | Low | |||||
---|---|---|---|---|---|---|---|
Year Ended December 31, 2006 | |||||||
First Quarter (through March 8, 2006) | $ | 30.60 | $ | 26.95 | |||
Year Ended December 31, 2005 | |||||||
Fourth Quarter | $ | 29.36 | $ | 24.71 | |||
Third Quarter | 30.82 | 23.49 | |||||
Second Quarter | 29.17 | 23.25 | |||||
First Quarter | 30.95 | 23.32 | |||||
Year Ended December 31, 2004 | |||||||
Fourth Quarter | $ | 32.11 | $ | 21.28 | |||
Third Quarter | 34.12 | 22.96 | |||||
Second Quarter | 38.45 | 31.59 | |||||
First Quarter | 38.80 | 30.50 |
As of March 14, 2005,8, 2006, there were approximately 5,2006,000 holders of record of the Company's Common Stockcommon stock and the closing price of IAC Common Stockcommon stock was $22.53.$30.09. Because many of the outstanding shares of IAC Common Stockcommon stock are held by brokers and other institutions on behalf of shareholders, IAC is not able to estimate the total number of beneficial shareholders represented by these record holders.
As of March 14, 2005,8, 2006, there were 10six holders of record of the Company's Class B Common Stock.common stock. IAC has paid no cash dividends on its Common Stockcommon stock or Class B Common Stockcommon stock to date and does not anticipate paying cash dividends on its Common Stockcommon stock or Class B Common Stockcommon stock in the immediate future.
During the quarter ended December 31, 2004,2005, the Company did not issue or sell any shares of its Common Stockcommon stock or other equity securities pursuant to unregistered transactions in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
The following table sets forth purchases by the Company of its Common Stockcommon stock during the quarter ended December 31, 2004:2005:
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share(1) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs(2) | |||||
---|---|---|---|---|---|---|---|---|---|
October 2004(3) | 4,690 | $ | 21.02 | — | 22,865,908 | ||||
November 2004(3) | 2,558 | $ | 23.60 | — | 102,865,908 | ||||
December 2004(3) | 36,571 | $ | 27.52 | — | 102,865,908 | ||||
Total | 43,819 | $ | 26.60 | — | 102,865,908 | ||||
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share(1) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | (d) Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs(3)(4) | |||||
---|---|---|---|---|---|---|---|---|---|
October 2005 | 8,829,273 | $ | 25.69 | 8,829,273 | 6,333,081 | ||||
November 2005 | 2,557,323 | $ | 26.76 | 2,557,323 | 3,775,758 | ||||
December 2005 | 2,949,518 | $ | 27.94 | 2,949,518 | 826,240 | ||||
Total | 14,336,114 | $ | 26.34 | 14,336,114 | 826,240 | ||||
Item 6. Selected Financial Data
The following table presents selected historical financial data of IAC for each of the years in the five-year period ended December 31, 2004.2005. This data was derived from IAC's audited consolidated financial statements and reflects the operations and financial position of IAC at the dates and for the periods indicated. The information in this table should be read with the financial statements and accompanying notes and other financial data pertaining to IAC included herein. In August 2001, the CompanyIAC completed its 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"). On May 7, 2002, IAC completed its transaction with Vivendi Universal, S.A. ("Vivendi") in which IAC's USA Entertainment Group, consisting of USA Cable, Studios USA, and USA Films, was contributed to Vivendi Universal Entertainment LLLP ("VUE"), a joint venture then controlled by Vivendi. In addition, duringDuring the second quarter of 2003, USA Electronic Commerce Solutions ("ECS"), Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations. In June 2005, IAC sold its 48.6% ownership in EUVÍA. In addition, during the second quarter of 2005, TV Travel Shop ceased operations. Further, on August 9, 2005, IAC completed the Spin-Off of its travel businesses, including Expedia.com, Hotels.com, Hotwire and TripAdvisor, into an independent public company, Expedia, Inc. The financial position, and results of operations and cash flows of these companies as well as USAB and USA Entertainment Group have been presented as discontinued operations in the following table.
| Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000(1) | 2001(2) | 2002(3)(4) | 2003(5) | 2004(6)(7)(8) | |||||||||||
| (Dollars in Thousands, Except Per Share Data) | |||||||||||||||
Statements of Operations Data: | ||||||||||||||||
Net revenues | $ | 2,918,011 | $ | 3,434,571 | $ | 4,580,925 | $ | 6,328,118 | $ | 6,192,680 | ||||||
Operating (loss) profit | (107,955 | ) | (140,318 | ) | 152,598 | 400,183 | 232,506 | |||||||||
(Loss) earnings from continuing operations before cumulative effect of accounting change | (144,767 | ) | (162,811 | ) | 1,997 | 126,657 | 185,761 | |||||||||
(Loss) earnings before cumulative effect of accounting change | (147,983 | ) | 392,795 | 2,414,492 | 167,396 | 164,861 | ||||||||||
Net (loss) earnings available to common shareholders | (147,983 | ) | 383,608 | 1,941,344 | 154,341 | 151,808 | ||||||||||
Basic (loss) earnings per common share from continuing operations available to common shareholders(9)(10) | (0.40 | ) | (0.44 | ) | (0.02 | ) | 0.19 | 0.25 | ||||||||
Diluted (loss) earnings per common share from continuing operations available to common shareholders(9)(10) | (0.40 | ) | (0.44 | ) | (0.04 | ) | 0.17 | 0.23 | ||||||||
Basic (loss) earnings per common share before cumulative effect of accounting change available to common shareholders(9)(10) | (0.41 | ) | 1.05 | 5.64 | 0.26 | 0.22 | ||||||||||
Diluted (loss) earnings per common share before cumulative effect of accounting change available to common shareholders(9)(10) | (0.41 | ) | 1.05 | 5.62 | 0.23 | 0.20 | ||||||||||
Basic (loss) earnings per common share available to common shareholders(9)(10) | (0.41 | ) | 1.03 | 4.55 | 0.26 | 0.22 | ||||||||||
Diluted (loss) earnings per common share available to common shareholders(9)(10) | (0.41 | ) | 1.03 | 4.54 | 0.23 | 0.20 | ||||||||||
Balance Sheet Data (end of period): | ||||||||||||||||
Working Capital | $ | 355,157 | $ | 1,380,936 | $ | 3,069,516 | $ | 2,336,795 | $ | 2,239,037 | ||||||
Total Assets | 5,586,822 | 6,491,809 | 15,640,859 | 21,568,455 | 22,398,865 | |||||||||||
Long-term obligations, net of current maturities | 551,766 | 544,372 | 1,211,145 | 1,120,097 | 796,715 | |||||||||||
Minority Interest | 960,068 | 791,572 | 1,182,162 | 211,687 | 291,922 | |||||||||||
Shareholders' equity | 3,439,871 | 3,945,501 | 7,931,463 | 14,415,585 | 14,605,304 | |||||||||||
Other Data: | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 141,365 | $ | 369,279 | $ | 778,481 | $ | 1,304,668 | $ | 1,273,228 | ||||||
Investing activities | (427,955 | ) | (521,859 | ) | 316,637 | (1,770,072 | ) | (753,194 | ) | |||||||
Financing activities | (9,482 | ) | 6,954 | 672,521 | (567,640 | ) | (259,646 | ) | ||||||||
Discontinued operations | 94,706 | 322,342 | (172,832 | ) | (85,632 | ) | (17,528 | ) | ||||||||
Effect of exchange rate changes | (2,687 | ) | (3,663 | ) | 11,131 | 19,624 | 15,540 |
| Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005(1)(2) | 2004(3)(4) | 2003(5) | 2002(6)(7) | 2001(8) | |||||||||||
| (Dollars in Thousands, Except Per Share Data) | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||
Net revenue | $ | 5,753,671 | $ | 4,188,279 | $ | 3,823,489 | $ | 3,029,375 | $ | 2,898,074 | ||||||
Operating income (loss) | 344,229 | (20,244 | ) | 138,261 | (36,553 | ) | (156,129 | ) | ||||||||
Earnings (loss) from continuing operations before cumulative effect of accounting change | 598,387 | 54,867 | 10,709 | (56,905 | ) | (171,712 | ) | |||||||||
Earnings before cumulative effect of accounting change | 876,150 | 164,861 | 167,396 | 2,414,492 | 392,795 | |||||||||||
Net earnings available to common shareholders | 868,212 | 151,808 | 154,341 | 1,941,344 | 383,608 | |||||||||||
Basic earnings (loss) per common share from continuing operations before cumulative effect of accounting change available to common shareholders(9)(10) | 1.79 | 0.12 | (0.01 | ) | (0.32 | ) | (0.92 | ) | ||||||||
Diluted earnings (loss) per common share from continuing operations before cumulative effect of accounting change available to common shareholders(9)(10) | 1.68 | 0.11 | (0.01 | ) | (0.32 | ) | (0.92 | ) | ||||||||
Basic earnings per common share before cumulative effect of accounting change available to common shareholders(9)(10) | 2.64 | 0.44 | 0.51 | 11.27 | 2.10 | |||||||||||
Diluted earnings per common share before cumulative effect of accounting change available to common shareholders(9)(10) | 2.46 | 0.41 | 0.51 | 11.27 | 2.10 | |||||||||||
Basic earnings per common share available to common shareholders(9)(10) | 2.64 | 0.44 | 0.51 | 9.11 | 2.05 | |||||||||||
Diluted earnings per common share available to common shareholders(9)(10) | 2.46 | 0.41 | 0.51 | 9.11 | 2.05 | |||||||||||
Balance Sheet Data (end of period): | ||||||||||||||||
Working capital | $ | 1,760,531 | $ | 2,223,329 | $ | 2,336,795 | $ | 3,069,516 | $ | 1,380,936 | ||||||
Total assets | 13,917,765 | 22,398,865 | 21,568,455 | 15,640,859 | 6,491,809 | |||||||||||
Long-term obligations, net of current maturities | 959,410 | 796,715 | 1,117,826 | 1,211,145 | 544,372 | |||||||||||
Minority interest | 5,514 | 20,639 | (4,505 | ) | 461,538 | 475,573 | ||||||||||
Shareholders' equity | 9,230,828 | 14,605,304 | 14,415,585 | 7,931,463 | 3,945,501 | |||||||||||
Other Data: | ||||||||||||||||
Net cash (used in) provided by: | ||||||||||||||||
Operating activities attributable to continuing operations | $ | (72,296 | ) | $ | 503,656 | $ | 620,915 | $ | 354,186 | $ | 266,318 | |||||
Investing activities attributable to continuing operations | 2,085,472 | (1,102,037 | ) | (1,065,332 | ) | 670,799 | (404,532 | ) | ||||||||
Financing activities attributable to continuing operations | (2,705,330 | ) | (263,654 | ) | (525,290 | ) | 612,175 | (644 | ) | |||||||
Discontinued operations | 706,684 | 1,092,726 | (179,117 | ) | (45,964 | ) | 315,574 | |||||||||
Effect of exchange rate changes | (27,148 | ) | 9,390 | 14,588 | 10,481 | (3,663 | ) |
the cumulative effect of Teleservices goodwill that resulted from the Company's annual impairment review under Statementadoption as of Financial Accounting Standards No. 142 "Goodwill and Other Intangibles".
| Year Ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | ||||||
| (In Thousands, Except Per Share Data) | |||||||
LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS | ||||||||
Reported loss from continuing operations available to common shareholders | $ | (144,767 | ) | $ | (162,811 | ) | ||
Add: goodwill amortization | 63,851 | 134,018 | ||||||
Loss from continuing operations as adjusted | $ | (80,916 | ) | $ | (28,793 | ) | ||
Basic loss per share from continuing operations available to common shareholders as adjusted: | ||||||||
Reported basic loss per share | $ | (0.40 | ) | $ | (0.44 | ) | ||
Add: goodwill amortization | 0.18 | 0.36 | ||||||
Adjusted basic loss per share | $ | (0.22 | ) | $ | (0.08 | ) | ||
Diluted loss per share from continuing operation available to common shareholders as adjusted: | ||||||||
Reported diluted loss per share | $ | (0.40 | ) | $ | (0.44 | ) | ||
Add: goodwill amortization | 0.18 | 0.36 | ||||||
Adjusted diluted loss per share | $ | (0.22 | ) | $ | (0.08 | ) | ||
NET (LOSS) EARNINGS AVAILABLE TO COMMON SHAREHOLDERS | ||||||||
Net (loss) earnings available to common shareholders | $ | (147,983 | ) | $ | 383,608 | |||
Add: goodwill amortization | 206,151 | 176,413 | ||||||
Net earnings available to common shareholders as adjusted | $ | 58,168 | $ | 560,021 | ||||
Basic (loss) earnings per share as adjusted: | ||||||||
Reported basic net (loss) earnings per share | $ | (0.41 | ) | $ | 1.03 | |||
Add: goodwill amortization | 0.57 | 0.47 | ||||||
Adjusted basic net earnings per share | $ | 0.16 | $ | 1.50 | ||||
Diluted (loss) earnings per share: | ||||||||
Reported diluted net (loss) earnings per share | $ | (0.41 | ) | $ | 1.03 | |||
Add: goodwill amortization | 0.57 | 0.47 | ||||||
Adjusted diluted net earnings per share | $ | 0.16 | $ | 1.50 | ||||
| Year Ended December 31, 2001 | |||
---|---|---|---|---|
| (In Thousands, Except Per Share Data) | |||
LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS | ||||
Loss from continuing operations available to common shareholders, as reported | $ | (171,712 | ) | |
Add: goodwill amortization | 105,822 | |||
Loss from continuing operations, as adjusted | $ | (65,890 | ) | |
Basic loss per share from continuing operations available to common shareholders, as adjusted: | ||||
Basic loss per share, as reported | $ | (0.92 | ) | |
Add: goodwill amortization | 0.57 | |||
Basic loss per share, as adjusted | $ | (0.35 | ) | |
Diluted loss per share from continuing operations available to common shareholders, as adjusted: | ||||
Diluted loss per share, as reported | $ | (0.92 | ) | |
Add: goodwill amortization | 0.57 | |||
Diluted loss per share, as adjusted | $ | (0.35 | ) | |
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS | ||||
Net earnings available to common shareholders, as reported | $ | 383,608 | ||
Add: goodwill amortization | 176,413 | |||
Net earnings available to common shareholders, as adjusted | $ | 560,021 | ||
Basic earnings per share as adjusted: | ||||
Basic net earnings per share, as reported | $ | 2.05 | ||
Add: goodwill amortization | 0.94 | |||
Basic net earnings per share, as adjusted | $ | 2.99 | ||
Diluted earnings per share: | ||||
Diluted net earnings per share, as reported | $ | 2.05 | ||
Add: goodwill amortization | 0.94 | |||
Diluted net earnings per share, as adjusted | $ | 2.99 | ||
Item 7:7. Management's Discussion and Analysis of Financial Condition and Results of Operations
IACIAC/InterActiveCorp operates leading and diversified businesses in sectors being transformed by the internet, online and offline . . . ouroffline...our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. IAC currently operates a diversified portfolio of specialized and global brands in the travel, retailing, ticketing, personals, media, financial services, real estatefollowing sectors:
IAC enables billions of dollars of consumer-direct transactions and advertising for products and services via interactive distribution channels. All references to "IAC," the internet and telephone."Company," "we," "our" or "us" in this report are to IAC/InterActiveCorp.
IAC consists of the following segments:
For further information regarding the operations of these segments, see Note 1Prior to the Consolidated Financial Statements, beginningcommencement of trading on page 90,August 9, 2005, IAC completed the separation of its travel businesses into an independent public company. We refer to this transaction as the "Spin-Off" and "Item 1—Business," beginning on page 1.
On December 21, 2004, IAC announced its plans relating to the Spin-Off. Followingnew company that holds IAC's former travel and travel-related businesses as "Expedia." Immediately prior to the Spin-Off, IAC effected a one-for-two reverse stock split. Since the completion of the Spin-Off:
In June 2005, the Company sold its 48.6% ownership in EUVÍA. In addition, during the second quarter of 2005, TV Travel Shop ceased operations.
Accordingly, the results of operations, statements of position and cash flows of Expedia, EUVÍA and TV Travel Shop have been presented as discontinued operations for all periods presented. Further, all IAC common stock share information and related per share prices have been adjusted to reflect IAC's one-for-two reverse stock split.
On July 19, 2005, IAC completed the acquisition of Ask Jeeves, Inc. ("Ask"), a leading provider of world-class information retrieval technologies, brands and services that are available to consumers across a range of platforms, including destination websites, downloadable search-based applications and portals. Under the terms of the agreement, IAC issued 1.2668 shares (or 0.6334 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of Ask common stock in a tax-free transaction valued as of the date of the agreement at approximately $1.7 billion, net of cash acquired. On May 5, 2005, IAC completed the buy back of 26.4 million shares of IAC common stock through its previously authorized share repurchase programs. These shares represent approximately sixty percent of the number of fully diluted shares IAC issued for the Ask acquisition, thus effectively offsetting a substantial portion of the dilution from the Ask transaction. Ask is reported in our Media & Advertising sector and reporting segment. Ask recently changed its corporate name to IAC Search & Media, Inc. ("IAC Search & Media"), which change will have no impact on its various brand names.
On June 7, 2005, IAC completed a transaction with NBC Universal in which IAC will retain)sold its common and TripAdvisor, which during 2004 was operatedpreferred interests in Vivendi Universal Entertainment, LLLP ("VUE"), a joint venture formed in May 2002 between the Company and managed throughVivendi Universal, S.A., for approximately $3.4 billion in aggregate consideration.
On April 1, 2005, IAC Localcompleted its acquisition of Cornerstone Brands, Inc. ("Cornerstone Brands"), a portfolio of leading print catalogs and Media Services;online retailing sites that sell home products and
Set forth below are the contributions made by our various reporting segmentssectors, our emerging businesses and corporate expenses to consolidated revenue, operating income (loss) and Operating Income Before Amortization (as defined in IAC's Principles
of Financial Reporting) for the years ended December 31, 2005 and 2004 and 2003 (dollars in millions, rounding(rounding differences may occur):
| Twelve Months Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | |||||||
| (Dollars in millions) | ||||||||||
Revenue: | |||||||||||
IACT (on a comparable net basis)(a) | $ | 2,116.5 | 34% | $ | 1,670.5 | 31% | |||||
Electronic Retailing: | |||||||||||
HSN U.S. | 1,905.9 | 31% | 1,763.7 | 33% | |||||||
HSN International | 476.3 | 8% | 466.7 | 9% | |||||||
Total Electronic Retailing | 2,382.2 | 39% | 2,230.4 | 42% | |||||||
Ticketing | 768.2 | 12% | 743.2 | 14% | |||||||
Personals | 198.0 | 3% | 185.3 | 3% | |||||||
IAC Local and Media Services | 294.7 | 5% | 230.3 | 4% | |||||||
Financial Services and Real Estate | 189.8 | 3% | 55.8 | 1% | |||||||
Teleservices | 293.9 | 5% | 294.3 | 5% | |||||||
Intersegment elimination | (50.6 | ) | (1% | ) | (21.3 | ) | 0% | ||||
Total | $ | 6,192.7 | 100% | $ | 5,388.5 | 100% | |||||
As reported: | |||||||||||
IACT(a) | $ | 2,116.5 | 34% | $ | 2,610.1 | 41% | |||||
Total | $ | 6,192.7 | 100% | $ | 6,328.1 | 100% | |||||
| Twelve Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating Income (Loss): | ||||||||||||
IACT | $ | 429.0 | 185% | $ | 347.0 | 87% | ||||||
Electronic Retailing: | ||||||||||||
HSN U.S. | 141.7 | 61% | 117.5 | 29% | ||||||||
HSN International | 37.9 | 16% | 31.3 | 8% | ||||||||
Total Electronic Retailing | 179.6 | 77% | 148.8 | 37% | ||||||||
Ticketing | 137.9 | 59% | 116.5 | 29% | ||||||||
Personals | 18.8 | 8% | 14.1 | 4% | ||||||||
IAC Local and Media Services | (23.6 | ) | (10% | ) | (29.4 | ) | (8% | ) | ||||
Financial Services and Real Estate | (7.6 | ) | (3% | ) | (16.5 | ) | (4% | ) | ||||
Teleservices | (167.7 | ) | (72% | ) | 12.5 | 3% | ||||||
Corporate and other | (334.0 | ) | (144% | ) | (192.7 | ) | (48% | ) | ||||
Total | $ | 232.5 | 100% | $ | 400.2 | 100% | ||||||
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | Percentage of total | 2004 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Revenue: | ||||||||||||
Retailing | $ | 3,050.9 | 53 | % | $ | 2,247.9 | 54 | % | ||||
Services | 1,753.9 | 30 | % | 1,258.8 | 30 | % | ||||||
Media & Advertising | 213.5 | 4 | % | 30.5 | 1 | % | ||||||
Membership & Subscriptions | 739.8 | 13 | % | 671.5 | 16 | % | ||||||
Emerging Businesses | 29.9 | 1 | % | 6.6 | 0 | % | ||||||
Intersegment elimination | (34.2 | ) | (1 | )% | (27.0 | ) | (1 | )% | ||||
Total | $ | 5,753.7 | 100 | % | $ | 4,188.3 | 100 | % | ||||
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | Percentage of total | 2004 | Percentage of total | ||||||||
| | (Dollars in millions) | ||||||||||
Operating Income (Loss): | ||||||||||||
Retailing | $ | 221.1 | 64 | % | $ | 144.7 | (715 | )% | ||||
Services | 247.2 | 72 | % | (39.6 | ) | 196 | % | |||||
Media & Advertising | 7.7 | 2 | % | (47.1 | ) | 233 | % | |||||
Membership & Subscriptions | 140.8 | 41 | % | 97.9 | (484 | )% | ||||||
Emerging Businesses | (13.3 | ) | (4 | )% | (5.0 | ) | 25 | % | ||||
Corporate and other | (259.3 | ) | (75 | )% | (171.2 | ) | 845 | % | ||||
Total | $ | 344.2 | 100 | % | $ | (20.2 | ) | 100 | % | |||
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | Percentage of total | 2004 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating Income Before Amortization: | ||||||||||||
Retailing | $ | 282.3 | 42 | % | $ | 199.0 | 47 | % | ||||
Services | 316.5 | 47 | % | 203.1 | 48 | % | ||||||
Media & Advertising | 30.5 | 5 | % | (13.3 | ) | (3 | )% | |||||
Membership & Subscriptions | 176.2 | 26 | % | 139.8 | 33 | % | ||||||
Emerging Businesses | (12.7 | ) | (2 | )% | (1.1 | ) | 0 | % | ||||
Corporate and other | (124.4 | ) | (19 | )% | (105.9 | ) | (25 | )% | ||||
Total | $ | 668.3 | 100 | % | $ | 421.6 | 100 | % | ||||
| Twelve Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating Income (Loss) Before Amortization: | ||||||||||||
IACT | $ | 627.3 | 61% | $ | 523.8 | 61% | ||||||
Electronic Retailing: | ||||||||||||
HSN U.S. | 194.7 | 19% | 168.3 | 20% | ||||||||
HSN International | 39.2 | 4% | 32.6 | 4% | ||||||||
Total Electronic Retailing | 233.9 | 23% | 200.9 | 23% | ||||||||
Ticketing | 164.3 | 16% | 144.5 | 17% | ||||||||
Personals | 27.6 | 3% | 31.0 | 4% | ||||||||
IAC Local and Media Services | 26.5 | 3% | 26.2 | 3% | ||||||||
Financial Services and Real Estate | 21.4 | 2% | 1.2 | 0% | ||||||||
Teleservices | 17.1 | 2% | 12.5 | 1% | ||||||||
Corporate and other | (93.5 | ) | (10% | ) | (80.1 | ) | (9% | ) | ||||
Total | $ | 1,024.5 | 100% | $ | 860.1 | 100% | ||||||
Operating Income Before Amortization as a percentage of revenue (on a comparable net basis) | 17% | 16% | ||||||||||
Principal Products, Services, Sources of Revenue
For the years ended December 31, 2005 and 2004, and 2003, IAC Travel was our largest financial contributor. Through its various businesses and investments, IAC Travel makes available a variety of travel-related products and services from a wide array of travel suppliers on a stand-alone and package basis, through its merchant and agency businesses. During 2004, revenues from the worldwide booking of hotel rooms, particularly merchant hotel rooms (in which IAC Travel has certain latitude to establish and change prices charged to customers but does not typically assume inventory risk) continued to be an important part of IAC Travel's business.
Following the completion of the Spin-Off, we expect that Electronic Retailing and Ticketing will beServices sectors were our largest financial contributors. In Electronic Retailing, the majority of our revenue, operating income and Operating Income Before Amortization are derived from the sale of merchandise promoted through our television programming, in catalogs, via telephone or via the Internet.internet. We take ownership of and maintain inventory of most of the products we sell through Electronic Retailing.the Retailing sector.
Our Ticketing segment was the largest financial contributor to our Services sector for the years ended December 31, 2005 and 2004. Our Ticketing business principally Ticketmaster, is primarily an agency business that sells tickets for events on behalf of our clients and retains a convenience charge and order processing fee for our services. We sell these tickets through a combination of websites, telephone services and ticket outlets.
The results of our Lending, Real Estate, Teleservices and Home Services segments are also reflected in our Services sector. Our Financial ServicesLending and Real Estate businesses generally are compensated on a fee basis by the lenders, real estate brokers and agents who participate in our services.online exchange services, with direct lending operations principally deriving revenues from the origination and sale of various residential real estate loans in the secondary markets. Upon sale of the loan, the origination fees and costs are recognized as a component of the gain or loss on sale of loan. The origination and sale of various residential real estate loans occurs under two brand names, LendingTree Loans and Home Loan Center, principally derives its revenues from fees from borrowers and the sale of loans into the secondary markets. Teleserviceswhich brand names are collectively referred to in this report as "LendingTree Loans." Our Home Services business is generally compensated on a fee basis by home service providers who participate in our services. Our Teleservices business is generally compensated on a fee basis, by large multi-national companies in a wide variety of industries, based on the level and type of services provided.
Our Media & Advertising businesses offer information and services via the internet and are compensated directly and indirectly by advertisers generally based on performance and volume related measures.
The results of our Vacations, Personals and Discounts segments are reflected in our Membership & Subscriptions sector. The revenue of our Vacations business is generated primarily from fees paid by members in connection with exchange and rental transactions and membership fees. Our Personals business offers its own interactive services on a membership/subscription basisbasis. The revenue of our Discounts business is generated from the sale of coupon books, discount offers and IAC Local and Media Services businesses offer products and services that target the local market and are compensated based on products and services delivered.
Our businesses rely heavily on technology to deliver outstanding services to our customers. We seek to make available a broad range and unique selection of products and services to our customers,merchant promotions, as well as relevant information about those productsdiscount memberships and servicespackages in published and convenience and ease of use, including first class customer service, combined with great value and a unique merchant sensibility.online formats.
Channels of Distribution; Marketing Costs
We market and offer our products and services directly to customers through branded websites, pay television and broadcast television stations,programming, catalogs, telephone sales and membership programs, allowing our customers to transact directly with us in a convenient manner. We have made, and expect to continue to make, substantial investments in online and offline advertising to build our brands and drive traffic to our brands and businesses.
We also pay to market and distribute our services on third party distribution channels, such as Internetinternet portals and search engines. In addition, some of our businesses manage affiliate programs, pursuant to which we pay commissions and fees to third parties based on revenue earned. In many cases, theseThese distribution channels also offer their own products and services, as well as those of other third parties, that compete with those made available and offered by our businesses.
The cost of acquiring new customers through online and offline third party distribution channels has increased, particularly in the case of online channels as internet commerce continues to grow and
competition in the segments in which IAC's businesses operate increases. Also, we continue to place an increasedincrease emphasis on retaining current customers. As a result, of these continued efforts, we expect sales and marketing expense as a percentage of revenue to continue to increase. While sales and marketing expense as a percentage of revenue (on a comparable net basis) increased to approximately 16% in 2005 from approximately 17% in 2003 to approximately 19%14% in 2004, Operating Income Before Amortization margin (on a comparable net basis) increased to 12% in 2005 from approximately 16% in 2003 to approximately 17%10% in 2004.
Access to Supply
Our various businesses provide supplier partners with important customer acquisition channels in some cases through multiple IAC brands, and we believe that the ability of our supplier partners to reach a large qualified audience through our services is a greatsignificant benefit. Many of our businesses, including our travel, retailing, financial servicesRetailing, Lending and real estateReal Estate businesses, offer our customers the choice of multiple suppliers in one setting. While we aim to build and maintain strong relationships with our supplier partners, we may not succeed in these efforts and there is always the risk that certain supplier partners may not make their products and services available to us in the future, including suppliers of travel services, suppliers of goodsmerchandise sold through HSN U.S. and HSN International,our Retailing business, parties for whom we sell tickets and financial service and real estatethrough our Ticketing business, providers that participate in various services offered through our Lending and Real Estate businesses, and advertisers on related LendingTree exchanges. Additionally, in certain industries in which IAC'sthe businesses operate there has been increased emphasis by supplier partners on their own direct sale of products and services through their own direct channels. We are unable to predict if this will develop in other industries in which IAC's businesses operate.within our Media & Advertising sector.
International Operations
We continue to place great emphasis on international markets as we lookseek to further expand the presence of certain of our brands and businesses abroad, particularly in Europe, and to a lesser extent in Asia, given the large consumer marketplace for the goods and services that theseour brands and businesses offer. Although newer foreign markets generally lag the U.S. in online adoption, we believe they generally exhibit similar characteristics of the U.S. in regards to customer acceptance of an online marketplace. As a percentage of total IAC revenue (on a comparable net basis)(which excludes revenue related to discontinued operations), international operations represented approximately 18%14%, 17%16% and 12%15% in 2005, 2004 and 2003, respectively. International revenue grew approximately 24% in 2005 from 2004, and 2002, respectively.the decrease in international revenue as a percentage of total IAC revenue is due to domestic revenue growing at an even faster rate during this time period.
Economic and Other Trends and Events; Industry Specific Factors
Most of IAC's businesses are sensitive to the rate at which the purchase of products and services migrate online. For the online, components of IAC's various businesses, revenuesas online transactions are generally processed with little or no incremental cost as compared to offline sales, thereby favorably impacting results. Historically, revenues have generally been more
meaningfully impacted by the rate at which the purchase of related products or services migrates online globallymigration than by the rate at which the related industry grows, although this could changegrew. However, as online adoption progresses.our businesses have become larger, we are increasingly exposed to industry trends. See "Item 1A—Risk Factors" for further discussion on trends in the various industries in which our businesses operate.
Results of Operations for the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004
IAC Consolidated Results
Revenue increased $1.6 billion, or 37%, as a result of revenue increases of $803.0 million, or 36%, from the Retailing sector, $495.2 million, or 39%, from the Services sector, $183.0 million, or 601%, from the Media & Advertising sector and $68.3 million, or 10%, from the Membership & Subscriptions sector. The revenue growth from the Retailing and Media & Advertising sectors were driven primarily by the acquisition of Cornerstone Brands on April 1, 2005 and the acquisition of IAC Search & Media on July 19, 2005, respectively. The increase in the Services sector was driven by significant growth at the Lending segment, particularly from closing loans in its own name, along with growth in the Lending
exchange, as well as strong domestic concert and sporting event ticket sales and further international expansion at our Ticketing segment. The growth in Membership & Subscriptions was led by Personals, which increased worldwide subscribers by 21%.
Gross profit increased $833.5 million, or 47%, reflecting improved results at the Retailing sector, which were primarily driven by the acquisition of Cornerstone Brands and the Services sector, which were primarily driven by the Lending and Ticketing results. The increase in gross profit also reflects the acquisition of IAC Search & Media and improved results in the Media & Advertising sector and to a lesser extent, improved results in the Membership & Subscriptions sector driven by the growth in Personals.
Selling and marketing expense increased $373.0 million, or 65%. As a percentage of revenue, selling and marketing expense increased to 16% for 2005 from 14% in 2004. The increase in selling and marketing expense primarily reflects the impact of the Cornerstone Brands acquisition in the Retailing sector, increases at Lending and the impact of the IAC Search & Media acquisition in the Media & Advertising sector. The Lending segment experienced increased selling and marketing expense in order to build its brands through on-line and direct consumer advertising mediums. In addition, online migrationPersonals experienced higher selling and marketing expenses relating primarily to the company's offline marketing campaigns in 2005.
General and administrative expense increased $172.4 million, or 35%, due primarily to the inclusion of traditional offline businesses, such as retailingthe results of Lending's loan origination operations, Cornerstone Brands and ticketing, favorably impactsIAC Search & Media in the 2005 results, as well as the acquisition of ServiceMagic in September 2004. General and administrative expense also reflects increased employee costs at several operating segments due in part to increased head count in 2005. In addition, IAC incurred approximately $15.2 million of transaction expenses in connection with the Spin-Off in 2005.
Depreciation expense increased $4.6 million, or 3%, due primarily to capital expenditures of $241.5 million during 2005 and various acquisitions, partially offset by certain fixed assets becoming fully depreciated during the year.
Operating Income Before Amortization increased $246.7 million, or 59%, due primarily to the improved operating results at each of IAC's principal sectors and the acquisitions of Cornerstone Brands and IAC Search & Media in 2005.
Operating income increased $364.5 million, reflecting the increase in Operating Income Before Amortization noted above. In addition, the comparison of operating income with the prior period is impacted by a 2004 impairment charge of $184.8 million related to Teleservices goodwill, a decrease in 2005 non-cash distribution and marketing expense of $1.3 million, an increase in 2005 non-cash compensation expense of $67.2 million, or 96%, and an increase in 2005 amortization of intangibles of $1.1 million, or 1%. The increase in non-cash compensation is due primarily to a $67.0 million charge related to the modification of vested stock options in connection with the Spin-Off and, to a lesser degree, non-cash compensation expense related to unvested stock options and restricted stock assumed in the IAC Search & Media and Cornerstone Brands acquisitions. These increases were partially offset by a reduction in non-cash compensation expense of $5.5 million due to the cumulative effect of a change in the Company's estimate related to the number of stock-based awards that are expected to vest.
Interest income decreased $29.1 million in 2005 compared with 2004 as a result of a decrease in interest income earned on the VUE preferred securities, as these interests were sold on June 7, 2005, partially offset by higher interest rates earned during 2005. Interest expense increased $9.3 million in 2005 compared to 2004 primarily as a result of the impact of higher interest rates on interest rate swap arrangements, interest expense on the warehouse lines of credit at LendingTree Loans and interest
expense on the Ask Zero Coupon Convertible Subordinated Notes due June 1, 2008 (the "Convertible Notes").
The Company realized a pre-tax gain in 2005 of $523.5 million from the sale of its common and preferred interests in VUE to NBC Universal on June 7, 2005. In addition, the Company realized equity income from its investment in VUE in 2005 of $22.0 million compared with $16.2 million in 2004. Equity income in 2005 includes IAC's share in VUE's results for the fourth quarter of 2004, which IAC had previously consistently recorded on a one-quarter lag, and IAC's share in VUE's results from January 1, 2005 through the date of sale.
Equity in income of unconsolidated affiliates and other increased by $4.0 million due primarily to a $16.7 million gain on the sale of our minority interest share in the Italian home shopping operations, and a $4.6 million increase related to the change in fair value of the derivatives that were created in the Spin-Off due to IAC's obligation to deliver shares of both IAC and Expedia common stock upon the conversion of the Convertible Notes and the exercise of certain IAC warrants. These derivatives are marked to market each quarter with the change in fair value recorded as other income (loss). Additionally, there was a $9.2 million increase in the equity income of unconsolidated affiliates of HSN International primarily due to the earnings from Jupiter Shop Channel, a shopping channel in Japan. Partially offsetting these increases were increased realized losses related to marketable securities of $19.5 million ($15.0 million of these losses were deemed to be other-than-temporary as of the end of the first quarter 2005) and a $4.8 million decrease in foreign currency exchange gains. Losses deemed to be other-than-temporary related to marketable securities that were expected to be sold by the Company to fund its cash needs related to: the repurchase of 26.4 million shares of IAC common stock associated with the acquisition of IAC Search & Media; the acquisition of Cornerstone Brands; and the redemption of substantially all of IAC's preferred stock in connection with the Spin-Off.
In 2005, the Company recorded a tax provision on continuing operations of $391.1 million which represents an effective tax rate of 39%. The 2005 tax rate is higher than the federal statutory rate of 35% due principally to state taxes and the amortization of non-deductible non-cash compensation. In 2004, the Company recorded a tax provision on continuing operations of $74.3 million which represents an effective tax rate of 56%. The 2004 rate is higher than the federal statutory rate of 35% due principally to the impairment of goodwill that is not deductible for tax purposes, state and local taxes, earnings in foreign jurisdictions taxed at rates higher than 35% and the amortization of non-deductible intangible assets, partially offset by the benefit of utilization of foreign tax credits.
In 2005, the Joint Committee of Taxation completed its review and approved the audit settlement previously agreed to with the Internal Revenue Service ("IRS") for the years ended December 31, 1997 through 2000. The resolution of this IRS examination did not have a material effect on the Company's consolidated results of operations or its consolidated financial position. The IRS is currently examining the Company's tax returns for the years ended December 31, 2001 through 2003. The examination is expected to be completed in 2007. The Company is routinely under audit by federal, state, local and foreign authorities in the area of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by the Company are recorded in the period they become known. The ultimate outcome of these tax contingencies could have a material effect on the Company's consolidated financial statements.
Minority interest in the income of consolidated subsidiaries principally represents minority ownership of certain of Ticketmaster's international operations.
In June 2005, the Company sold its 48.6% ownership interest in EUVÍA. During the second quarter of 2005, TV Travel Shop ceased the sale of third-party travel products through its broadcast programming. On August 9, 2005, IAC completed the Spin-Off of Expedia to its shareholders. In addition, during the second quarter of 2003, USA Electronic Commerce Solutions ("ECS"), Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations. Accordingly, the results of operations and statements of position of these businesses are presented as discontinued operations for all periods presented. Income from discontinued operations in 2005 was $207.6 million, principally due to the income of Expedia through August 8, 2005 and the results of EUVÍA through June 2, 2005, as well as a tax benefit of $62.8 million related to the write-off of the investment in TV Travel Shop. Additionally, the Company recognized a gain on the sale of EUVÍA of $70.2 million, net of tax. Income from discontinued operations in 2004 was $110.0 million, principally due to the income of Expedia and EUVÍA, partially offset by losses at TVTS, including a $32.7 million impairment charge, as well as an adjustment in the second quarter of 2004 to the deferred tax liability of our investment in Styleclick, Inc. to reflect minority interest, which resulted in a reduction of a tax benefit recorded in 2002 when the deferred tax liabilities of our investment in Styleclick, Inc. were originally reversed.
In addition to the discussion of consolidated results, the following is a discussion of the results of each sector.
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Revenue: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 2,671.0 | $ | 1,905.9 | 40 | % | ||||
International | 379.9 | 342.0 | 11 | % | ||||||
Total Retailing | 3,050.9 | 2,247.9 | 36 | % | ||||||
Services: | ||||||||||
Ticketing | 950.2 | 768.2 | 24 | % | ||||||
Lending | 367.8 | 159.3 | 131 | % | ||||||
Real Estate | 57.6 | 30.4 | 89 | % | ||||||
Teleservices | 337.4 | 293.9 | 15 | % | ||||||
Home Services | 41.0 | 6.9 | 494 | % | ||||||
Total Services | 1,753.9 | 1,258.8 | 39 | % | ||||||
Media & Advertising | 213.5 | 30.5 | 601 | % | ||||||
Membership & Subscriptions: | ||||||||||
Vacations | 272.8 | 256.8 | 6 | % | ||||||
Personals | 249.5 | 198.0 | 26 | % | ||||||
Discounts | 219.0 | 217.9 | 0 | % | ||||||
Intra-sector elimination | (1.5 | ) | (1.3 | ) | (11 | )% | ||||
Total Membership & Subscriptions | 739.8 | 671.5 | 10 | % | ||||||
Emerging Businesses | 29.9 | 6.6 | 353 | % | ||||||
Intersegment elimination | (34.2 | ) | (27.0 | ) | (27 | )% | ||||
Total | $ | 5,753.7 | $ | 4,188.3 | 37 | % | ||||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Operating Income (Loss): | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 216.7 | $ | 141.7 | 53 | % | ||||
International | 4.5 | 3.0 | 49 | % | ||||||
Total Retailing | 221.1 | 144.7 | 53 | % | ||||||
Services: | ||||||||||
Ticketing | 189.9 | 137.9 | 38 | % | ||||||
Lending | 55.3 | 4.4 | 1,161 | % | ||||||
Real Estate | (29.5 | ) | (12.0 | ) | (147 | )% | ||||
Teleservices | 22.6 | (167.7 | ) | NM | ||||||
Home Services | 8.9 | (2.2 | ) | NM | ||||||
Total Services | 247.2 | (39.6 | ) | NM | ||||||
Media & Advertising | 7.7 | (47.1 | ) | NM | ||||||
Membership & Subscriptions: | ||||||||||
Vacations | 85.5 | 65.0 | 32 | % | ||||||
Personals | 44.1 | 18.8 | 134 | % | ||||||
Discounts | 11.2 | 14.0 | (21 | )% | ||||||
Total Membership & Subscriptions | 140.8 | 97.9 | 44 | % | ||||||
Emerging Businesses | (13.3 | ) | (5.0 | ) | (167 | )% | ||||
Corporate and other | (259.3 | ) | (171.2 | ) | (51 | )% | ||||
Total | $ | 344.2 | $ | (20.2 | ) | NM | ||||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Operating Income Before Amortization: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 276.6 | $ | 194.7 | 42 | % | ||||
International | 5.8 | 4.3 | 34 | % | ||||||
Total Retailing | 282.3 | 199.0 | 42 | % | ||||||
Services: | ||||||||||
Ticketing | 218.7 | 164.3 | 33 | % | ||||||
Lending | 80.6 | 26.1 | 209 | % | ||||||
Real Estate | (16.7 | ) | (4.6 | ) | (260 | )% | ||||
Teleservices | 22.6 | 17.1 | 33 | % | ||||||
Home Services | 11.2 | 0.3 | 3,799 | % | ||||||
Total Services | 316.5 | 203.1 | 56 | % | ||||||
Media & Advertising | 30.5 | (13.3 | ) | NM | ||||||
Membership & Subscriptions: | ||||||||||
Vacations | 110.7 | 90.2 | 23 | % | ||||||
Personals | 47.9 | 27.6 | 74 | % | ||||||
Discounts | 17.5 | 22.0 | (20 | )% | ||||||
Total Membership & Subscriptions | 176.2 | 139.8 | 26 | % | ||||||
Emerging Businesses | (12.7 | ) | (1.1 | ) | (1,103 | )% | ||||
Corporate and other | (124.4 | ) | (105.9 | ) | (17 | )% | ||||
Total | $ | 668.3 | $ | 421.6 | 59 | % | ||||
Operating Income Before Amortization as a percentage of revenue | 12 | % | 10 | % | ||||||
Retailing
Revenue, Operating Income Before Amortization and operating income for the Retailing sector increased year-over-year primarily due to the inclusion of Cornerstone Brands, which was acquired on April 1, 2005. Retailing U.S. also includes HSN, which had modest year-over-year revenue growth.
U.S.
Revenue grew 40% to $2.7 billion, principally reflecting Cornerstone Brands as well as strong online sales transactionsgrowth at HSN.com. Revenue benefited from a 12% increase in average price point and a 25% increase in units shipped, partially offset by a 30 basis point increase in return rates. Excluding the results of Cornerstone Brands, HSN's revenue growth was 6% in 2005 compared with 2004 as a result of a 3% increase in units shipped and a 4% increase in average price point, partially offset by a 20 basis point increase in return rates. Overall, HSN's product mix shifted in 2005 with decreased sales of Jewelry and Health and Beauty and increased sales of Ready to Wear, Home-Hard Goods and Home Fashions.
Operating Income Before Amortization grew 42% to $276.6 million, due primarily to the higher revenues noted above and an increase in gross profit margins of 110 basis points, partially offset by an increase in return rates. Although Retailing U.S. benefited from higher gross margins at Cornerstone Brands, gross margins at HSN declined 60 basis points principally due to increased shipping and handling promotions. Other operating efficiencies were partially offset by the inclusion of Cornerstone Brands, as catalogs typically have relatively higher operating expenses. Higher return rates impact both revenue and gross margins, as higher returns result in higher warehouse processing costs and higher inventory mark-downs for goods that are processed withnot resalable at full retail price. The impact of the increase in overall return rates on gross profit was $3.8 million. The 2005 results were also favorably impacted by a $5.8 million adjustment to certain accrued liabilities in 2005. The 2004 results were unfavorably impacted by a $3.5 million impairment charge related to the closure of a warehouse facility in Salem, VA and favorably impacted by the reversal of a reserve of $2.5 million as a result of the final resolution of a legal dispute.
Operating income grew 53% to $216.7 million due to the increase in Operating Income Before Amortization described above, partially offset by a $6.5 million increase in amortization of intangibles primarily resulting from the acquisition of Cornerstone Brands and a $0.4 million increase in amortization of non-cash compensation expense.
Year-over-year sales growth declined in 2005 primarily due to execution, certain key personnel gaps and distractions related to the Cornerstone Brands acquisition. We are taking steps that we believe will address these issues in 2006 but we do not expect those efforts to bear fruit in the beginning part of the year.
International
Revenue grew 11% to $379.9 million due primarily to revenue growth across nearly all product lines at HSE-Germany and increased online sales. Foreign exchange had little or noimpact on the results for the full year. Weakness in the Wellness product line negatively impacted the 2004 results.
Operating Income Before Amortization and operating income increased costs,34% and 49% to $5.8 million and $4.5 million, respectively, reflecting the revenue growth in HSE-Germany noted above as well as lower depreciation expense as certain fixed assets became fully depreciated during the year. Offsetting the increase in revenue noted above is a decrease in gross profit margins by 70 basis points and an unfavorable arbitration settlement in the second quarter 2005 related to a former Spanish language service. The decrease in gross profit margins is primarily due to margin declines in certain
categories as well as a shift in product mix as compared to offlinethe prior year, partially offset by a decrease in customer fulfillment costs. Favorably impacting the 2004 results was a settlement received on an uncollectible receivable that previously had been written off.
In June 2005, the Company sold its 48.6% ownership interest in EUVÍA. Accordingly, the results of operations, statements of position and cash flows of EUVÍA are presented as discontinued operations for all periods presented.
Services
Revenue, Operating Income Before Amortization and operating income for the Services sector increased in 2005, driven primarily by significant growth at LendingTree, particularly from closing loans in its own name along with growth from the Lending exchange, as well as strong domestic growth in concert and sporting event ticket sales for which increased call center and other costs are incurred. We also expect rates of online adoption to grow internationally and we continue to devote significant resources tofurther international expansion efforts. Our financial servicesin our Ticketing segment. The segment formerly known as Financial Services and real estateReal Estate has been reported as separate segments, Lending and Real Estate, with effect from the third quarter of 2005. Financial information for prior periods has been reclassified to conform to this new segment presentation.
In addition to the operating segment results discussed below, the Services sector includes the results of the Home Services operating segment as noted on pages 42 through 43. Home Services includes ServiceMagic which was acquired in September 2004. ServiceMagic acquired ImproveNet in August 2005 and these two businesses are impactedhave integrated their operations.
Ticketing
Revenue grew 24% to $950.2 million driven by increases in both domestic and international revenue as total worldwide tickets sold increased by 21% over the demand for mortgage loansprior year. Domestic revenue increased by 21% due primarily to the strength in the U.S. concert season and solid sporting event ticket sales in 2005, along with a 4% increase in average domestic revenue per ticket. The increase in average domestic revenue per ticket resulted from higher convenience and processing fees due in part to the higher mix of live music and sporting events. International revenue increased by 33%, or 31% excluding the impact of foreign exchange, due primarily to Ticketmaster's purchase of the remaining interest in its Australian joint venture in April 2005, strong ticket sales in Canada, as well as increased revenues from acquisitions in Sweden and Finland completed in the second half of 2004. These effects on international revenue were partially offset by the absence of non-recurring license income related to the Athens 2004 Summer Olympics.
Operating Income Before Amortization and operating income increased 33% and 38% to $218.7 million and $189.9 million, respectively, growing at a faster rate than revenue due primarily to operational efficiencies resulting from increased ticket volume, increased average revenue per ticket and sales distribution efficiencies. In addition, increased cross-selling on behalf of IAC businesses favorably impacted profits in 2005. These increases were partially offset by higher domestic ticket royalties as a percentage of revenue and increased costs associated with the development and support of ticketing technology. We expect to continue to experience higher operating costs in certain areas, including the development and support of ticketing technology. Domestic ticketing royalties are also expected to continue to increase as a percentage of revenue. Operating Income Before Amortization in 2004 benefited from the favorable resolution of non-income tax contingencies of $5.0 million. Further, operating income in 2005 was negatively impacted by a $2.6 million increase in amortization of intangibles related to recent acquisitions.
Lending
Revenue grew 131% to $367.8 million driven primarily by revenue from the sale of loans and an increase in revenue from loans closed. LendingTree's strategy to close in its own name a portion of the loans sourced through the LendingTree exchange began in December 2004 with the acquisition of LendingTree Loans. The addition of this business resulted in a substantial increase in revenue per closing. Volumes and revenues from refinance mortgages were strong and refinance increased as a percentage of revenue from the prior year period. Revenue from home equity loans grew strongly over the prior year period, while revenue from home purchase loans showed a more modest increase. Revenue growth was also favorably impacted by price increases on the LendingTree exchange during 2005. The dollar value of closed loans in 2005 increased 22% to $34.7 billion. This includes refinance mortgages of $19.8 billion, purchase mortgages of $8.0 billion and home equity loans of $5.8 billion. The dollar value of closed loans in 2004 was $28.5 billion, including refinance mortgages of $14.8 billion, purchase mortgages of $6.4 billion and home equity loans of $6.1 billion.
Operating Income Before Amortization increased 209% to $80.6 million in 2005, growing at a faster rate than revenue due primarily to a decrease in marketing costs as a percentage of revenue. This increase was offset in part by higher overhead costs incurred as a result of infrastructure changes resulting from direct lending operations, higher costs of originating, funding and closing loans and an accrual related to an adverse legal judgment of $5.8 million.
Operating income increased to $55.3 million in 2005 primarily due to the increase in Operating Income Before Amortization described above and a $0.8 million decrease in amortization of non-cash compensation expense, partially offset by a $4.5 million increase in amortization of intangibles.
There are well-known indications that the overall mortgage market is currently facing a contraction. Such market conditions typically pressure margins, marketing costs and certain other elements of the lending business. While we expect to feel some near-term impact from these conditions, we believe these conditions also create opportunities for us to gain market share, as we have done previously in a contracting market.
Real Estate
Revenue grew 89% to $57.6 million primarily due to a 38% increase in closings (in dollars) driven by the acquisition of iNest in October 2004 and growth in the Company's other real estate businesses.
Operating Income Before Amortization loss increased 260% to $16.7 million reflecting increased marketing costs relating to RealEstate.com, higher customer rebates for real estate closings and increases in overhead costs incurred as a result of the growth of the overall Real Estate business. Results reflect, in part, the early stage development of products and services, higher marketing spending and startup costs in connection with the company's anticipated launch of a brokerage business.
Operating loss increased 147% to $29.5 million in 2005 primarily due to the increase in Operating Income Before Amortization loss described above, a $5.4 million increase in amortization of intangibles and a $0.1 million increase in amortization of non-cash compensation expense.
Teleservices
Revenue grew 15% to $337.4 million in 2005 driven primarily by growth in new business, as well as existing client programs, both domestically and internationally.
Operating Income Before Amortization increased by 33% to $22.6 million, growing at a faster rate than revenue due primarily to certain favorable adjustments to benefit accruals in 2005 and lower depreciation expense. Gross margins increased in the second half of the year as the company realized the benefits of volume and margin expansion in new business. In addition, during the year the company
incurred new global contact center start-up costs, the full benefit of which is expected to be realized in future periods.
Operating income increased to $22.6 million in 2005 from an operating loss of $167.7 million in 2004 primarily due to a goodwill impairment charge of $184.8 million recognized in 2004. In addition, operating income reflects the increase in Operating Income Before Amortization described above.
Revenue for the year ended December 31, 2005 and 2004 includes $29.2 million and $23.3 million, respectively, for services provided to other IAC businesses, including certain businesses currently presented in discontinued operations.
Media & Advertising
Media & Advertising consists of the results of Citysearch, Evite and IAC Search & Media (since its acquisition on July 19, 2005).
Revenue grew 601% to $213.5 million, primarily due to increased revenue from the acquisition of IAC Search & Media as well as increased traffic at Citysearch which favorably impacted its pay-for-performance revenue.
Operating Income Before Amortization improved to $30.5 million in 2005 from a loss of $13.3 million in 2004 primarily driven by the IAC Search & Media acquisition. Additionally, Citysearch continues to benefit from increased revenue along with cost cutting initiatives which have led to reduced operating costs and positive Operating Income Before Amortization for the year.
Operating income improved to $7.7 million in 2005 from a loss of $47.1 million in 2004 primarily due to the increase in Operating Income Before Amortization described above. In addition, benefiting operating income in 2005 is a $33.2 million decrease in amortization of intangibles primarily resulting from certain Citysearch intangibles becoming fully amortized in 2004, partially offset by the increase of $22.6 million in amortization of intangibles resulting from the IAC Search & Media acquisition, as well as a $0.4 million decrease in non-cash distribution and marketing expense. This was Citysearch's first ever profitable year.
Comparing IAC Search & Media's results on a standalone, full year-over-year basis, IAC Search & Media revenue increased 42% compared to the prior year period. Revenue growth was primarily driven by acquisitions made by IAC Search & Media in the second half of 2004 and increased volume through syndication partnerships, as well as an increase in search queries in North America, partially offset by declines in non-search advertising revenue. Initiatives such as the reduced number of sponsored links on Ask.com launched in August 2005 had an adverse impact on revenue growth and operating income in the second half of 2005, as anticipated, and are expected to continue to adversely impact revenues and margins in the near-term. IAC Search & Media profit margins were also adversely impacted by increased marketing expense and higher revenue share payments to third party traffic sources.
The Company expects to make significant investments in IAC Search & Media in order to enhance its competitive position. Such investments include, but are not limited to, advertising and marketing expense, product development expense, and technology and infrastructure to support Ask.com and its other web properties, as well as the development of an expanded advertising sales infrastructure. IAC Search & Media does not expect to grow profits in 2006 as it is making these investments.
Membership & Subscriptions
Membership & Subscriptions sector results were led by record revenue and profits at the Personals segment and improved performance in Vacations. Discounts had disappointing results as its fundraising business struggled during its seasonally strongest fourth quarter.
Vacations
Vacations grew revenue by 6% to $272.8 million, driven by increased membership revenue, higher average fees and increased confirmed vacations as compared to the prior year. Total active members increased 5% to 1.8 million.
Operating Income Before Amortization and operating income grew by 23% and 32% to $110.7 million and $85.5 million, respectively, due primarily to the higher revenue noted above, higher gross margins which were impacted by decreased call center costs as more vacations were confirmed online and lower depreciation expense. Vacations confirmed online were 21% during 2005 compared with 18% in 2004.
Personals
Revenue grew 26% to $249.5 million, reflecting a 21% increase in worldwide paid subscribers to 1.2 million and an increase in the average revenue per paid subscriber due to higher package prices implemented in early 2005. International subscribers grew 14% over the prior year driven by expansion in several markets, most notably in Scandinavia, Latin America and France.
Operating Income Before Amortization increased 74% to $47.9 million in 2005, growing at a faster rate than revenue due primarily to operating efficiencies as well as a decrease in depreciation expense. This increase is partially offset by higher customer acquisition costs relating primarily to the company's off-line marketing campaign which began in the first quarter 2005, increased online marketing expense as well as start-up costs in connection with Chemistry.com, a premium relationship service launched in the third quarter of 2005. Negatively impacting the 2004 results were charges related to management transition and the strengthelimination of certain non-core business lines.
The increase in operating income of 134% to $44.1 million reflects an increase in Operating Income Before Amortization described above and a $4.3 million decrease in amortization of intangibles which resulted from certain intangibles becoming fully amortized in 2004 and early 2005 and a $0.7 million decrease in non-cash distribution and marketing expense.
Discounts
Revenue remained essentially flat in 2005 due primarily to disappointing local coupon book sales through schools and community groups. This impact was slightly more than offset by online and direct sales.
Operating Income Before Amortization declined 20% to $17.5 million, primarily due to higher product and other operating costs, including advertising and promotional efforts and depreciation expense.
Operating income decreased 21% to $11.2 million in 2005, primarily due to the decrease in Operating Income Before Amortization noted above, partially offset by a $1.6 million decrease in amortization of intangibles.
Corporate and Other
Corporate operating expenses in 2005 were $259.3 million compared with $171.2 million in 2004, of which $134.8 million and $65.2 million relate to amortization of non-cash compensation in 2005 and 2004, respectively. The increase in amortization of non-cash compensation was principally due to a $67.0 million charge related to the modification of vested stock options in connection with the Spin-Off. To a lesser degree, amortization of non-cash compensation expense increased due to expense related to unvested stock options and restricted stock assumed in the IAC Search & Media and Cornerstone Brands acquisitions. These increases were partially offset by a reduction in amortization of non-cash compensation expense of $5.5 million due to the cumulative effect of a change in the Company's estimate related to the number of stock-based awards that are expected to vest. Amortization of non-cash compensation related to equity awards assumed in acquisitions is recorded over the remaining vesting period of the U.S. housing market.equity awards and therefore will decline over time as the awards vest. In addition, Corporate operating expenses include $15.2 million related to transaction expenses incurred in 2005 associated with the Spin-Off.
Results of Operations for the Year Ended December 31, 2004 compared to the Year Ended December 31, 2003
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Revenue: | ||||||||||||
Retailing | $ | 2,247.9 | 54 | % | $ | 2,112.1 | 55 | % | ||||
Services | 1,258.8 | 30 | % | 1,093.3 | 29 | % | ||||||
Media & Advertising | 30.5 | 1 | % | 28.7 | 1 | % | ||||||
Membership & Subscriptions | 671.5 | 16 | % | 608.2 | 16 | % | ||||||
Emerging Businesses | 6.6 | 0 | % | — | 0 | % | ||||||
Intersegment elimination | (27.0 | ) | (1 | )% | (18.8 | ) | 0 | % | ||||
Total | $ | 4,188.3 | 100 | % | $ | 3,823.5 | 100 | % | ||||
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating (Loss) Income: | ||||||||||||
Retailing | $ | 144.7 | (715 | )% | $ | 120.9 | 87 | % | ||||
Services | (39.6 | ) | 196 | % | 112.5 | 81 | % | |||||
Media & Advertising | (47.1 | ) | 233 | % | (69.8 | ) | (51 | )% | ||||
Membership & Subscriptions | 97.9 | (484 | )% | 95.5 | 69 | % | ||||||
Emerging Businesses | (5.0 | ) | 25 | % | (5.9 | ) | (4 | )% | ||||
Corporate and other | (171.2 | ) | 845 | % | (114.8 | ) | (83 | )% | ||||
Total | $ | (20.2 | ) | 100 | % | $ | 138.3 | 100 | % | |||
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | Percentage of total | 2003 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating Income Before Amortization: | ||||||||||||
Retailing | $ | 199.0 | 47 | % | $ | 173.0 | 47 | % | ||||
Services | 203.1 | 48 | % | 158.2 | 43 | % | ||||||
Media & Advertising | (13.3 | ) | (3 | )% | (19.9 | ) | (5 | )% | ||||
Membership & Subscriptions | 139.8 | 33 | % | 143.3 | 39 | % | ||||||
Emerging Businesses | (1.1 | ) | 0 | % | (3.8 | ) | (1 | )% | ||||
Corporate and other | (105.9 | ) | (25 | )% | (83.9 | ) | (23 | )% | ||||
Total | $ | 421.6 | 100 | % | $ | 366.9 | 100 | % | ||||
IAC Consolidated Results
Revenue decreased $135.4increased $364.8 million, or 2%, although on a comparable net basis, revenue increased $804.2 million, or 15%10%. As previously noted, IAC began to report revenues from Hotels.com on a net basis in the first quarter of 2004, and we have provided prior year results as though they had been reported on a net basis for better comparability. Growth was primarily driven by revenue increases of $446.0$165.5 million or 27%, from IACT and $142.2 million, or 8%, from HSN U.S., as well as increased revenuethe Services sector, which includes the full year results of $134.0 million from LendingTree, which was acquired in August 2003.2003, and $135.8 million from the Retailing sector.
Gross profit increased $509.6$216.9 million, or 18%14%, primarily reflecting improved operating results of IACT, driven by the merchant hotel business, the air business and packages, and Electronic Retailing sector, which was driven primarily by improved results at EUVÍA and higher margins at HSN U.S.
Selling and marketing expensesexpense increased $273.9$84.3 million, or 29%17%. As a percentage of comparable net revenue, selling and marketing expense increased to 19%14% in 2004 from 17%13% in 2003 reflecting, in part, the impact of acquisitions, as LendingTree Hotwire and TripAdvisor generally havehad higher selling and marketing expenses as a percentage of revenue than IAC overall. In addition, IACT's selling and marketing expense increased as a percentage of revenue as IACT has placed greater emphasis on its international businesses, which have a higher selling and marketing cost relative to revenue due to earlier stages of development, and the inclusion of Hotwire in the 2004 results. Selling and marketing expense for 2003 included the $4.6 million write-down of a satellite distribution contract at TV Travel Shop.
General and administrative expensesexpense increased $35.1$50.7 million, or 5%11%, due primarily to increased headcount at certain IACT companies and the inclusion of the full year of LendingTree Hotwire and Entertainment Publications in the 2004 results. These increases were partially offset by a decrease at IACT due to the reclassification of certain general and administrative expenses to cost of sales as a result of Hotels.com reporting revenues on a net basis consistent with Expedia's historical practices.
The 2004 restructuring charge, isincluded in general and administrative expense, was principally comprised of (1) asset impairments and severance costs related to the shut down of HSN's Salem, VA facility as HSN migratesmigrated certain operations to its new fulfillment center in Tennessee and (2) severance and other costs associated with the elimination of certain non-core business lines at the Personals segment. These charges were partially offset by the reversal of reserves related primarily to the favorable resolution of a contractual arrangement with a supplier, as well as the settlement of an uncollectible receivable that had been written off in 2003 related to the restructuring of HSN's U.K. offices. The 2003 restructuring charge, included in general and administrative expense, principally consistsconsisted of (1) a write-downwrite-off of a receivable from the 2002 restructuring of HSN's U.K. offices, (2) facility closure costs at uDate's Derby, U.K. facility as the back-office operations of uDate were combined with Match International, and (3) costs related to employee terminations due principally to the decline in the teleservicing market that resulted in excess capacity. Such 2003 restructuring charges were offset by the reversals of contingent costs for terminated employees, which arewere no longer probable of occurrence.
Depreciation expense increased $7.1$4.0 million, or 4%3%, due primarily to capital expenditures of $223.8$167.8 million during the year offset by certain fixed assets becoming fully depreciated throughout 2004. Comparisons to prior year were impacted by a $4.7 million write-down of packaging technology at Hotels.com recognized in 2003 as a result of Hotels.com adopting Expedia's packaging technology.
Operating Income Before Amortization increased $164.4$54.7 million, or 19%15%, due primarily to the improved operating results of IACT, the Electronic Retailing segmentsector and the Ticketing segment as well as the inclusion of the full year of LendingTree in the 2004 results.results within the Services sector.
In the fourth quarter of 2004, the Company recorded an impairment charge related to the write-down to the goodwill of the Teleservices segment of $184.8 million before tax, which was recorded as a component of operating income (loss) in the accompanying consolidated statement of operations. The write-down was determined by comparing the fair value of the business and the implied value of the goodwill with the carrying amounts on the balance sheet. The write-down primarily resulted from continued competition and macroeconomic factors which have negatively impacted industry valuations. The goodwill impairment charge recorded in 2004 resulted from the Company's annual impairment review for goodwill and intangible assets, which took place in the fourth quarter in connection with the preparation of ourits year-end financial statements.
Operating income decreased $167.7$158.5 million, or 42%115%, reflecting the goodwill impairment charge of $184.8 million noted above, as well as increased non-cash compensation of $113.5$37.9 million, or 89%117%, and increasedpartially offset by a decrease in amortization of intangibles of $79.0$1.3 million, or 29%1%, partially offset byand a decrease in non-cash distribution and marketing expense of $33.4$8.2 million, or 65%86%. This net increase in chargesexpenses offset the increase in Operating Income Before Amortization discussed above. The increase in non-cash compensation principally resulted from expense recognized on modifications made to certain equity awards as well as expense related to restricted stock units granted by IAC. In addition, non-cash compensation expense includes a full year of expense related to unvested stock options warrants and restricted stock assumed in IAC's 2003 mergers with its formerly publicly traded subsidiaries and the acquisition of LendingTree included in 2004 results.various acquisitions. This non-cash compensation relating to equity awards assumed in acquisitions is recorded over the remaining vesting period of the equity awards and therefore will decline over time as the awards vest. The increase in the amortization of intangibles was principally due to IAC's 2003 mergers with Expedia and Hotels.com, as well as the acquisition of LendingTree in August 2003. An impairment charge of $32.7 million was recorded in the fourth quarter of 2004 in connection with the write-off of certain intangible assets of TV Travel Shop, which has been included in amortization of intangibles in the accompanying consolidated statement of operations. This impairment was recorded due to management's reassessment of TV Travel Shop's expected future financial performance. The decrease in the amortization of non-cash distribution and marketing expense was principally duerelated primarily to the termination of the Hotels.comamounts recognized by Ticketmaster, Citysearch and Match.com related to barter arrangements, which expired in March 2004, for distribution agreement with Travelocity in September 2003.secured from third parties.
Interest income increased $15.9$22.7 million in 2004 compared with 2003 as a result of higher interest rates and increased interest income from the VUE preferred securities. Interest expense decreased $5.5$11.7 million in 2004 compared to 2003 due primarily to the repurchase in 2003 of $92.2 million of the Company's $500 million 63/4% Senior Notes issued in 1998, as well as the impact of interest rate swap arrangements entered into in late 2003 and 2004 which effectively changed the interest rate on a portion of the Company's debt.
The Company realized equity income from its investment in Vivendi Universal Entertainment LLLP ("VUE")VUE in 2004 of $16.2 million compared with a loss in 2003 of $224.5 million. During the first quarter of 2003, IAC received the audited financial statements of VUE for the year ended December 31, 2002, which disclosed that VUE had recorded an impairment charge for goodwill and intangible assets and other long-lived assets of $4.5 billion in the period May 7, 2002 to December 31, 2002 based upon VUE management's review of the estimated fair value of VUE as of December 31, 2002. Because of delays in VUE's financial reporting, IAC recordsrecorded its 5.44% proportionate share of the results of VUE on a one-quarter lag. The charge taken by IAC in the first quarter of 2003 was approximately $245 million, before a tax benefit of $96 million.
Equity in the income of unconsolidated subsidiariesaffiliates and other income (expense) increased by $21.9$23.3 million due primarily to (1) a $10.9 million increase in the equity income of unconsolidated subsidiaries of HSN International, including TVSN and Jupiter Shop Channel, (2)an increase in foreign currency exchange gains and losses on the repurchase of bonds of $8.6 million recorded in the 2003 period and (3) an increase in foreign currency exchange gains.period.
TheIn 2004, the Company recorded a tax provision on continuing operations of $74.3 million which represented an effective tax rate from continuing operations was 47% in 2004 as compared to 27% in 2003.of 56%. The 2004 rate iswas higher than the federal statutory rate of 35% due principally to the impairment of goodwill that iswas not deductible for tax purposes, state and local taxes, earnings in foreign jurisdictions taxed at rates higher than 35% and the amortization of non-deductible intangible assets, and the recognition of a valuation allowance on tax losses, partially offset by the benefit of utilization of foreign tax credits. In 2003, the Company recorded a tax benefit on continuing operations of $24.2 million which represented an effective tax rate of 320%. The 2003 rate was lowerhigher than the federal statutory rate of 35% due principally to the reversal of valuation allowances, tax-exempt income, utilization of foreign tax credits and a decrease in deferred tax liabilities due to a change in the effective state tax rate. The reversal of valuation allowances in 2003 was based on an assessment that it was probable that the related tax benefits would be realized. The effective state tax rate decreased as a result of IAC's mergers with its formerly publicpublicly traded subsidiaries in 2003 and the Vivendi transaction in 2002. Partially offsetting these decreases in income taxes were earnings in foreign jurisdictions that were taxed at rates higher than 35% and amortization of non-deductible intangible assets.
Minority interest in the income of consolidated subsidiaries in 2004 principally representsrepresented minority ownership in HSE-Germany and EUVÍA in 2004 and 2003, as well as the public's minority ownership in Ticketmaster, Hotels.com and Expedia until the datecertain international operations of their respective buy-ins in 2003.Ticketmaster. Minority interest in the income of consolidated subsidiaries decreased $51.3 million duein 2003 primarily to the buy-outrepresents minority ownership in certain international operations of the respective minority interests as a result of IAC's 2003 mergers with its formerly publicly traded subsidiaries.Entertainment Publications, Ticketmaster and HSE-Germany.
In the second quarter of 2003, USA Electronic Commerce Solutions ("ECS"), Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations. Accordingly, the results of operations and statement of position of these businesses are presented as discontinued operations for all periods presented. The lossIncome from discontinued operations, net of tax in 2004 and 2003 was $110.0 million and $156.7 million, respectively. Income from discontinued operations, net of tax in 2004 was $20.9 million, principally due to the income of Expedia and EUVÍA, partially offset by losses at TV Travel Shop, including a $32.7 million impairment charge, as well as an adjustment in the second quarter of 2004 to the deferred tax liability of our investment in Styleclick to reflect minority interest, which resulted in a reduction of a tax benefit recorded in 2002 when the deferred tax liabilities of our investment in Styleclick were originally reversed. Income from discontinued operations, net of tax in 2003 was $40.7 million, principally due to the income of Expedia and EUVÍA as well as a tax benefit recognized due to the shut-down of Styleclick.
IAC Travel
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues (on a comparable net basis)(a) | $ | 2,116.5 | $ | 1,670.5 | 27 | % | ||||
Revenues (as reported) | $ | 2,116.5 | $ | 2,610.1 | (19 | %) | ||||
Operating Income Before Amortization | 627.3 | 523.8 | 20 | % | ||||||
Amortization of non-cash distribution and marketing expense | (16.7 | ) | (41.9 | ) | ||||||
Amortization of non-cash compensation expense | — | (16.2 | ) | |||||||
Amortization of intangibles | (181.6 | ) | (107.0 | ) | ||||||
Merger costs | — | (11.7 | ) | |||||||
Operating income | $ | 429.0 | $ | 347.0 | 24 | % | ||||
Operating income as a percentage of revenue (on a comparable net basis) | 20.3 | % | 20.8 | % | ||||||
Operating Income Before Amortization as a percentage of revenue (on a comparable net basis) | 29.6 | % | 31.4 | % |
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Revenue: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 1,905.9 | $ | 1,763.7 | 8 | % | ||||
International | 342.0 | 348.4 | (2 | )% | ||||||
Total Retailing | 2,247.9 | 2,112.1 | 6 | % | ||||||
Services: | ||||||||||
Ticketing | 768.2 | 743.2 | 3 | % | ||||||
Lending | 159.3 | 48.6 | 228 | % | ||||||
Real Estate | 30.4 | 7.2 | 325 | % | ||||||
Teleservices | 293.9 | 294.3 | 0 | % | ||||||
Home Services | 6.9 | N/A | N/A | |||||||
Total Services | 1,258.8 | 1,093.3 | 15 | % | ||||||
Media & Advertising | 30.5 | 28.7 | 6 | % | ||||||
Membership & Subscriptions: | ||||||||||
Vacations | 256.8 | 222.8 | 15 | % | ||||||
Personals | 198.0 | 185.3 | 7 | % | ||||||
Discounts | 217.9 | 201.5 | 8 | % | ||||||
Intra-sector elimination | (1.3 | ) | (1.4 | ) | 9 | % | ||||
Total Membership & Subscriptions | 671.5 | 608.2 | 10 | % | ||||||
Emerging Businesses | 6.6 | — | N/A | |||||||
Intersegment elimination | (27.0 | ) | (18.8 | ) | (43 | )% | ||||
Total | $ | 4,188.3 | $ | 3,823.5 | 10 | % | ||||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Operating (Loss) Income: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 141.7 | $ | 117.5 | 21 | % | ||||
International | 3.0 | 3.4 | (12 | )% | ||||||
Total Retailing | 144.7 | 120.9 | 20 | % | ||||||
Services: | ||||||||||
Ticketing | 137.9 | 116.5 | 18 | % | ||||||
Lending | 4.4 | (11.6 | ) | NM | ||||||
Real Estate | (12.0 | ) | (4.8 | ) | (148 | )% | ||||
Teleservices | (167.7 | ) | 12.5 | NM | ||||||
Home Services | (2.2 | ) | N/A | N/A | ||||||
Total Services | (39.6 | ) | 112.5 | NM | ||||||
Media & Advertising | (47.1 | ) | (69.8 | ) | 33 | % | ||||
Membership & Subscriptions: | ||||||||||
Vacations | 65.0 | 41.0 | 59 | % | ||||||
Personals | 18.8 | 14.1 | 33 | % | ||||||
Discounts | 14.0 | 40.4 | (65 | )% | ||||||
Total Membership & Subscriptions | 97.9 | 95.5 | 2 | % | ||||||
Emerging Businesses | (5.0 | ) | (5.9 | ) | 16 | % | ||||
Corporate and other | (171.2 | ) | (114.8 | ) | (49 | )% | ||||
Total | $ | (20.2 | ) | $ | 138.3 | (115 | )% | |||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Growth | |||||||
| (Dollars in millions, rounding differences may occur) | |||||||||
Operating Income Before Amortization: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 194.7 | $ | 168.3 | 16 | % | ||||
International | 4.3 | 4.7 | (9 | )% | ||||||
Total Retailing | 199.0 | 173.0 | 15 | % | ||||||
Services: | ||||||||||
Ticketing | 164.3 | 144.5 | 14 | % | ||||||
Lending | 26.1 | 3.1 | 728 | % | ||||||
Real Estate | (4.6 | ) | (2.0 | ) | (138 | )% | ||||
Teleservices | 17.1 | 12.5 | 37 | % | ||||||
Home Services | 0.3 | N/A | N/A | |||||||
Total Services | 203.1 | 158.2 | 28 | % | ||||||
Media & Advertising | (13.3 | ) | (19.9 | ) | 33 | % | ||||
Membership & Subscriptions: | ||||||||||
Vacations | 90.2 | 66.2 | 36 | % | ||||||
Personals | 27.6 | 31.0 | (11 | )% | ||||||
Discounts | 22.0 | 46.1 | (52 | )% | ||||||
Total Membership & Subscriptions | 139.8 | 143.3 | (2 | )% | ||||||
Emerging Businesses | (1.1 | ) | (3.8 | ) | 72 | % | ||||
Corporate and other | (105.9 | ) | (83.9 | ) | (26 | )% | ||||
Total | $ | 421.6 | $ | 366.9 | 15 | % | ||||
Operating Income Before Amortization as a percentage of revenue | 10 | % | 10 | % | ||||||
Retailing
Revenue, Operating Income Before Amortization fromand operating income for the change in reporting.
The following discussion is based upon comparable net revenue amounts:
Revenue grew 27%, primarily driven by the merchant hotel business, the air business and packages, all of which benefited from the inclusion of Hotwire as of November 5, 2003.
Merchant hotel revenueRetailing sector increased 24% due to an increase in merchant hotel room nights stayed, as well as an increase in revenue per room night. Merchant hotel room nights stayed, including rooms booked as a component of packages, increased 21% to 31.7 million, reflecting continued growth in demand from IACT's international websites, the inclusion of Hotwire in the 2004 results and growth in IACT's private label business. Revenue per room night increased 3%, due primarily to increases in average daily room rates, partially offset by a decline in merchant hotel raw margins (defined as merchant hotel net revenue as a percent of gross bookings).
IACT's U.S. merchant hotel business continues to operate in a more challenging environment than in the prior year due primarily to increased competition from third party distributors, increased promotion by hotel chains of their own direct sites and higher overall occupancy rates, resulting in decreased availability of favorably priced travel products and services compared with the priorover year period. These trends are generally expected to continue.
Revenue from international websites increased 66%, or 54% on a local currency basis, to $397.3 million in 2004 from $239.2 million in 2003. The United Kingdom, German and Canadian websites, as well as the inclusion ofwww.anyway.com and Expedia Corporate Travel-Europe in 2004 results, contributed to the international growth. Full-service IACT-branded websites were also introduced in France and Italy in late June 2004.
Revenue from global travel packages, which allow customers to customize their travel by combining air, hotel, car and other stand-alone travel products, was up 27% from 2003, due to improved package options.
Overall revenue margins (defined as net revenue as a percent of gross bookings) decreasedresults at HSN U.S. offset partially by 60 basis points, due primarily to lower merchant hotel raw margins and lower air revenue per transaction, partially offset by higher merchant hotel average daily rates. We expect these trends to continue in the near term. While air revenue per transaction was lower, air transaction volume increased over the prior year period, driven by domestic and international ticket sales and the inclusion of Hotwire.
Operating Income Before Amortization grew 20% due primarily to increased revenues as discussed above, profitabilitydeclines at Expedia Europe and margin improvement at Interval. In addition, Operating Income Before Amortization was impacted by a 43% increase in selling and marketing expense. The increase in selling and marketing expenses was driven by search related costs and increased marketing volume, as well as higher costs of traffic acquisitions online and greater emphasis on our international businesses, which have a higher selling and marketing cost relative to revenue due to earlier stages of development and the inclusion of Hotwire for the full year in the 2004 results. International selling and marketing expense increased 92%. IACT was also favorably impacted in 2004 by a $12.1 million net reserve adjustment primarily related to the reversal of an air excise tax reserve and the resolution of a contractual dispute. Comparisons of Operating Income Before Amortization to prior year results were also favorably impacted by certain charges in 2003 including (1) a write-down of $4.7 million by Hotels.com of its packaging software as it migrated to Expedia's packaging technology and (2) a write-down of $4.6 million by TV Travel Shop related to the termination of a satellite contract.
Operating income grew 24% due to the increase in Operating Income Before Amortization described above as well as (1) a decrease in non-cash distribution and marketing expense of $25.2 million due primarily to the termination of Hotels.com's distribution agreement with Travelocity, (2) a decrease in non-cash compensation of $16.2 million at IACT due to IAC's 2003 mergers with Expedia and Hotels.com resulting in the conversion of all Expedia and Hotels.com stock options, warrants, and restricted stock into IAC equity awards and (3) a decrease in merger costs of $11.7 million associated with IAC's mergers with Expedia and Hotels.com. These items were partially offset by an increase in the amortization of intangibles of $74.6 million principally due to the intangible asset impairment charge of $32.7 million at TV Travel Shop as well as increases in intangible amortization related to IAC's 2003 merger with Expedia and Hotels.com.
IACT does not collect or remit occupancy tax on the portion of hotel customer payments that it retains for the intermediary services it provides in connection with its merchant hotel business. While discussions and developments relating to this practice are ongoing in various tax jurisdictions and the issue is the subject of several ongoing lawsuits, IAC continues to believe the issue will not have a material adverse effect on its past or future financial results.
Electronic RetailingHSE-Germany.
HSN U.S.
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 1,905.9 | $ | 1,763.7 | 8 | % | ||||
Operating Income Before Amortization | 194.7 | 168.3 | 16 | % | ||||||
Amortization of intangibles | (52.9 | ) | (50.8 | ) | ||||||
Operating income | $ | 141.7 | $ | 117.5 | 21 | % | ||||
Operating income as a percentage of revenue | 7.4 | % | 6.7 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 10.2 | % | 9.5 | % | ||||||
Segment Operating Metrics: | ||||||||||
Units Shipped (mm) | 40.5 | 41.6 | (3 | %) | ||||||
Gross Profit % | 37.3 | % | 37.1 | % | ||||||
Return Rate | 16.2 | % | 17.7 | % | ||||||
Average Price Point | $ | 51.22 | $ | 46.62 | 10 | % |
Revenue grew 8% to $1.9 billion, primarily as a result of a 10% increase in average price point and a 150 basis point decline in return rates, partially offset by a 3% decrease in units shipped. As part of this growth, HSN.com increased revenues by 21% over the prior year. Overall, the product mix shifted from 2003 resulting inwith a decrease in sales of Jewelry and increases inincreased sales of Health and Beauty and Home Fashions in 2004. This shift increased the average price point, as Home Fashions, which comprise a wide array of items such as home furnishings and accessories and cookware, generally carry higher sales prices and lower return rates, as compared to Jewelry. In addition, the average price point increased for most product categories year over year.
Operating Income Before Amortization grew 16%, to $194.7 million, due primarily to the growth in revenue, and an increase in gross profit margins by 20 basis points, due primarily to the shift in product mix to products that carry lower return rates, as well as margin improvements within the product mixes.mix. Lower return rates impact both revenue and gross margins, as lower returns result in lower warehouse processing costs and lower inventory mark-downs for goods that are not resalable at full retail price. The impact of the decline in overall return rates on gross profit was $13.5 million. Operating Income Before Amortization was also impacted by increased customer service costs, including costs relating to HSN's new distribution facility in Tennessee, which opened in October 2004, and by results of the infomercial and catalog businesses, which have lower operating margins relative to the television
business. The 2004 results were also impacted by (1) a $3.5 million impairment charge related to the closure of the warehouse facility in Salem, VA and (2) the reversal of a reserve of $2.5 million as a result of the final resolution of a legal dispute.
Operating income grew 21% to $141.7 million, due primarily to the increase in Operating Income Before Amortization described above.
As noted in previous Company filings, the majority of the USA Broadcasting stations sold to Univision were 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 incurred incremental costs to obtain carriage lost in the disengagement markets and conduct marketing activities to inform viewers of new channel positioning for the HSN service. Higher incremental costs were incurred in 2002, so disengagement costs were presented separately from HSN results when comparing 2003 results to 2002. Comparable costs were incurred in 2004 in relation to
2003, and HSN's results are presented including disengagement costs in each period presented. Disengagement expenses were $18.0 million in 2004 compared to $22.0 million in 2003, principally reflecting a decrease in marketing expenses.
HSN International
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 476.3 | $ | 466.7 | 2 | % | ||||
Operating Income Before Amortization | 39.2 | 32.6 | 20 | % | ||||||
Amortization of intangibles | (1.3 | ) | (1.3 | ) | ||||||
Operating income | $ | 37.9 | $ | 31.3 | 21 | % | ||||
Operating income as a percentage of revenue | 8.0 | % | 6.7 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 8.2 | % | 7.0 | % |
Revenue increaseddecreased 2% to $342.0 million in U.S. dollars, due primarily to favorable exchange rates and the addition of HSN's new Quiz TV venture in the U.K., which was launched in June 2004. On11% on a local currency basis, revenues decreased 8% due primarily to decreases at HSE-Germany and EUVÍA. EUVÍA year over year comparisons were negatively impacted by a non-recurring override payment recorded in the first quarter of 2003. In 2002 and early 2003, due to EUVÍA's early stage of development, its contracts with its telecom carriers carried lower pricing per call, but allowed for overrides based on achieving volume targets. The current carrier contracts call for higher pricing, with no significant override payments, so the 2004 results do not include such override payments. Excluding the impact of the override payment, EUVÍA results increased primarily due to Neun Live, an interactive game and quiz show oriented television channel, which saw a 10% increase in pricing and a 6% increase in call volume, as the company improved its terms with its current carriers and expanded call volume from Austria, Switzerland and the U.K. during the year. Neun Live continues to experience increased competition in its industry, but new program formats benefited call volumes in the second half of 2004. HSE-Germany results were negatively impacted primarily by the poor results of the Wellness product line compared to 2003.
Operating Income Before Amortization decreased 9% to $4.3 million for 2004 primarily reflects the favorable exchange rates, results of EUVÍA and the addition of the U.K. Quiz TV venture asreflecting decreased revenues at HSE-Germany noted above, offset by decreases in 2004 at HSE-Germany.above. In addition, 2004 results were favorably impacted by a settlement received by HSN International on an uncollectible receivable that had been previously written off.
Operating income growth wasdeclined 12% to $3.0 million, due to the increasedecrease in Operating Income Before Amortization described above.
TicketingServices
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 768.2 | $ | 743.2 | 3 | % | ||||
Operating Income Before Amortization | 164.3 | 144.5 | 14 | % | ||||||
Amortization of non-cash distribution and marketing expense | (0.2 | ) | (0.9 | ) | ||||||
Amortization of intangibles | (26.2 | ) | (27.0 | ) | ||||||
Merger costs | — | (0.1 | ) | |||||||
Operating income | $ | 137.9 | $ | 116.5 | 18 | % | ||||
Operating income as a percentage of revenue | 18.0 | % | 15.7 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 21.4 | % | 19.4 | % | ||||||
Segment Operating Metrics: | ||||||||||
Number of tickets sold (mm) | 98.3 | 100.0 | (2 | %) | ||||||
Gross value of tickets sold (mm) | $ | 4,987 | $ | 4,867 | 2 | % |
Revenue and Operating Income Before Amortization for the Services sector increased year over year due to the inclusion of the full year results of LendingTree, which was acquired in August 2003, improved results at the Ticketing segment and the inclusion of Home Services, which was acquired in September 2004. Operating income decreased from 2003 due primarily to a fourth quarter goodwill impairment charge of $184.8 million recorded at the Teleservices segment.
Ticketing
Revenue grew 3% to $768.2 million, reflecting a 4% increase in the average revenue per ticket, partially offset by a 2% decrease in the number of tickets sold. The increase in average revenue per ticket resulted from favorable exchange rates from foreign markets and higher convenience and processing fees. The decrease in the number of tickets sold iswas due primarily to the weakness in domestic concert ticket sales and the effects of the NHL lockout. International revenue increased 28%, 17% on a local currency basis, due primarily to the recent acquisition in Sweden in the second half of 2004, increased sales in the United Kingdom and Ireland and the Athens 2004 Summer Olympics license fee.
Operating Income Before Amortization reflectsincreased 14% to $164.3 million, reflecting the increase in revenues and increased distribution efficiencies, which were mostly offset by higher depreciation expense, cost of technology and ticket royalties. As the company continuescontinued to develop enhanced products to sell more tickets for its clients, technology expenses are expected to increase;increased; ticket royalties are also expected to continue to increaseincreased as a percentage of revenue. To dateThrough 2004, the company has offset these increases with other distribution efficiencies. Operating Income Before Amortization in 2004 and 2003 benefited from the favorable resolution of non-income tax contingencies of $5.0 million and $3.7 million, respectively.
Operating income reflectsincreased 18% to $137.9 million, reflecting the increase in Operating Income Before Amortization described above as well as decreasesa $0.8 million decrease in the amortization of intangibles and non-cash distribution and marketing expense.
In addition, the Company expects the recent cancellation of the rest of the NHL season to adversely impact results in the near term.
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 198.0 | $ | 185.3 | 7 | % | ||||
Operating Income Before Amortization | 27.6 | 31.0 | (11 | %) | ||||||
Amortization of non-cash distribution and marketing expense | (0.7 | ) | (4.0 | ) | ||||||
Amortization of intangibles | (8.1 | ) | (12.9 | ) | ||||||
Operating income | $ | 18.8 | $ | 14.1 | 33 | % | ||||
Operating income as a percentage of revenue | 9.5 | % | 7.6 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 13.9 | % | 16.7 | % | ||||||
Segment Operating Metrics: | ||||||||||
Paid Subscribers (000's) | 982.8 | 939.4 | 5 | % |
Revenue grew 7%, reflecting a 5% increase in paid subscribers, partially offset by a decrease in the average revenue per subscriber due to lower package prices implemented in 2003 that remained in place for most of 2004. International subscribers grew 37% over the prior year, excluding declines at uDate of 28%.
Operating Income Before Amortization in 2004 was negatively impacted by higher customer acquisition costs, increased spending for international operations and charges relating to management transition and the elimination of certain non-core business lines.
Operating income reflects the decrease in Operating Income Before Amortization described above, offset by a$0.7 million decrease in non-cash distribution and marketing expense and a decrease in the amortization of intangibles which resulted from certain intangibles becoming fully amortized in 2004.expense.
IAC Local and Media ServicesLending
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 294.7 | $ | 230.3 | 28 | % | ||||
Operating Income Before Amortization | 26.5 | 26.2 | 1 | % | ||||||
Amortization of non-cash distribution and marketing expense | (0.4 | ) | (2.3 | ) | ||||||
Amortization of non-cash compensation expense | (1.5 | ) | — | |||||||
Amortization of intangibles | (48.1 | ) | (53.3 | ) | ||||||
Operating loss | $ | (23.6 | ) | $ | (29.4 | ) | 20 | % | ||
Operating loss as a percentage of revenue | (8.0 | %) | (12.8 | %) | ||||||
Operating Income Before Amortization as a percentage of revenue | 9.0 | % | 11.4 | % |
Revenues increased $64.5 million, or 28%, primarily due to the acquisitions of TripAdvisor in April 2004, ServiceMagic in September 2004, and Entertainment Publications in March 2003. Citysearch's revenues remained flat due to the shift of its business model from building web sites for local businesses for an annual fee to the introductionLending consisted of a new Pay-For-Performance business model in June 2003. The Pay-For-Performance business built momentum throughout 2004 resulting in increased revenues for Citysearch in the second half of 2004 driven by both the addition of new Pay-for-Performance merchants and increased traffic.
Operating Income Before Amortization increased resulting primarily from the inclusion of TripAdvisor's results since April 2004 and narrowed losses at Citysearch due principally to headcount reductions, substantially offset by declines at Entertainment Publications due to weakness in the company's core fundraising channels. Entertainment Publications' results are significantly seasonal with the majority of its profitability experienced in the fourth quarter. In addition, Operating Income Before Amortization and operating income were negatively impacted by the sale of EPI's Australian and New Zealand operations in August 2003, which contributed $5.6 million in Operating Income Before Amortization and operating income in 2003.
Operating losses improved by $5.9 million primarily reflecting the increase in Operating Income Before Amortization described above and was further impacted by the decrease in the amortization of intangible assets.
Revenue for 2004 and 2003 includes $27.2 million and $2.5 million, respectively, for services provided to other IAC businesses, primarily related to TripAdvisor and Entertainment Publications.
Financial Services and Real Estate
| Twelve Months Ended December 31, 2004 | Period from August 8– December 31, 2003 | Percentage Change | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | |||||||||
Revenues | $ | 189.8 | $ | 55.8 | 240 | % | ||||
Operating Income Before Amortization | 21.4 | 1.2 | 1,690 | % | ||||||
Amortization of non-cash compensation expense | (3.6 | ) | (1.5 | ) | ||||||
Amortization of intangibles | (25.4 | ) | (16.2 | ) | ||||||
Operating loss | $ | (7.6 | ) | $ | (16.5 | ) | 54 | % | ||
Operating loss as a percentage of revenue | (4.0 | %) | (29.6 | %) | ||||||
Operating Income Before Amortization as a percentage of revenue | 11.3 | % | 2.2 | % |
Financial Services and Real Estate consistsportion of the results of LendingTree, Inc., whichfrom the date it was acquired in August 2003, and the brands and businesses it operates. As a point of comparison, the discussion below compares the results of this segment for 2004 to the full year period in 2003.
Revenue increased 19%10% to $159.3 million in 2004 as compared to 2003 as the company continued to grow its non-refinance mortgages business. As expected, a rising interest rate environment hasin 2004 caused a shift towards lending products other than refinance mortgages, LendingTree's primary product in 2003. The company reported a 108% increase in revenue from purchase mortgages a 41% increase in revenue from closed real estate transactions,and a 17% growthincrease in revenue from home equity loans and a 158% increase in other services revenue.loans. These revenue increases were partially offset by a 39% decrease in revenue from refinance mortgage activity. The increase in other service revenue primarily relates to the acquisition of GetSmart in December 2003 iNest in October 2004 and Home Loan Center (now called LendingTree Loans)Loans in December 2004.
While the number of loan and real estate requests transmitted increased by just 4%, driven by acquisitions and growth in purchase mortgage and real estate categories, the dollar volume of requests transmitted increased 19%, reflecting a shift in the mix towards higher value purchase mortgages and real estate transactions. The number and dollar volumevalue of closed transactionsloans decreased 13% and 14%, respectively in 2004,year over year, reflecting the expected impact caused by the drop off in refinance mortgage activity from late 2003 and throughout 2004. This impact was offset in part by the higher mix of purchase mortgage and real estate closings in 2004, which have higher per-transaction values than other products.products
TeleservicesReal Estate
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 293.9 | $ | 294.3 | 0 | % | ||||
Operating Income Before Amortization | 17.1 | 12.5 | 37 | % | ||||||
Goodwill impairment | (184.8 | ) | — | |||||||
Operating (loss) income | $ | (167.7 | ) | $ | 12.5 | NM | ||||
Operating (loss) income as a percentage of revenue | (57.1 | %) | 4.2 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 5.8 | % | 4.2 | % |
Real Estate consists of several brands, including Real Estate.com, and is part of LendingTree, which was acquired in August 2003. As a point of comparison, the discussion below compares the results of this segment for 2004 to the full year period in 2003.
Real Estate revenue increased 101% to $30.4 million in 2004 as compared to 2003 primarily due to increases in closed real estate transactions by consumers and the addition of iNest acquired October 2004.
Teleservices
Revenue remained comparable to the prior year despite the loss of two key clients that ceased to outsource outbound call volume. The company was able to partially offset these revenue losses in 2004 by increases in existing client programs and new business. PRC and the industry continuecontinued to face significant pricing pressure and increased competition.competition during 2004.
Operating Income Before Amortization increased $4.6 million, or 37%, to $17.1 million due to lower operating expenses, including lower depreciation expense and fixed costs, as management continued to focus on improving operating efficiencies. These savings were partially offset by lower contribution margins due to pricing pressures.pressures during 2004.
Operating (loss) income decreased by $180.2 million to a loss of $167.7 million due primarily to a fourth quarter goodwill impairment charge of $184.8 million before tax, which was recorded as a component of operating income (loss) in the accompanying consolidated statement of operations. The write-down was determined by comparing the fair value of the business and the implied value of the goodwill with the carrying amounts on the balance sheet. The write-down primarily resulted from continued competition and macroeconomic factors which have negatively impacted industry valuations. The goodwill impairment charge recorded in 2004 resulted from the Company's annual impairment review for goodwill and intangible assets, which took place in the fourth quarter in connection with the preparation of our year-end financial statements. The impairment charge was partially offset by the increase in Operating Income Before Amortization described above. In addition, during 2003 the company recorded a pretax charge of $2.1 million related to real estate and software write-downs which positively impacts year over year comparisons.
Revenue for 2004 and 2003 includesincluded $23.3 million and $17.8 million, respectively, for services provided to other IAC businesses.
Inbusinesses, including certain of the second quarter of 2003 the Company ceased operations of Avaltus, Inc., a subsidiary of PRC. Accordingly, the results of operations and statement of position of Avaltus arebusinesses currently presented asin discontinued operations for all periods presented.operations.
CorporateMedia & Advertising
Corporate operating expenses in 2004 were $324.4 million compared with $186.0 million in 2003, of which $236.6 million and $110.5 million relate to non-cash compensation in 2004 and 2003, respectively. Included in these amounts for 2004 and 2003 are $167.8 million and $83.7 million, respectively, recognized with respect to the unvested stock options, warrants and restricted stock units assumed in the buy-ins of Ticketmaster, Hotels.com and Expedia. This non-cash compensation is recorded over the remaining vesting period of the equity awards and the aggregate amount of this expense will decline as the awards vest. These amounts also include expense related to restricted stock units granted by IAC and which became IAC's primary form of stock based compensation beginning in 2003.
Results of Operations For the Year Ended December 31, 2003 compared to the Year Ended December 31, 2002
| Twelve Months Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Percentage of total | 2002 | Percentage of total | |||||||
| (Dollars in millions) | ||||||||||
Revenue: | |||||||||||
IACT (on a comparable net basis)(a) | $ | 1,670.5 | 31% | $ | 906.2 | 23% | |||||
Electronic Retailing: | |||||||||||
HSN U.S. | 1,763.7 | 33% | 1,613.2 | 41% | |||||||
HSN International | 466.7 | 9% | 309.0 | 8% | |||||||
Total Electronic Retailing | 2,230.4 | 42% | 1,922.2 | 49% | |||||||
Ticketing | 743.2 | 14% | 655.3 | 17% | |||||||
Personals | 185.3 | 3% | 125.8 | 3% | |||||||
IAC Local and Media Services | 230.3 | 4% | 30.8 | 1% | |||||||
Financial Services and Real Estate | 55.8 | 1% | N/A | N/A | |||||||
Teleservices | 294.3 | 5% | 294.1 | 7% | |||||||
Intersegment elimination | (21.3 | ) | 0% | (11.2 | ) | 0% | |||||
Total | $ | 5,388.5 | 100% | $ | 3,923.3 | 100% | |||||
As reported: | |||||||||||
IACT(a) | $ | 2,610.1 | 41% | $ | 1,563.9 | 34% | |||||
Total | $ | 6,328.1 | 100% | $ | 4,580.9 | 100% | |||||
| Twelve Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Percentage of total | 2002 | Percentage of total | ||||||||
| | (Dollars in millions) | | |||||||||
Operating Income (Loss): | ||||||||||||
IACT | $ | 347.0 | 87% | $ | 177.9 | 117% | ||||||
Electronic Retailing: | ||||||||||||
HSN U.S. | 117.5 | 29% | 98.7 | 65% | ||||||||
HSN International | 31.3 | 8% | (62.3 | ) | (41% | ) | ||||||
Total Electronic Retailing | 148.8 | 37% | 36.4 | 24% | ||||||||
Ticketing | 116.5 | 29% | 96.9 | 63% | ||||||||
Personals | 14.1 | 4% | 22.6 | 15% | ||||||||
IAC Local and Media Services | (29.4 | ) | (8% | ) | (86.3 | ) | (57% | ) | ||||
Financial Services and Real Estate | (16.5 | ) | (4% | ) | N/A | N/A | ||||||
Teleservices | 12.5 | 3% | (26.4 | ) | (17% | ) | ||||||
Corporate and other | (192.7 | ) | (48% | ) | (68.6 | ) | (45% | ) | ||||
Total | $ | 400.2 | 100% | $ | 152.6 | 100% | ||||||
| Twelve Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Percentage of total | 2002 | Percentage of total | ||||||||
| (Dollars in millions) | |||||||||||
Operating Income (Loss) Before Amortization: | ||||||||||||
IACT | $ | 523.8 | 61% | $ | 279.8 | 72% | ||||||
Electronic Retailing: | ||||||||||||
HSN U.S. | 168.3 | 20% | 131.4 | 34% | ||||||||
HSN International - | 32.6 | 4% | (61.6 | ) | (16% | ) | ||||||
Total Electronic Retailing | 200.9 | 23% | 69.8 | 18% | ||||||||
Ticketing | 144.5 | 17% | 108.1 | 28% | ||||||||
Personals | 31.0 | 4% | 28.4 | 7% | ||||||||
IAC Local and Media Services | 26.2 | 3% | (32.3 | ) | (8% | ) | ||||||
Financial Services and Real Estate | 1.2 | 0% | N/A | N/A | ||||||||
Teleservices | 12.5 | 1% | (4.1 | ) | (1% | ) | ||||||
Corporate and other | (80.1 | ) | (9% | ) | (60.5 | ) | (16% | ) | ||||
Total | $ | 860.1 | 100% | $ | 389.1 | 100% | ||||||
Operating Income Before Amortization as a percentage of revenue (on a comparable net basis) | 16% | 10% | ||||||||||
IAC Consolidated Results
RevenueRevenues increased $1.7 billion, or 38%, although on a comparable net basis revenue increased $1.5 billion, or 37%. Growth was primarily driven by increased revenue of $764.3$1.8 million, or 84%6%, from IACT on a comparable net basis and $308.2to $30.5 million, or 16%, from the Electronic Retailing segment, as well as the contributions of $201.5 million and $55.8 million from Entertainment Publications and LendingTree, respectively, which were acquired in March 2003 and August 2003. The revenue growth from IACT included the increase in revenue of $184.0 million from Interval which was acquired in September 2002 and $12.5 million from the acquisition of Hotwire in 2003.
Gross profit increased $1.1 billion, or 58%, primarily reflecting improved operating results of IACT, the Ticketing segment and the Electronic Retailing segment as well as the inclusion of Entertainment Publications in 2003 results.
Selling and marketing expenses increased $369.7 million, or 66%. As a percentage of comparable net revenue, selling and marketing expense increased to 17% for 2003 from 14% in 2002 which reflects in part the impact of acquisitions, as LendingTree and Hotwire generally have higher selling and marketing expenses as a percentage of revenue than IAC overall.
General and administrative expenses increased $216.4 million, or 44%, due primarily to the inclusion of Entertainment Publications and LendingTree in the 2003 results and increased headcount at IACT.
Restructuring costs decreased $54.1 million in 2003. The 2003 restructure charge principally consisted of (1) a write-down of a receivable from the 2002 restructuring of HSN's U.K. offices, (2) facility closure costs at uDate's Derby, U.K. facility as the back-office operations of uDate were combined with Match International, and (3) costs related to employee terminations due principally to the decline in the teleservicing market that resulted in excess capacity. Such restructuring charges were offset by the reversals of costs for terminated employees, which are no longer probable of occurrence. The 2002 amounts are principally comprised of (1) $31.4 million related to the write-down of the Company's investment in HSE-Italy, (2) $14.8 million for HSN International related to the shut-down
of HSN-Espanol, the Company's Spanish language electronic retailing operation, due to high costs of carriage and disappointing sales per home due to the fragmented market, and (3) $7.9 million for PRC related principally to the shut down of three call centers and employee terminations due principally to the decline of the teleservices market that resulted in excess industry capacity and lower pricing.
Operating Income Before Amortization increased $471.0 million, or 121%, primarily reflecting expanding gross margins and improved operating results at IACT, the Electronic Retailing segment and the Ticketing segment, as well as the inclusion of Entertainment Publications in 2003 results. Operating Income Before Amortization was also favorably impacted by a $22.4 million adjustment in 2003 related to estimated supplier liabilities.
Operating income increased $247.6 million, or 162%, reflecting the increase in Operating Income Before Amortization described above as well as a decrease in Teleservices goodwill impairment of $22.2 million. These results were partially offset by increased amortization of intangibles of $122.8 million, or 84%, increased non-cash compensation of $112.5 million, or 720%, and increased amortization of non-cash distribution and marketing expense of $14.1 million or 38%. The increase in non-cash compensation principally resulted from expense related to unvested stock options assumed in IAC's 2003 mergers with Expedia and Hotels.com and the acquisition of LendingTree in August 2003. The increase in the amortization of intangibles was principally due to IAC's 2003 mergers with Expedia and Hotels.com, as well as the acquisition of LendingTree.
Interest income increased $61.2 million in 2003 compared with 2002. The increase in interest income was due primarily to amounts earned on the proceeds from the Vivendi transaction in May 2002, including (1) $37.3 million of paid in kind interest on the Series A Preferred in 2003 compared with $23.0 million in 2002 and (2) $63.9 million of cash interest on the Series B Preferred in 2003 compared with $41.1 million in 2002. In addition, average cash and marketable securities on hand during 2003 and 2002 were $3.6 billion and $2.5 billion, respectively, resulting in higher interest income in 2003.
Interest expense increased $48.4 million in 2003 compared to 2002. The increase in interest expense was due primarily to an increase of $50.3 million related to the Company's $750 million 7% Senior Notes issued in December 2002, partially offset by a $6.2 million decrease in interest on the Company's $500 million 63/4% Senior Notes issued in 1998 due to the repurchases made in late 2002 and 2003, including $92.2 million in aggregate principle amount that were repurchased during 2003.
The Company realized pre-tax losses in 2003 of $224.5 million on equity losses from its investment in VUE, compared with equity income of $6.1 million in 2002. During the first quarter of 2003, the Company recorded a charge of $245 million pretax in connection with VUE's $4.5 billion impairment charge of which IAC recorded its 5.44% proportionate interest.
Equity in the income (losses) of unconsolidated subsidiaries and other income (expense) increased by $119.4 million due primarily to (1) an $88.3 million charge in 2002 related to the closure of HOT Network's Belgium and UK operations, (2) a write-down in 2002 of HSN's investment in China based on operating performance and (3) losses on the repurchase of bonds of $8.6 million and $2.0 million recorded in 2003 and 2002, respectively.
The effective tax rate for continuing operations was 27% in 2003 compared to 58% in 2002. The 2003 tax rate was lower than the federal tax rate of 35% due principally to reversals of valuation allowances of $34.2 million and a decrease in deferred tax liabilities of $13.3 million due to a change in the effective state tax rate. The reversals of valuation allowances were based on an assessment that it was probable that the related tax benefits would be realized. The effective state tax rate decreased as a result of IAC's mergers with its formerly public subsidiaries in 2003 and the Vivendi transaction in 2002. Partially offsetting these decreases in income taxes are earnings in foreign jurisdictions that are taxed at rates higher than 35% and amortization of intangibles for book purposes for which the Company receives no tax deduction. In 2002, the Company recorded, in continuing operations, a tax benefit of $42 million related to a deduction related to its investment in HOT Networks.
Minority interest increased $19.0 million and in 2003 represented the public's minority ownership in Ticketmaster, Hotels.com and Expedia until the date of their respective buy-ins in 2003, HSE-Germany and EUVÍA, including redeemable preferred equity interests issued by EUVÍA that are originally due in 2006, but EUVÍA has the right to extend maturity to 2016 based on meeting certain financial covenants. The EUVÍA preferred equity interest is only due to the holder under German law to the extent sufficient funds in excess of fixed capital at EUVÍA are available. In 2002 minority interest primarily represented Universal's and Liberty's ownership interest in USANi LLC through May 7, 2002, Liberty's ownership interest in Home Shopping Network, Inc. through June 27, 2002, the public's minority interests in Ticketmaster, Hotels.com and Expedia, HSE-Germany, and EUVÍA since its consolidation in July 2002.
In the second quarter 2003 ECS, Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations. In addition, through May 7, 2002, the Company's results also included the USA Entertainment Group, consisting of USA Cable, including USA Network and Sci Fi Channel, and Emerging Networks TRIO, Newsworld International and Crime; Studios USA, which produced and distributed television programming; and USA Films, which produced and distributed films. The USA Entertainment Group was contributed to a joint venture with Vivendi on May 7, 2002. As a result, the results of operations and assets and liabilities of USA Entertainment are presented as a discontinued operation through May 7, 2002. The net gain on contribution of the USA Entertainment Group to VUE for the year ended December 31, 2002 was $2.4 billion, which occurred in the second quarter of 2002. Income from discontinued operations in 2003 and 2002 was $40.7 million and $34.2 million, respectively, net of tax. The 2003 results are principally due to a tax benefit recognized due to the shut-down of Styleclick.
IAC Travel
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | | ||||||||
Revenues (on a comparable net basis)(a) | $ | 1,670.5 | $ | 906.2 | 84 | % | ||||
Revenues (as reported) | 2,610.1 | 1,563.9 | 67 | % | ||||||
Operating Income Before Amortization | 523.8 | 279.8 | 87 | % | ||||||
Amortization of non-cash distribution and marketing expense | (41.9 | ) | (32.7 | ) | ||||||
Amortization of non-cash compensation expense | (16.2 | ) | (5.7 | ) | ||||||
Amortization of intangibles | (107.0 | ) | (53.5 | ) | ||||||
Merger costs | (11.7 | ) | (2.3 | ) | ||||||
Pro forma adjustments | — | (7.7 | ) | |||||||
Operating income | $ | 347.0 | $ | 177.9 | 95 | % | ||||
Operating income as a percentage of revenue (on a comparable net basis) | 20.8 | % | 19.6 | % | ||||||
Operating Income Before Amortization as a percentage of revenue (on a comparable net basis) | 31.4 | % | 30.9 | % |
The following discussion is based upon comparable net revenue amounts:
Revenue growth in 2003 was primarily driven by strong results from merchant hotel revenue, with additional growth coming from package revenue and membership fee and exchange revenue from Interval.
Merchant hotel room nights stayed increased 64% over 2002, including an increase in international markets, which represented 12% of total merchant hotel revenues in 2003 as compared to 5% in 2002. The increase in merchant hotel revenue was partially offset by the termination of the Travelocity affiliate relationship in September 2003. Travelocity was the largest affiliate of Hotels.com, representing 8% of IACT revenues on a comparable net basis (5% as reported) in 2003 as compared to 18%, on a comparable net basis, and 11% as reported, in 2002. Even though Travelocity represented a significant, albeit declining, percentage of revenue, we expect that the long-term benefits of this event will outweigh the near-term negative impact, including the ability to integrate the operations of Expedia and Hotels.com.
Revenue from travel packages, which allow customers to customize their travel by combining air, hotel, car and other stand-alone travel products, was $333.0 million in 2003, up 109% from 2002, due to improved package offerings and consumer acceptance of this product. Interval, which was acquired in September 2002, had increased 2003 revenue of $184.0 million as compared to the period post-acquisition in 2002. In addition, Hotwire, which was acquired in November 2003, contributed $12.5 million in revenue, although its operating income and Operating Income Before Amortization results were minimal for the period consolidated.
Revenue, Operating Income Before Amortization and operating income were positively impacted in 2003 based on an analysis performed in the fourth quarter related to estimated supplier liabilities, resulting in an adjustment of $22.4 million, $9.8 million of which related to periods prior to 2003. Excluding this amount, IACT's revenue, Operating Income Before Amortization and operating income would have grown 82%, 79% and 82%, respectively in 2003. The analysis performed provided
additional evidence that IACT used to update and refine its estimation of supplier liabilities, resulting in the decrease of $22.4 million. IACT does not expect to record any similar-sized adjustments in future periods.
Operating Income Before Amortization and operating income increased as a result of the growth inat Evite. Citysearch's revenues although they increased at higher rates than revenue due to expanding gross margins as well as the scalability of the businesses that allow them to support higher revenue levels without commensurate increases in operating costs. Net revenue as a percentage of total gross transaction value, assuming Hotels.com reported revenues net, was 16.6% in 2003 compared to 14.8% in 2002. IACT incurred selling and marketing expenses of $472.5 million in 2003, up 92% from the prior year, in order to build brands and drive traffic to our sites. The increase in selling and marketing expenses as a percent of revenue was driven by higher costs of traffic acquisitions online, higher CPMs offline, and shift in business mix as our international businesses, which have a higher selling and marketing cost relative to revenue due to their early stages of development, grew faster than our domestic businesses. This increase was more than offset by the operating efficiencies described above. Comparisons of Operating Income Before Amortization and operating income to prior year results were also negatively impacted by the integration efforts undertaken in 2003, resulting in a Hotels.com write-off of duplicative packaging software of $4.7 million, as it adopted Expedia's technology. Interval's 2003 Operating Income Before Amortization and operating income increased $64.6 million and $46.2 million, respectively, as compared to the period post-acquisition in 2002.
Operating income was further impacted by increased amortization of intangibles of $53.5 million due principally to IAC's acquisition of the public's minority interest in Hotels.com and Expedia in 2003, as well as increased non-cash compensation, merger costs and non-cash distribution and marketing expense.
Electronic Retailing
HSN U.S.
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 1,763.7 | $ | 1,613.2 | 9 | % | ||||
Operating Income Before Amortization | 168.3 | 131.4 | 28 | % | ||||||
Amortization of non-cash compensation expense | — | (0.3 | ) | |||||||
Amortization of intangibles | (50.8 | ) | (32.3 | ) | ||||||
Operating income | $ | 117.5 | $ | 98.7 | 19 | % | ||||
Operating income as a percentage of revenue | 6.7 | % | 6.1 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 9.5 | % | 8.1 | % | ||||||
Segment Operating Metrics: | ||||||||||
Units Shipped (mm) | 41.6 | 39.7 | 5 | % | ||||||
Gross Profit % | 37.1 | % | 37.2 | % | ||||||
Return Rate | 17.7 | % | 18.6 | % | ||||||
Average Price Point | $ | 46.62 | $ | 44.71 | 4 | % |
Revenue growth in 2003 reflected a 5% increase in units shipped, a 4% increase in average price point, and a decline in the return rate of 90 basis points. Overall, the product mix shifted slightly from Apparel/ Accessories and Jewelry to Health & Beauty and Home-Hard Goods. The shift in product mix increased the average price point, as Home-Hard Goods, which are comprised of items such as computers and electronics, generally carry higher sales prices and reduced return rates, as compared to Apparel/Accessories and Jewelry. The impact of the decrease in return rates on gross profit was $6.8 million. Off air sales, which include Autoship programs for health products and Upsell programs, had increased revenue of $30.3 million, or 20%, over 2002.
Gross profit remained relatively consistent between years, at 37.1% for 2003 compared with 37.2% in 2002. Changes in product mix that occurred during 2003, shifting into products that carry slightly lower margins, were partially offset by lower markdowns and improvements in fulfillment costs. Operating Income Before Amortization and operating income reflect the growth in revenue, as well as operating efficiencies, as fixed costs as a percentage of revenue declined from 11.6% in 2002 to 11.3% in 2003. In addition, depreciation expense declined $8.7 million compared to 2002.
Operating income grew 19% and reflected the increase in Operating Income Before Amortization noted above as well as increased amortization of intangibles resulting from the full year impact of the step-up in basis as a result of the Vivendi transaction that occurred in May 2002. Amortization of intangibles includes $2.7 million related to non-cash cable carriage acquired as a result of the VUE transaction.
As noted in previous Company filings, the majority of the USA Broadcasting stations sold to Univision were 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 incurred incremental costs to obtain carriage lost in the disengagement markets and conduct marketing activities to inform viewers of new channel positioning for the HSN service. HSN's results are presented including disengagement costs in each period presented. Disengagement expenses were $22.0 million in 2003 compared to $31.8 million in 2002, principally reflecting a decrease in marketing expenses.
HSN International
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | | ||||||||
Revenues | $ | 466.7 | $ | 309.0 | 51 | % | ||||
Operating Income Before Amortization | 32.6 | (61.6 | ) | NM | ||||||
Amortization of intangibles | (1.3 | ) | (0.7 | ) | ||||||
Operating income (loss) | $ | 31.3 | $ | (62.3 | ) | NM | ||||
Operating income (loss) as a percentage of revenue | 6.7 | % | (20.2 | %) | ||||||
Operating Income Before Amortization as a percentage of revenue | 7.0 | % | (19.9 | %) |
Revenue growth in 2003 was driven by the full year impact of EUVÍA, which IAC began to consolidate in July 2002, which resulted in increased revenues of $91.9 million, to $118.3 million in 2003, and HSE-Germany, which increased revenues by $75.6 million, or 28%. On a pro forma basis, assuming EUVÍA were consolidated for all of 2002, EUVÍA's revenue increased 39% on a year over year Euro-equivalent basis due primarily to NeunLive, its game and quiz show television format. This increase was due to a 12% increase in rates and a 29% increase in call volume, despite a continued increase in competition which caused call volume to decline slightly over the course of 2003 as compared to the fourth quarter of 2002. EUVÍA's travel business, Sonneklar, continued to develop, and contributed 18% to its overall revenue in 2003 compared to 13% in 2002, on a full year basis. HSE-Germany's growth was primarily due to the favorable impact of foreign exchange rates, which contributed $57.2 million in 2003, or 76% of the growth. HSE-Germany's revenue increased 7% on a year over year Euro-equivalent basis due to improved efficiencies with respect to the ordering process, which has resulted in a decrease in the cancellation rates on orders.
Operating Income Before Amortization and operating income were negatively impacted in 2002 by $31.4 million of restructuring and other charges recognized related to the closure of its operations in Italy, and a $17.8 million charge for the shut-down of HSN-Espanol, which operated a Spanish language electronic retailing operation serving customers primarily in the United States and Mexico.
Ticketing
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 743.2 | $ | 655.3 | 13 | % | ||||
Operating Income Before Amortization | 144.5 | 108.1 | 34 | % | ||||||
Amortization of non-cash distribution and marketing expense | (0.9 | ) | (1.0 | ) | ||||||
Amortization of noncash compensation expense | — | (0.5 | ) | |||||||
Amortization of intangibles | (27.0 | ) | (9.7 | ) | ||||||
Merger costs | (0.1 | ) | — | |||||||
Operating income | $ | 116.5 | $ | 96.9 | 20 | % | ||||
Operating income as a percentage of revenue | 15.7 | % | 14.8 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 19.4 | % | 16.5 | % | ||||||
Segment Operating Metrics: | ||||||||||
Number of tickets sold (mm) | 100.0 | 95.1 | 5 | % | ||||||
Gross value of tickets sold (mm) | $ | 4,867 | $ | 4,288 | 14 | % |
Revenue growth in 2003 was driven by a 9% increase in average revenue per ticket and a 5% increase in the number of tickets sold. Revenues increased $87.9 million, including $52.2 million domestically and $35.7 million internationally, including $11.7 million related to the full year impact of acquisitions made in 2002 in Denmark and the Netherlands. Revenue per ticket increased due to higher convenience and processing fees in both domestic and foreign markets as well as favorable exchange rates from foreign markets. International revenue increased $19.5 million, or 18%, on a year over year local currency basis. Revenues were favorably impacted by the mix of entertainment events, including an above-average number of stadium shows in 2003.
Operating Income Before Amortization and operating income reflect the positive revenue variance, operating efficiencies and the favorable resolution of tax contingencies of $3.7 million. Fixed costs as a percentage of revenue declined from 28.3% in 2002 to 26.8% in 2003 due to the scalability of the business.
Operating income grew 20% and reflected the increase in Operating Income before Amortization noted above as well as the increase in amortization of intangibles of $17.3 million due to IAC's acquisition of the public's minority interest in Ticketmaster during 2003.
Personals
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 185.3 | $ | 125.8 | 47 | % | ||||
Operating Income Before Amortization | 31.0 | 28.4 | 9 | % | ||||||
Amortization of non-cash distribution and marketing expense | (4.0 | ) | (5.8 | ) | ||||||
Amortization of intangibles | (12.9 | ) | — | |||||||
Operating income | $ | 14.1 | $ | 22.6 | (38 | %) | ||||
Operating income as a percentage of revenue | 7.6 | % | 18.0 | % | ||||||
Operating Income Before Amortization as a percentage of revenue | 16.7 | % | 22.6 | % | ||||||
Segment Operating Metrics: | ||||||||||
Paid Subscribers (000's) | 939.4 | 724.8 | 30 | % |
Personals ended 2003 with approximately 939,000 paid subscribers, up 30% from the end of 2002, with uDate, which was acquired in April 2003, contributing 12% of the subscriber growth. Revenue increased in domestic markets due to increases in subscriber count of 13% and higher overall pricing, although pricing declined during 2003 due to the introduction of lower monthly pricing for long-term subscriptions. Revenue from international operations increased $33.1 million, including the contribution of uDate of $18.5 million, with international operations accounting for 20% of total segment revenues in 2003 versus 3% in 2002. Overall, international operations were unprofitable in 2003 with an Operating Income Before Amortization loss of $10.1 million compared to a loss of $4.0 million in 2002, due primarily to increased investments in building out the international operations and the results of uDate.
Operating Income Before Amortization margins decreased in 2003 relative to 2002 primarily due to losses of international operations, including uDate described above.
Operating income in 2003 reflected an increase of $12.9 million of amortization of intangibles related primarily to the Ticketmaster buy-in, which included Match.com, completed by IAC in January 2003 and the acquisition of uDate.
IAC Local and Media Services
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | | ||||||||
Revenues | $ | 230.3 | $ | 30.8 | 648 | % | ||||
Operating Income (Loss) Before Amortization | 26.2 | (32.3 | ) | NM | ||||||
Amortization of non-cash distribution and marketing expense | (2.3 | ) | (2.0 | ) | ||||||
Amortization of intangibles | (53.3 | ) | (46.4 | ) | ||||||
Merger costs | — | (5.6 | ) | |||||||
Operating loss | $ | (29.4 | ) | $ | (86.3 | ) | 66 | % | ||
Operating loss as a percentage of revenue | (12.8 | %) | (280.2 | %) | ||||||
Operating Income (Loss) Before Amortization as a percentage of revenue | 11.4 | % | (104.9 | %) |
IAC Local and Media Services consisted primarily of Citysearch, including Evite, and Entertainment Publications. Net revenues for the year ended December 31, 2003 increased due to the acquisition of Entertainment Publications in March 2003, which contributed $201.5 million of revenue, $46.1 million of Operating Income Before Amortization and $40.4 million of operating income in 2003. Revenue for Citysearch declined as compared to 2002flat due to the shift of theits business model from building web siteswebsites for local businesses for an annual fee to the introduction of a new Pay-For PerformancePay-For-Performance business model in 2003, which is expected to grow over time. Due to cost cutting initiatives introducedJune 2003. The Pay-For-Performance business built momentum throughout 2004 resulting in 2002increased revenues for Citysearch in the second half of 2004 driven by both the addition of new Pay-for-Performance merchants and continued in 2003, Citysearch was able to decrease itsincreased traffic.
Operating Income Before Amortization and operatingimproved 33% to a loss of $13.3 million, resulting primarily from narrowed losses as comparedat Citysearch due principally to the prior year.headcount reductions.
Operating losses in 2003 improved 33% to $47.1 million, primarily reflecting the increase in Operating Income beforeBefore Amortization described above. These results wereabove and was further impacted by decreasesa $14.2 million decrease in merger costs offset by increases in amortization of intangibles related primarily to the Ticketmaster buy-in, which included Citysearch, completed by IAC in January 2003.
Financial Services and Real Estate
| Period from August 8- December 31, 2003 | ||||
---|---|---|---|---|---|
| (Dollars in millions) | ||||
Revenues | $ | 55.8 | |||
Operating Income Before Amortization | 1.2 | ||||
Amortization of non-cash compensation expense | (1.5 | ) | |||
Amortization of intangibles | (16.2 | ) | |||
Operating loss | $ | (16.5 | ) | ||
Operating loss as a percentage of revenue | (29.6 | %) | |||
Operating Income Before Amortization as a percentage of revenue | 2.2 | % |
Financial Services and Real Estate consisted of the results of LendingTree from the date of acquisition on August 8, 2003. The fourth quarter of 2003 was the first full quarter that LendingTree, along with the rest of the industry, began to encounter the expected lower demand for refinancings of mortgages. This trend resulted in fewer mortgage requests and closings, and as a result revenue and operating income showed declines in the fourth quarter of 2003 compared with the fourth quarter of 2002 of $3.3 million and $17.7 million respectively. Some of the decline was also due to an increasingly competitive environment, higher marketing spend at the end of 2003 in anticipation of the seasonally stronger first quarter of 2004 and the amortization of intangiblesintangible assets.
Membership & Subscriptions
Revenues for the Membership & Subscriptions sector increased year over year due to membership and non-cash compensation in relation tosubscriber growth at the IAC acquisitionVacations and Personals segments, respectively, as well as the inclusion of $9.9 million.
Forthe full year 2003 compared to 2002, LendingTree's revenue increased $48.8 million, or 44%, to $160.2 million, reflecting growth from both realty and lending services, particularly refinance mortgages.
Teleservices
| Twelve Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | Percentage Change | |||||||
| (Dollars in millions) | |||||||||
Revenues | $ | 294.3 | $ | 294.1 | 0 | % | ||||
Operating Income (Loss) Before Amortization | 12.5 | (4.1 | ) | NM | ||||||
Goodwill Impairment | — | (22.2 | ) | |||||||
Operating income (loss) | $ | 12.5 | $ | (26.4 | ) | NM | ||||
Operating income (loss) as a percentage of revenue | 4.2 | % | (9.0 | %) | ||||||
Operating Income (Loss) Before Amortization as a percentage of revenue | 4.2 | % | (1.4 | %) |
Teleservices revenue remained flat in 2003 due in part to tough economic conditions affectingresults of the industry. While revenue remained flat,Discounts segment. Operating Income Before Amortization and operating income both increased over 2002. PRC continueddecreased from 2003 due primarily to face significant pricing pressure and competition for reduced call volumes but PRC continued to grow organic market share to help offset these pressures.
Operating Income Before Amortization for 2002 included a goodwill impairment charge of $22.2 million recognizedweakness in the second quarter and a $7.9 million restructuring charge recognized for the closure of certain call centers. The goodwill impairment charge of $22.2 million noted above related to contingent purchase consideration recordedDiscounts core fundraising channels, partially offset by improved results in the second quarterVacations segment. Operating income increased year over year from improved results in Vacations and Personals, offset by a decline in Discounts.
Vacations
Revenue grew 15% to $256.8 million, reflecting growth in membership and transaction revenues. The increase in membership revenues was due primarily to renewal memberships, and the increase in transaction revenue was due primarily to an increase in volume, as well as higher average fees. The number of 2002 in connection with the purchase of Access Direct.active members at December 31, 2004 increased 6% to 1.7 million.
Excluding these charges in 2002, Operating Income Before Amortization and operating income increased by $8.736% and 59%, respectively, to $90.2 million and $65.0 million, respectively, due to decreasesan increase in call center capacity, fixed costsgross profit margins, partially offset by increased general and depreciation expense in 2003. These costs decreased as management continued to focus on improving operating efficienciesadministrative expenses associated with increased headcount.
and key strategic initiatives throughoutPersonals
Revenue grew 7% to $198.0 million, reflecting a 5% increase in paid subscribers to 982.8 thousand, partially offset by a decrease in the organization. PRC anticipates it will continueaverage revenue per subscriber due to realizelower package prices implemented in 2003 that remained in place for most of 2004. International subscribers grew 37% over the benefitsprior year, excluding declines at uDate of turnaround measures28%.
Operating Income Before Amortization decreased 11% to $27.6 million in 2004 although PRC expectsand was negatively impacted by higher customer acquisition costs, increased spending for international operations and charges relating to management transition and the firstelimination of certain non-core business lines.
Operating income increased 33% to $18.8 million, reflecting the decrease in Operating Income Before Amortization described above, offset by a $3.3 million decrease in non-cash distribution and second quartersmarketing expense and a $4.8 million decrease in the amortization of intangibles which resulted from certain intangibles becoming fully amortized in 2004.
Discounts
Revenue grew 8% to $217.9 million in 2004 due to be adverselythe inclusion of the full year results of Entertainment Publications which was acquired in March 2003.
Operating Income Before Amortization and operating income decreased 52% and 65%, respectively, to $22.0 million and $14.0 million, respectively, due to weakness in the company's core fundraising channels. Entertainment Publications' results are significantly seasonal with the majority of its profitability experienced in the fourth quarter. In addition, Operating Income Before Amortization and operating income were negatively impacted by the anticipated terminationsale of certain client programs. Revenue for the year ended December 31,Entertainment Publications' Australian and New Zealand operations in August 2003, which contributed $5.6 million in Operating Income Before Amortization and 2002 includes $17.8 million and $9.9 million, respectively, for services provided to other IAC businesses.
In the second quarter of 2003 the Company ceased operations of Avaltus, Inc., a subsidiary of PRC. Accordingly, the results of operations and statement of position of Avaltus are presented as discontinued operations for all periods presented.operating income in 2003.
Corporate and Other
Corporate operating expenses in 20032004 were $186.0$171.2 million compared with $64.9$114.8 million in 2002. The increase was related primarily2003, of which $65.2 million and $30.9 million relate to non-cash compensation of $110.5 million, including the impact of unvested stock options assumed in the buy-ins of Ticketmaster, Hotels.com2004 and Expedia and other acquisitions,2003, respectively. The increase in non-cash compensation principally resulted from expense recognized on modifications made to certain equity awards as well as expense related to restricted stock units granted by IAC, which IAC beganbecame IAC's primary form of stock-based compensation beginning in 2003. In addition, non-cash compensation expense included a full year of expense related to issueunvested stock options and restricted stock assumed in 2003various acquisitions. This non-cash compensation related to equity awards assumed in lieuacquisitions is recorded over the remaining vesting period of stock options.the equity awards and therefore will decline over time as the awards vest.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
All IAC common stock share information has been adjusted to reflect IAC's one-for-two reverse stock split in August 2005.
As of December 31, 2004,2005, the Company had $1.2$1.1 billion of cash and $2.4cash equivalents and restricted cash and cash equivalents, and $1.5 billion of marketable securities on hand, including $142.2$215.9 million in funds representing amounts equal to the face value of tickets sold by TicketmasterTicketing on behalf of its clientsclients.
As of December 31, 2005, LendingTree Loans had warehouse lines of credit totaling $1.25 billion, of which $362.3 million was outstanding. The warehouse lines of credit are used to fund consumer residential loans that are held for sale. Total borrowings under these lines of credit are secured by outstanding mortgage loans held for sale. Interest rates under these lines of credit fall within a range of 30-day LIBOR plus 75 - 100 basis points, depending on the underlying quality of the loans in the borrowing base and $488.7the length of time the loans remain outstanding, but may exceed this range under certain circumstances. Under the terms of the committed lines of credit, LendingTree Loans is required to maintain various financial and other covenants. The loans are non-recourse to IAC and LendingTree. LendingTree Loans pays a facility fee based on the total amount of the committed lines. As of December 31, 2005, LendingTree Loans had committed lines aggregating $1.0 billion which expire from September 30, 2006 to August 31, 2007 and uncommitted lines aggregating $250 million. The committed lines of credit can be canceled at the option of the lender without default upon sixty-to-ninety days notice. LendingTree Loans believes that the availability under these lines is sufficient to fund its operating needs in the foreseeable future and intends to extend the facilities on or prior to expiration. Loans under the warehouse lines of credit are repaid from proceeds from the sale of loans held for sale by LendingTree Loans.
Net cash used in operating activities attributable to continuing operations was approximately $72.3 million in combined deferred merchant bookings2005 and deferred revenue at IACT. Ticketmaster net funds collected on behalfcash provided by operating activities attributable to continuing operations was approximately $503.7 million in 2004. Cash used in operating activities in 2005 was negatively impacted by higher cash tax payments made, including $862.6 million related to the sale of clientsthe Company's VUE interests. The proceeds related to the sale of the Company's VUE interests are included in cash provided by investing activities. Excluding the tax payments related to the sale of the Company's VUE interests, cash flows from operating activities were impacted by the payment of approximately $95 million in income taxes in 2005, as compared to $112 million in 2004. An additional $4 million and $7 million of income taxes were paid in 2005 and 2004, respectively, attributable to discontinued operations and as such are not included in cash flows from operating activities attributable to continuing operations. Cash flows from operating activities were also impacted by the net increases related to loans held for sale. Partially offsetting the uses of cash were higher earnings and increased contribution from Ticketing client cash of $70.9 million in 2005 compared with $15.3 million $1.7 million and $26.4 million in 2004, 2003 and 2002, respectively, primarily due to timing of settlements with venues.
Net cash provided by operating activities was approximately $1.3 billionclients and in each of 2004 and 2003. Expedia's and Hotels.com's cash flows from their merchant hotel business models contributed significantlypart due to the cash providedpurchase by operating activities. The increase in working capital cash flow from IACT was $323.9 million in 2004 as compared to $254.9 million in 2003, reflecting principally changes in deferred merchant bookings and deferred revenue and in accounts payable and accrued expenses. For the years ended December 31, 2004 and 2003, cash flows provided by deferred merchant bookings and deferred revenue at IACT were $81.8 million and $135.8 million, respectively. In the merchant business, Expedia and Hotels.com receive cash from customers on hotel and air bookings before the stay or flight has occurred. These amounts are classified on our balance sheet as deferred merchant bookings. The payment to the suppliers related to these bookings is not made until approximately one week after booking for air travel and, for all other merchant bookings, after the customer's use and subsequent billing from the supplier. Therefore, especially for the hotel business, which is the majority of our merchant bookings, there is generally a significant period of time from the receiptTicketing of the cash from the customers to the payment to the suppliers. However, over time we have paid our suppliers faster and we expect this trend to continue. As long as the merchant hotel businesses continue to grow positively, as they have historically, and our business model does not change, we expect that the changeremaining interest in working capital will continue to be positive. If these businesses were to decline or if the model otherwise changed, it would negatively impact working capital. There is a seasonal element to cash flow related to merchant bookings, as the first half of the year has traditionally been a period where hotel bookings significantly exceed stays, resultingits Australian joint venture in much higher cash flow related to working capital. This trend reverses in the later part of the year. While we expect the seasonality to continue, working capital related to merchant bookings may be impacted by changes in growth rates which might counteract the anticipated seasonality.April 2005. There is a seasonal element to the inventory balances at the Electronic Retailing segmentsector and Entertainment Publicationsthe Discounts segment as inventory tends to be higher in the third quarter in anticipation of the fourth quarter selling season. At December 31, 2004,2005, inventory, net of reserves, increased $25.0by $96.3 million to $241.0$337.2 million from $216.0$240.9 million at December 31, 2003. In addition,2004 due primarily to the acquisition of Cornerstone Brands, which contributed $94.0 million of the increase.
Net cash provided by investing activities attributable to continuing operations was impacted byin 2005 of $2.1 billion resulted from the paymentproceeds generated from the sale of approximately $120IAC's common and preferred interests in VUE of $1.9 billion, net proceeds of $965.5 million generated from the sale of marketable securities and proceeds from the sale of EUVÍA of $183.0 million. Partially offsetting these amounts were acquisitions, net of cash acquired, of $693.4 million and capital expenditures of $241.5 million.
Cash acquisitions in taxes2005 primarily relate to Cornerstone Brands. Net cash used in 2004, as comparedinvesting activities attributable to $19 million in 2003. An additional $86 million of taxes were paid in 2003 related to discontinued operations and as such is not included in cash provided by operations. Cash provided bycontinuing operations in 2004 was negatively impacted by increases in loans held for sale at HLC which were not included in the prior year period.
Cash provided by operations and available cash in 2004 were usedrelate primarily to pay fornet purchases of marketable securities of $720.6 million, acquisitions, and deal costs, net of cash acquired cash, of $486.0 million. Cash acquisitions in 2004 primarily relate to TripAdvisor, ServiceMagic$234.7 million, and Home Loan Center. In addition, in 2004 the Company increased its long-term investments by $47.5 million, primarily related to eLong, Inc. and incurred capital expenditures of $223.8$167.8 million, including approximately $25.5 million related to the acquisition of HSN's new distribution facility located in Tennessee. Cash acquisitions in 2004 primarily relate to ServiceMagic and LendingTree Loans.
Net cash provided by operating activities and available cash in 2003 were used to pay for acquisition and deal costs, net of acquired cash, of $1.1 billion for the acquisitions of Entertainment Publications, LendingTree, Hotwire.com and Anyway.com, $497.0 million to purchase marketable securities and $186.9 million to make capital expenditures.
Cash used in financing activities attributable to continuing operations in 2005 of $2.7 billion was primarily due to the purchase of treasury stock of $1.8 billion, the redemption of substantially all of IAC's convertible preferred stock of $655.7 million in connection with the Spin-Off, as well as the repayment of $360.8 million of 1998 Senior Notes due November 15, 2005. These items were partially offset by increased net borrowings under various warehouse lines of credit of $162.8 million at LendingTree Loans and $80.0 million of borrowings under the Liberty Bond program (see below). The increased borrowings under the warehouse lines of credit are directly related to the increase in loans held for sale included within cash flows from operations. Net cash used in financing activities attributable to continuing operations in 2004 of $259.6$263.7 million was primarily due to the purchase of treasury stock of $430.3 million and the payment of preferred dividends of $13.1 million, partially offset by the proceeds from the issuance of common stock pursuant to stock option exercises of $147.3 million and increased borrowings under various warehouse lines of credit of $23.4$25.2 million.
Net cash provided by discontinued operations in 2005 and 2004 of $706.7 million and the payment of preferred dividends of $13.1 million. Cash used in financing activities in 2003 of $567.6 million was$1.1 billion, respectively, relate primarily due to the purchaseoperations of treasury stock of $1.5 billion, the purchaseExpedia through August 8, 2005 and EUVÍA through June 2, 2005. The Company does not expect future cash flows generated from Vivendi of warrantsexisting discontinued operations to acquire 28.2 million shares of IAC common stock for an aggregate purchase price of $407.4 million pursuant to the exercise, as Barry Diller's designee, of a right of first refusal and the repurchase of $92.2 million principal amount of IAC's 63/4% Senior Notes due November 15, 2005 for an aggregate purchase price of $100.8 million. These cash outflows were partially offset by proceeds of approximately $1.2 billion related to the sale of 48.7 million shares of common stock to Liberty, pursuant to Liberty's preemptive rights in relation to the Ticketmaster merger, the uDate acquisition, the Expedia and Hotels.com mergers and in connection with IAC option exercises between May 2, 2003 and June 3, 2003, as well as proceeds from the issuance of common stock pursuant to stock option exercises of $264.2 million.be significant.
As of December 31, 2004,2005, the Company has $1.4had $1.3 billion in short and long-term obligations, of which $565.3$375.3 million, consisting primarily of 1998 Senior Notes and various warehouse lines of credit, are classified as current. Long-term debt consists primarily of the 2002 Senior Notes due 2013, the Convertible Notes due 2008 and the Liberty Bonds due 2035. The warehouse lines of credit are used by HLCCompany's cash, cash equivalents and marketable securities and access to the capital markets is believed to be sufficient to fund mortgageits debt payments.
On July 19, 2005, as part of the IAC Search & Media acquisition, IAC guaranteed $115.0 million par value of the Convertible Notes ($114.0 million par value at December 31, 2005). The Convertible Notes are convertible at the option of the holders into shares of both IAC common stock and home equity loans.Expedia common stock at an initial conversion price of $13.34 per share, subject to certain adjustments. Upon conversion, IAC and Expedia have the right, subject to certain conditions, to deliver cash (or a combination of cash and shares) in lieu of shares of its respective common stock. During January 2006, $68.2 million of Convertible Notes was converted into 2.6 million IAC and 2.6 million Expedia common shares.
In connection with the financing of the construction of IAC's corporate headquarters, on August 31, 2005, the New York City Industrial Development Agency (the "Agency") issued $80 million in aggregate principal amount of New York City Industrial Development Agency Liberty Bonds (IAC/InterActiveCorp Project), Series 2005 (the "Liberty Bonds"). Interest rates under these lines of credit fall within a range of 30-day LIBOR plus 100 basis points to 30-day LIBOR plus 245 basis points, depending on the underlying qualityLiberty Bonds is payable at a rate of 5% per annum, payable semi-annually on March 1 and September 1 of each year, commencing on March 1, 2006, and mature on September 1, 2035. IAC is obligated to make all principal, interest and other payments in respect of the loansLiberty Bonds pursuant to certain security and payment arrangements between IAC and the Agency, which arrangements were entered into in connection with the borrowing base. Underclosing of the termsLiberty Bond issuance. Liberty Bonds proceeds may only be used for certain expenditures relating to the construction of these lines of credit, HLC is required to maintain various financialIAC's corporate headquarters and other covenants. IAC anticipatesmay not be used for general corporate purposes. The Company expects that the repayment of the current maturities related to the 63/4% Senior Notes will come from current cash balances while the repayment of the warehouse lines of credit will comeremaining proceeds from the saleLiberty Bond financing will be spent during the year ending December 31, 2006 as qualified expenditures arise
and are settled. The Convertible Notes and the Liberty Bonds are classified as long-term obligations on the accompanying consolidated balance sheet at December 31, 2005.
During 2005 and 2004, IAC purchased 50.6 million and 7.9 million shares of loans heldIAC common stock for sale by HLC. Theaggregate consideration of $1.8 billion and $426.9 million, respectively. At December 31, 2005, IAC had approximately 1.0 million shares remaining in its authorization. These shares were subsequently repurchased in January 2006 for an aggregate consideration of $23.8 million. Additionally, on February 8, 2006, the Company is evaluating alternative funding strategies relative to HLC's business.
In November 2004, IAC announced that its Board of Directors authorized the repurchase of up to 8042 million shares of IAC common stock. This authorization is in addition to the 22.9 million shares IAC has remaining under the repurchase authorizations announced in March 2003 and November 2003, which initially covered a total of 80 million shares. IAC may purchase shares over an indefinite period of time on the open market, or through private transactions, depending on those factors IAC management deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook. Pursuant to
On June 7, 2005 IAC completed a transaction with NBC Universal in which it sold its interests in VUE. After paying applicable taxes on the Board's 2003 authorizations, during 2004 and 2003,transaction, IAC purchased 15.8netted approximately $1.0 billion in cash. As part of the consideration in this transaction, IAC also received 28.3 million and 41.3 millionIAC shares for aggregate consideration of $426.9 million andvalued at $1.4 billion, respectively, pursuant to these authorizations. At December 31, 2004, IAC had 102.9 million shares remaining in its authorizations.billion.
IAC anticipates that it will need to investmake capital and other expenditures in connection with the development and expansion of its overall operations. The Company may make a number of acquisitions, which could result in the reduction of its cash balance or the incurrence of debt. Furthermore, future capital and other expenditures mayare expected to be higher than current amounts over the next several years.
Future demand for our products and services may be impacted by future economic and political developments. As previously discussed, a significant amountyears, primarily due to the construction of operating cash flow is fromIAC's new corporate headquarters, which will result in increased deferred merchant bookingscapital expenditures, and the period between receiptimprovement and expansion of cash from the customer and payment of cashtechnology infrastructure, including data centers, which is expected to the vendor. A change in this historical pattern could result in a decrease inincreased capital and/or operating cash flow, or negative operating cash flows in certain periods.expenditures.
We believe that our financial situation would enable us to absorb a significant potential downturn in business. As a result,The Company has considered its anticipated operating cash flows in management's opinion, available2006, cash internally generated funds and available borrowings will providecash equivalents and marketable securities, borrowing capacity under warehouse lines of credit and access to capital markets and believes that these are sufficient to fund its operating needs, including commitments and contingencies and capital resources to meet IAC'sand investing commitments for the foreseeable needs.future.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
| Payments Due by Period | Payments Due by Period | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | ||||||||||||||||||||
| (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||
Short and Long-term obligations | $ | 1,353,930 | $ | 560,275 | $ | 18,638 | $ | 17,804 | $ | 757,213 | ||||||||||||||||||||
Short and long-term obligations | $ | 1,329,395 | $ | 372,094 | $ | 128,931 | $ | 430 | $ | 827,940 | ||||||||||||||||||||
Capital lease obligations | 8,058 | 4,998 | 3,059 | 1 | — | 5,291 | 3,182 | 2,092 | 17 | — | ||||||||||||||||||||
Purchase obligations(a) | 69,584 | 44,941 | 24,643 | — | — | 45,028 | 34,189 | 10,798 | 41 | — | ||||||||||||||||||||
Operating leases | 465,316 | 103,734 | 143,292 | 104,069 | 114,221 | 661,700 | 98,423 | 157,433 | 118,035 | 287,809 | ||||||||||||||||||||
Total contractual cash obligations | $ | 1,896,888 | $ | 713,948 | $ | 189,632 | $ | 121,874 | $ | 871,434 | $ | 2,041,414 | $ | 507,888 | $ | 299,254 | $ | 118,523 | $ | 1,115,749 | ||||||||||
| Amount of Commitment Expiration Per Period | Amount of Commitment Expiration Per Period | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other Commercial Commitments* | Total Amounts Committed | Less than 1 year | 1–3 years | 3–5 years | ||||||||||||||||||||
Other Commercial Commitments* | Total Amounts Committed | Less than 1 year | 1-3 years | 3-5 years | ||||||||||||||||||||
| (In Thousands) | (In Thousands) | ||||||||||||||||||||||
Letters of credit | $ | 78,298 | $ | 76,384 | $ | 1,791 | $ | 123 | $ | 52,328 | $ | 52,190 | $ | 53 | $ | 85 | ||||||||
Guarantees | 87,498 | 85,531 | 1,656 | 311 | 13,541 | 12,372 | 829 | 340 | ||||||||||||||||
Total Commercial Commitments | $ | 165,796 | $ | 161,915 | $ | 3,447 | $ | 434 | ||||||||||||||||
Total commercial commitments | $ | 65,869 | $ | 64,562 | $ | 882 | $ | 425 | ||||||||||||||||
Off-Balance Sheet Arrangements
Other than the items described above, the Company does not have any off-balance sheet arrangements as of December 31, 2005.
IAC'S PRINCIPLES OF FINANCIAL REPORTING
IAC reports Operating Income Before Amortization as a supplemental measure to GAAP. This measure is one of the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should generally have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measure which we discuss below.
Definition of IAC's Non-GAAP Measure
Operating Income Before Amortization is defined as operating income plus:excluding, if applicable: (1) amortization of non-cash compensation, distribution marketing and compensationmarketing expense, (2) amortization of intangibles and goodwill impairment, if applicable, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. We believe this measure is useful to investors because it represents the consolidated operating results from IAC's segments, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to IAC's income statement of operations of certain expenses, including non-cash compensation, non-cash payments to partners,marketing expense, and acquisition- relatedacquisition-related accounting. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, and adjustments, including quantifying such items, to derive the non-GAAP measure.
Pro Forma Results
We have presented Operating Income Before Amortization pro forma for the impact of IAC's initial acquisition of a majority stake in Expedia which occurred in February 2002, as if the transaction had occurred as of January 1, 2002. We believe that the pro forma results provide investors with better comparisons to prior periods, and a better view of ongoing operations.
One-Time Items
Operating Income Before Amortization is presented before one-time items. These items are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. GAAP results include one-time items. Merger costs incurred by Expedia, Hotels.com and Ticketmaster for investment banking, legal, and accounting fees were related directly to the mergers and were theThe only costs treated as one-time items for calculating Operating Income Before Amortization.Amortization are merger costs incurred by Ticketmaster in 2003 for investment banking, legal, and accounting fees. These costs were incurred solely in relation to the mergers,IAC's buy-in of Ticketmaster, but maycould not be capitalized since Expedia, Hotels.com and Ticketmaster werewas considered targetsthe target in the transaction for accounting purposes. These costs do not directly benefit operations in any manner, and would not normally be recorded by IAC if not for the fact it already consolidated these entities, and are all related to the same transaction, as IAC simultaneously announced its intention to commence its exchange offer for the companies in 2002.Ticketmaster. The majority of costs are for advisory services provided by investment bankers, and the amounts incurred in 2003 were pursuant to the same fee lettersletter entered into by each companyTicketmaster after IAC announced its intention to commence an exchange offer for Ticketmaster in 2002. Given these factors, we believe it is appropriate to consider these costs as one-time.
Non-Cash Expenses That Are Excluded From OurIAC's Non-GAAP MeasuresMeasure
Amortization of non-cash compensation expense consists of restricted stock and options expense, which relates mostly to unvested options assumed by IAC in the Ticketmaster, Hotels.com and Expedia mergers as well as expense associated with the grants of restricted stock, restricted stock units and stock options for compensation purposes. These expenses are not paid in cash and we include the related shares in our fully diluted shares outstanding.outstanding which, for restricted stock units and stock options, are included on a treasury method basis. For 2005, the options expense primarily reflects the expense related to modifications of vested options in connection with the Spin-Off and unvested options assumed by IAC in its acquisitions.
Amortization of non-cash distribution and marketing expense consists mainlyprincipally of Hotels.com performance warrants issued to obtain distribution andthe non-cash advertising secured from Universal Television as part of the Vivendi transaction. The Hotels.com warrants were principally issued as part of its initial public offering,transaction pursuant to which VUE was
created and we do not anticipate replicating these arrangements. With the termination of the Travelocity affiliate agreement in September 2003, all outstanding Travelocity warrants were cancelled although certain other Hotels.com warrants remain outstanding. The non-cash advertising from Universal has primarily been used for the benefit of Expedia, which runs television advertising primarily on the USA and Sci Fi cable channels without any cash cost. Ticketmaster and Match.com also recognized non-cash distribution and marketing expense recognized by Ticketmaster, Citysearch and Match.com related to barter arrangements, which expired in March 2004, for distribution secured from third parties, whereby the advertising was provided by Ticketmaster, Citysearch and Match.com to a third party in return for distribution over the third party's network. The non-cash advertising providedfrom Universal is available for television advertising primarily on the USA and Sci Fi cable channels without any cash cost and was securedused principally by IAC pursuant to an agreement with Universal as part of the Vivendi transaction. Sufficient advertising has been secured to satisfy existing obligations. We do not expect to replace this non-cash marketing with an equivalent cash expense after it runs outMatch.com in 2007, nor would IAC incur such amounts absent the advertising received in the Vivendi transaction.2004 and 2003.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as supplier contracts and customer relationships, are valued and amortized over their estimated lives. While it is likely that we will have significant intangible amortization expense as we continue to acquire companies, we believe that since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs and will not be replaced with cash costs when the intangibles are fully amortized.costs.
Reconciliation of Operating Income Before Amortization
The following table is a reconciliation ofreconciles Operating Income Before Amortization to operating income (loss) and net earnings available to common shareholders for the years ended December 31, 2005, 2004, and 2003 and 2002.(in thousands).
| | Years Ended December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2003 | |||||||||||||||||
Operating Income Before Amortization | Operating Income Before Amortization | $ | 668,277 | $ | 421,552 | $ | 366,896 | ||||||||||||||
Amortization of non-cash compensation expense | Amortization of non-cash compensation expense | (137,537 | ) | (70,326 | ) | (32,404 | ) | ||||||||||||||
Amortization of non-cash distribution and marketing expense | Amortization of non-cash distribution and marketing expense | — | (1,302 | ) | (9,458 | ) | |||||||||||||||
Amortization of intangibles | Amortization of intangibles | (186,511 | ) | (185,388 | ) | (186,677 | ) | ||||||||||||||
Goodwill impairment | Goodwill impairment | — | (184,780 | ) | — | ||||||||||||||||
Merger costs(a) | Merger costs(a) | — | — | (96 | ) | ||||||||||||||||
Operating income (loss) | 344,229 | (20,244 | ) | 138,261 | |||||||||||||||||
Interest income | Interest income | 141,104 | 170,181 | 147,528 | |||||||||||||||||
Interest expense | Interest expense | (77,674 | ) | (68,367 | ) | (80,108 | ) | ||||||||||||||
Gain on sale of VUE interests | Gain on sale of VUE interests | 523,487 | — | — | |||||||||||||||||
Equity in income (losses) of VUE | Equity in income (losses) of VUE | 21,960 | 16,188 | (224,468 | ) | ||||||||||||||||
Equity in income of unconsolidated affiliates and other | Equity in income of unconsolidated affiliates and other | 38,579 | 34,534 | 11,215 | |||||||||||||||||
Income tax (expense) benefit | Income tax (expense) benefit | (391,069 | ) | (74,266 | ) | 24,214 | |||||||||||||||
Minority interest in income of consolidated subsidiaries | Minority interest in income of consolidated subsidiaries | (2,229 | ) | (3,159 | ) | (5,933 | ) | ||||||||||||||
Gain on sale of EUVÍA, net of tax | Gain on sale of EUVÍA, net of tax | 70,152 | — | — | |||||||||||||||||
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | 207,611 | 109,994 | 156,687 | |||||||||||||||||
Preferred dividends | Preferred dividends | (7,938 | ) | (13,053 | ) | (13,055 | ) | ||||||||||||||
| Twelve Months Ended December 31, | ||||||||||||||||||||
| 2004 | 2003 | 2002 | Net earnings available to common shareholders | $ | 868,212 | $ | 151,808 | $ | 154,341 | |||||||||||
| (In Thousands) | ||||||||||||||||||||
Operating Income Before Amortization | $ | 1,024,499 | $ | 860,064 | $ | 389,116 | |||||||||||||||
Amortization of non-cash distribution and marketing expense | (18,030 | ) | (51,432 | ) | (37,344 | ) | |||||||||||||||
Amortization of non-cash compensation expense | (241,726 | ) | (128,185 | ) | (15,637 | ) | |||||||||||||||
Amortization of intangibles | (347,457 | ) | (268,504 | ) | (145,667 | ) | |||||||||||||||
Goodwill impairment | (184,780 | ) | — | (22,247 | ) | ||||||||||||||||
Merger costs(a) | — | (11,760 | ) | (7,910 | ) | ||||||||||||||||
Pro forma adjustments(b) | — | — | (7,713 | ) | |||||||||||||||||
Operating income | 232,506 | 400,183 | 152,598 | ||||||||||||||||||
Interest income | 191,679 | 175,822 | 114,599 | ||||||||||||||||||
Interest expense | (87,388 | ) | (92,913 | ) | (44,467 | ) | |||||||||||||||
Equity in income (losses) of VUE | 16,188 | (224,468 | ) | 6,107 | |||||||||||||||||
Equity in income (losses) in unconsolidated subsidiaries and other expenses | 25,691 | 3,767 | (115,640 | ) | |||||||||||||||||
Income tax expense | (179,186 | ) | (70,691 | ) | (65,127 | ) | |||||||||||||||
Minority interest in income of consolidated subsidiaries | (13,729 | ) | (65,043 | ) | (46,073 | ) | |||||||||||||||
Gain on contribution of USA Entertainment to VUE, net of tax | — | — | 2,378,311 | ||||||||||||||||||
Discontinued operations, net of tax | (20,900 | ) | 40,739 | 34,184 | |||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | (461,389 | ) | |||||||||||||||||
Preferred dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | |||||||||||||||
Net earnings available to common shareholders | $ | 151,808 | $ | 154,341 | $ | 1,941,344 | |||||||||||||||
RECONCILIATION OF NON-GAAP MEASURE
The following table reconciles Operating Income Before Amortization to operating income (loss) for the Company's reportingoperating segments and to net earnings available to common shareholders in total (in millions, rounding differences may occur):
| For the year ended December 31, 2005 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Operating income (loss) | ||||||||
Retailing: | |||||||||||
U.S. | $ | 276.6 | $ | (59.9 | ) | $ | 216.7 | ||||
International | 5.8 | (1.3 | ) | 4.5 | |||||||
Total Retailing | 282.3 | (61.2 | ) | 221.1 | |||||||
Services: | |||||||||||
Ticketing | 218.7 | (28.7 | ) | 189.9 | |||||||
Lending | 80.6 | (25.4 | ) | 55.3 | |||||||
Real Estate | (16.7 | ) | (12.8 | ) | (29.5 | ) | |||||
Teleservices | 22.6 | — | 22.6 | ||||||||
Home Services | 11.2 | (2.3 | ) | 8.9 | |||||||
Total Services | 316.5 | (69.3 | ) | 247.2 | |||||||
Media & Advertising | 30.5 | (22.8 | ) | 7.7 | |||||||
Membership & Subscriptions: | |||||||||||
Vacations | 110.7 | (25.2 | ) | 85.5 | |||||||
Personals | 47.9 | (3.8 | ) | 44.1 | |||||||
Discounts | 17.5 | (6.4 | ) | 11.2 | |||||||
Total Membership & Subscriptions | 176.2 | (35.4 | ) | 140.8 | |||||||
Emerging Businesses | (12.7 | ) | (0.6 | ) | (13.3 | ) | |||||
Corporate and other | (124.4 | ) | (134.8 | ) | (259.3 | ) | |||||
TOTAL | $ | 668.3 | $ | (324.0 | ) | 344.2 | |||||
Other income, net | 647.5 | ||||||||||
Earnings from continuing operations before income taxes and minority interest | 991.7 | ||||||||||
Income tax expense | (391.1 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (2.2 | ) | |||||||||
Earnings from continuing operations | 598.4 | ||||||||||
Gain on sale of EUVÍA, net of tax | 70.2 | ||||||||||
Income from discontinued operations, net of tax | 207.6 | ||||||||||
Earnings before preferred dividends | 876.2 | ||||||||||
Preferred dividends | (7.9 | ) | |||||||||
Net earnings available to common shareholders | $ | 868.2 | |||||||||
| For the year ended December 31, 2004 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Operating income (loss) | |||||||
IAC Travel | $ | 627.3 | $ | (198.3 | ) | $ | 429.0 | |||
HSN U.S. (a). | 194.7 | (52.9 | ) | 141.7 | ||||||
HSN International | 39.2 | (1.3 | ) | 37.9 | ||||||
Ticketing | 164.3 | (26.4 | ) | 137.9 | ||||||
Personals | 27.6 | (8.7 | ) | 18.8 | ||||||
IAC Local and Media Services | 26.5 | (50.0 | ) | (23.6 | ) | |||||
Financial Services and Real Estate | 21.4 | (29.0 | ) | (7.6 | ) | |||||
Teleservices | 17.1 | (184.8 | ) | (167.7 | ) | |||||
Corporate Expense and other adjustments | (94.0 | ) | (240.5 | ) | (334.5 | ) | ||||
Intersegment Elimination | 0.5 | — | 0.5 | |||||||
TOTAL | $ | 1,024.5 | $ | (792.0 | ) | $ | 232.5 | |||
Other income, net | 146.2 | |||||||||
Earnings from continuing operations before income taxes and minority interest | 378.7 | |||||||||
Income tax expense | (179.2 | ) | ||||||||
Minority interest in income of consolidated subsidiaries | (13.7 | ) | ||||||||
Earnings from continuing operations | 185.8 | |||||||||
Discontinued operations | (20.9 | ) | ||||||||
Earnings before preferred dividends | 164.9 | |||||||||
Preferred dividends | (13.1 | ) | ||||||||
Net earnings available to common shareholders | $ | 151.8 | ||||||||
| For the year ended December 31, 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Merger Costs | Operating income (loss) | |||||||||
IAC Travel | $ | 523.8 | $ | (165.2 | ) | $ | (11.7 | ) | $ | 347.0 | |||
HSN U.S.(a) | 168.3 | (50.8 | ) | — | 117.5 | ||||||||
HSN International | 32.6 | (1.3 | ) | — | 31.3 | ||||||||
Ticketing | 144.5 | (27.9 | ) | (0.1 | ) | 116.5 | |||||||
Personals | 31.0 | (16.9 | ) | — | 14.1 | ||||||||
IAC Local and Media Services | 26.2 | (55.6 | ) | — | (29.4 | ) | |||||||
Financial Services and Real Estate | 1.2 | (17.7 | ) | — | (16.5 | ) | |||||||
Teleservices | 12.5 | — | — | 12.5 | |||||||||
Corporate Expense and other adjustments | (79.3 | ) | (112.6 | ) | — | (191.9 | ) | ||||||
Intersegment Elimination | (0.8 | ) | — | — | (0.8 | ) | |||||||
TOTAL | $ | 860.1 | $ | (448.1 | ) | $ | (11.8 | ) | $ | 400.2 | |||
Other expenses, net | (137.8 | ) | |||||||||||
Earnings from continuing operations before income taxes and minority interest | 262.4 | ||||||||||||
Income tax expense | (70.7 | ) | |||||||||||
Minority interest in income of consolidated subsidiaries | (65.0 | ) | |||||||||||
Earnings from continuing operations | 126.7 | ||||||||||||
Discontinued operations | 40.7 | ||||||||||||
Earnings before preferred dividends | 167.4 | ||||||||||||
Preferred dividends | (13.1 | ) | |||||||||||
Net earnings available to common shareholders | $ | 154.3 | |||||||||||
| For the year ended December 31, 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Operating income (loss) | ||||||||
Retailing: | |||||||||||
U.S. | $ | 194.7 | $ | (52.9 | ) | $ | 141.7 | ||||
International | 4.3 | (1.3 | ) | 3.0 | |||||||
Total Retailing | 199.0 | (54.2 | ) | 144.7 | |||||||
Services: | |||||||||||
Ticketing | 164.3 | (26.4 | ) | 137.9 | |||||||
Lending | 26.1 | (21.7 | ) | 4.4 | |||||||
Real Estate | (4.6 | ) | (7.3 | ) | (12.0 | ) | |||||
Teleservices | 17.1 | (184.8 | ) | (167.7 | ) | ||||||
Home Services | 0.3 | (2.5 | ) | (2.2 | ) | ||||||
Total Services | 203.1 | (242.7 | ) | (39.6 | ) | ||||||
Media & Advertising | (13.3 | ) | (33.8 | ) | (47.1 | ) | |||||
Membership & Subscriptions: | |||||||||||
Vacations | 90.2 | (25.2 | ) | 65.0 | |||||||
Personals | 27.6 | (8.7 | ) | 18.8 | |||||||
Discounts | 22.0 | (8.0 | ) | 14.0 | |||||||
Total Membership & Subscriptions | 139.8 | (41.9 | ) | 97.9 | |||||||
Emerging Businesses | (1.1 | ) | (3.9 | ) | (5.0 | ) | |||||
Corporate and other | (105.9 | ) | (65.2 | ) | (171.2 | ) | |||||
TOTAL | $ | 421.6 | $ | (441.8 | ) | (20.2 | ) | ||||
Other income, net | 152.5 | ||||||||||
Earnings from continuing operations before income taxes and minority interest | 132.3 | ||||||||||
Income tax expense | (74.3 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (3.2 | ) | |||||||||
Earnings from continuing operations | 54.9 | ||||||||||
Income from discontinued operations, net of tax | 110.0 | ||||||||||
Earnings before preferred dividends | 164.9 | ||||||||||
Preferred dividends | (13.1 | ) | |||||||||
Net earnings available to common shareholders | $ | 151.8 | |||||||||
| For the year ended December 31, 2002 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Merger Costs | Pro forma Adjustments(b) | Operating income (loss) | |||||||||||
IAC Travel | $ | 279.8 | $ | (91.9 | ) | $ | (2.3 | ) | $ | (7.7 | ) | $ | 177.9 | |||
HSN U.S.(a). | 131.4 | (32.6 | ) | — | — | 98.7 | ||||||||||
HSN International | (61.6 | ) | (0.7 | ) | — | — | (62.3 | ) | ||||||||
Ticketing | 108.1 | (11.1 | ) | — | — | 96.9 | ||||||||||
Personals | 28.4 | (5.8 | ) | — | — | 22.6 | ||||||||||
IAC Local and Media Services | (32.3 | ) | (48.3 | ) | (5.6 | ) | — | (86.3 | ) | |||||||
Teleservices | (4.1 | ) | (22.2 | ) | — | — | (26.4 | ) | ||||||||
Corporate Expense and other adjustments | (58.1 | ) | (12.3 | ) | — | — | (70.3 | ) | ||||||||
Intersegment Elimination | (2.4 | ) | 4.1 | — | — | 1.7 | ||||||||||
TOTAL | $ | 389.1 | $ | (220.9 | ) | $ | (7.9 | ) | $ | (7.7 | ) | $ | 152.6 | |||
Other expenses, net | (39.4 | ) | ||||||||||||||
Earnings from continuing operations before income taxes and minority interest | 113.2 | |||||||||||||||
Income tax expense | (65.1 | ) | ||||||||||||||
Minority interest in income of consolidated subsidiaries | (46.1 | ) | ||||||||||||||
Earnings from continuing operations | 2.0 | |||||||||||||||
Gain on contribution of USA Entertainment to VUE | 2,378.3 | |||||||||||||||
Discontinued operations | 34.2 | |||||||||||||||
Earnings before cumulative effect of accounting change | 2,414.5 | |||||||||||||||
Cumulative effect of accounting change | (461.4 | ) | ||||||||||||||
Earnings before preferred dividends | 1,953.1 | |||||||||||||||
Preferred dividends | (11.8 | ) | ||||||||||||||
Net earnings available to common shareholders | $ | 1,941.3 | ||||||||||||||
| For the year ended December 31, 2003 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Merger costs | Operating income (loss) | ||||||||||
Retailing: | ||||||||||||||
U.S. | $ | 168.3 | $ | (50.8 | ) | $ | — | $ | 117.5 | |||||
International | 4.7 | (1.3 | ) | — | 3.4 | |||||||||
Total Retailing | 173.0 | (52.1 | ) | — | 120.9 | |||||||||
Services: | ||||||||||||||
Ticketing | 144.5 | (28.0 | ) | (0.1 | ) | 116.5 | ||||||||
Lending | 3.1 | (14.8 | ) | — | (11.6 | ) | ||||||||
Real Estate | (2.0 | ) | (2.9 | ) | — | (4.8 | ) | |||||||
Teleservices | 12.5 | — | — | 12.5 | ||||||||||
Total Services | 158.2 | (45.7 | ) | (0.1 | ) | 112.5 | ||||||||
Media & Advertising | (19.9 | ) | (50.0 | ) | — | (69.8 | ) | |||||||
Membership & Subscriptions: | ||||||||||||||
Vacations | 66.2 | (25.2 | ) | — | 41.0 | |||||||||
Personals | 31.0 | (16.9 | ) | — | 14.1 | |||||||||
Discounts | 46.1 | (5.7 | ) | — | 40.4 | |||||||||
Total Membership & Subscriptions | 143.3 | (47.8 | ) | — | 95.5 | |||||||||
Emerging Businesses | (3.8 | ) | (2.1 | ) | — | (5.9 | ) | |||||||
Corporate and other | (83.9 | ) | (30.9 | ) | — | (114.8 | ) | |||||||
TOTAL | $ | 366.9 | $ | (228.5 | ) | $ | (0.1 | ) | 138.3 | |||||
Other expense, net | (145.8 | ) | ||||||||||||
Loss from continuing operations before income taxes and minority interest | (7.6 | ) | ||||||||||||
Income tax benefit | 24.2 | |||||||||||||
Minority interest in income of consolidated subsidiaries | (5.9 | ) | ||||||||||||
Earnings from continuing operations | 10.7 | |||||||||||||
Income from discontinued operations, net of tax | 156.7 | |||||||||||||
Earnings before preferred dividends | 167.4 | |||||||||||||
Preferred dividends | (13.1 | ) | ||||||||||||
Net earnings available to common shareholders | $ | 154.3 | ||||||||||||
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of IAC's accounting policies contained in Note 2 to the Consolidated Financial Statementsconsolidated financial statements in regard to significant areas of judgment. Management of the Company is required to make certain estimates and assumptions during the preparation of its 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 to which they relate, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. What follows is a discussion of some of our more significant accounting policies and estimates.
the probability of realization. As of December 31, 2004,2005, the balance of long term deferred tax liabilities, net, is $2.3 billion, including $1.0 billion related to the VUE limited partnership.$1.2 billion. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or based uponthe outcome of any review of our tax returns by the Internal Revenue Service, as well as actual operating results of the Company that vary significantly from budgets.
from estimates due to changes in customer tastes or viewing habits, or errors in judgmentjudgemental decisions made by merchandising personnel when ordering new products. As of December 31, 2004,2005, the Company had $241.0$337.2 million of inventory on hand, net of an associated reserve of $37.9$41.9 million.
IAC common stock and amortized ratably as non-cash compensation over the vesting term.
the indicators outlined in EITF 99-19.remaining vesting term. See Note 2 "Summaryfor a description of Significant Accounting Policies," Revenue Recognition,effect of the change in the Notes to Consolidated Financial Statements for discussion of the factors considered by Hotels.com and Expedia in arriving at their conclusions. Beginning January 1, 2004, as part of the integration of IACT's businesses, Hotels.com conformed its merchant hotel business practices with those of the other IACT businesses. As a result, IAC commenced prospectively reporting revenue for Hotels.com on a net basis, consistent with Expedia's historical practice.
Seasonality
IAC's businesses are subjectDuring 2005, the Company's consolidated results were heavily weighted to the effects of seasonality with revenues typically lowest in the first quartersecond half of the year, and highestparticularly in the fourth quarter, primarily as a result of seasonality at our travel business as well as Entertainment Publications and, to a lesser extent, HSN.
Our travel business experiences seasonal fluctuations, reflecting seasonal trends for the products and services made available. For example, traditional leisure travel supplier and agency bookings typically are highest in the first two calendar quarters of the year as consumers plan and book their spring and summer travel and then the number of bookings flattens in the last two calendar quarters of the year. Because revenue in our merchant business is generally recognized when the travel takes place rather than when it is booked, our revenue growth typically lags our bookings growth by a month or two. As a result, revenue for the last two years has been lowest in the first quarter of the year and highest in the third quarter.
Our results may also be affected by seasonal fluctuations in the products and services made available by travel suppliers to consumers booking through us. For instance, during seasonal periods when demand is high, suppliers may impose blackouts that prohibit us from making those products and services available during such periods.
Interval's revenues from existing members are influenced by the seasonal nature of planned family travelthe Retailing sector and the Discounts segment. Heavy marketing spending at the Personals and Lending segments in the early part of the year also contributed to increased profitability in the later half of 2005. The Company expects that these trends will continue into 2006. In addition, the reduction in the number of sponsored links and related initiatives on the Ask websites and the significant investments in IAC Search & Media that are anticipated in 2006 are also expected to contribute to higher profitability in the second half of 2006 as compared with the first quarter generally experiencinghalf of the strongest bookings andyear.
The seasonality related to certain of the fourth quarter generally experiencing weaker bookings.individual segments is as follows:
Seasonality also impacts IAC's Electronic Retailing segment,sector, with sales highest in the fourth quarter, but not to the same extent it impacts the retail industry in general.
Ticketing operations revenues are impacted by fluctuations in the availability of events for sale to the public, which vary depending upon scheduling by the client.our venue clients. Due to the generally highest level of ticket on-sales for events, the second quarter of the year generally experiences the highest revenue levels.
Financial ServicesLending and Real Estate revenues are subject to the seasonal trends of the U.S. housing market. Home sales typically rise during the spring and summer months and decline during the fall and winter.winter months. Refinancing activity is less impacted by seasonality and is principally driven by current mortgage interest rates.
Entertainment Publication'sIAC Search & Media revenues will be impacted as internet advertising continues the transition from an emerging to a more developed market. Seasonal and cyclical patterns have developed, including advertising sales being lower during the summer vacation period and queries on its sites being strongest in the first and fourth fiscal quarters and weakest in the third quarter, as a reflection of greater usage during the school year. Furthermore, seasonality in the retail industry may also continue to affect the prices advertisers are willing to bid for keywords.
Revenues from existing members in the Vacations segment are influenced by the seasonal nature of planned family travel with the first quarter generally experiencing the strongest bookings and the fourth quarter generally experiencing weaker bookings.
Discounts' revenues are significantly seasonal with the majority of the company's revenues and profitability experienced in the fourth quarter.
New Accounting Pronouncements
In March 2004, On February 16, 2006, the FASB's Emerging Issues Task ForceFinancial Accounting Standards Board issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("EITF"SFAS No. 155") reached, which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabim1ities". SFAS No. 155 alters the financial reporting of certain hybrid financial instruments by requiring more
consistent accounting that eliminates exemptions and provides a consensusmeans to simplify the accounting for these instruments. Among other things, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on EITF Issuea fair value basis. SFAS No. 03-1, "The Meaning155 is effective for all financial instruments acquired or issued after the beginning of Other-Than-Temporary Impairmentan entity's first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year. The Company is currently assessing the impact of SFAS No. 155 on its consolidated financial position, results of operations and Its Application to Certain Investments." The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In September 2004,cash flows.
On June 7, 2005, the FASB delayedissued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"), replacing APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 alters the requirements for the accounting provisionsfor and reporting of EITF 03-1; however,a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the disclosure requirements remainperiod of the change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for annual periods endingaccounting changes made in fiscal years beginning after December 15, 2003. The2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. We do not believe adoption of the disclosure provision of EITF 03-1 did notSFAS No. 154 will have anya material effect on our consolidated financial position, results of operations or cash flows. We will evaluate the additional effect, if any, the remainder of EITF 03-1 will have on our consolidated financial statements once final guidance is issued.
In April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on our calculation of earnings per share.
On December 16, 2004, the FASB issued FASB Statement No. 123(R)123 (R), Share-Based"Share-Based Payment," which is a revision of FASB StatementSFAS No. 123, "Accounting for Stock-Based Compensation".123. Statement 123(R) supersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees", and amends FASB StatementSFAS No. 95, "Statement of Cash Flows".Flows." Generally, the approach in Statement 123(R) is similar to the approach described in StatementSFAS No. 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. Public
entities areThe Company is required to apply Statement 123(R) as ofno later than the first interim or annual reporting period that begins after June 15, 2005.quarter of 2006.
The Company adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure". Currently, the Company uses the Black-Scholes-MertonBlack-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on JulyJanuary 1, 2005. Because Statement 123(R) must be applied not only2006. Due to new awards butthe modification related to previously granted awards that are not fully vested on the effective date, and becauseSpin-Off, the Company adopted Statement 123 usingis recognizing expense for all stock-based compensation instruments in the prospective transition method (which applied only to awards granted, modified or settledstatement of operations after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R).Spin-Off. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We do not believe the adoption of Statement 123(R) will have a material effect on the Company's consolidated statement of operations. The Company is currently assessing the impact of this pronouncement on its consolidated statement of operations and statement of cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on the Company's current financial condition or results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: IAC's future financial performance, IAC's business prospects and strategy, including the Spin-Off, anticipated trends and prospects in the various industries in which IAC and its businesses operate, new products, services and related strategies and other similar matters. These forward-looking statements reflect the views of IAC management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward-looking statements included in this report for a variety of reasons, including, among others: adverse changes in economic conditions generally or in any of the markets or industries in which IAC's businesses operate, changes in senior management at IAC and/or its businesses, the rate of growth of the Internet, the e-commerce industry and broadband access, the rate of online migration in the various markets and industries in which IAC's businesses operate, the ability of IAC to expand successfully in international markets, the successful integration of acquired businesses, and the integrity, security and redundancy of the systems and networks of IAC and its businesses. Certain of these and other risks and uncertainties are discussed in more detail in other parts of this report, especially under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other
unknown or unpredictable factors also could have a material adverse effect on IAC's business, financial condition and results of operations.
In light of these risks and uncertainties, the forward-looking statements discussed in this report may not occur. Accordingly, readers should not place undue reliance on these forward-looking statements, which only reflect the views of IAC management as of the date of this report. IAC is not under any obligation and does not intend to publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.
Item 7A:7A. Quantitative and Qualitative Disclosures Aboutabout 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, loans held for sale and long-term debt.debt, including the current portion thereof, and its warehouse line of credit. The Company invests its excess cash in debt instrumentssecurities of governmentgovernments, governmental 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 helddecline in the portfolio deteriorates.fair value is determined to be other-than-temporary.
Based on the Company's total outstanding debt investment securities as of December 31, 2004,2005, a 100 basis point increase or decrease in the level of interest rates would, respectively, decrease or increase the fair
value of the debt securities by approximately $29.0$17.6 million. Such potential increase or decreasesdecrease in fair value are based on certain simplifying assumptions, including a constant level and rate of debt securities and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period. Conversely, since almost all of the Company's cash balance of approximately $1.2$1.1 billion is invested in variable rate interest earning assets, the Company would also earn more (less) interest income due to such an increase (decrease) in interest rates.
At December 31, 2004,2005, the Company's outstanding debt approximated $1.4$1.3 billion, substantially all of which iswith a substantial portion bearing fixed rate obligations.rates. If market rates decline, the Company runs the risk that the related required payments on itsthe fixed rate debt will exceed those based on market rates. As part of its risk management strategy, the Company uses derivative instruments, including interest rate swaps, to hedge somea portion of this interest rate exposure. The Company's intent is to offset gains and losses resulting from this exposure with losses and gains on the derivative contracts used to hedge it, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. The Company's objective in managing its exposure to interest rate risk on its long-term debt is to maintain its mix of floating rate and fixed rate debt within a certain range. DuringIn 2004 and 2003, the Company entered into interest rate swap agreements related to a portion of the 2002 Senior Notes, which allow IAC to receive fixed rate amounts in exchange for making floating rate payments based on the LIBOR. As of December 31, 2004,2005, of the $750 million notionalprincipal amount outstanding under the 2002 Senior Notes, the interest rate is fixed on $350$400 million at 7% and floating on $400$350 million, with the rate based on a spread over 6-month LIBOR. In addition, during 2004To further manage risk, the Company soldunwound swap agreements of a notional amount of $250 million and $100 million for nominal gains in 2004 and 2005, which are being amortized over the remaining life of the 2002 Senior Notes. The changes in fair value of the interest rate swaps at December 31, 20042005 resulted in an unrealizeda loss of $8.8 million which has been entirely offset by a corresponding gain of $0.4 million.attributable to the fixed rate debt.
The majority of the Company's outstanding fixed-rate debt at December 31, 2005 relates to the $750.0$750 million notional amount outstanding under the 2002 Senior Notes, as well as the $360.8$114 million notional amount outstanding under the 1998 Senior Notes.Convertible Notes and the $80 million outstanding under the Liberty Bonds. Excluding the $400$350 million under the 2002 Senior Notes, which currently pays a variable interest rate as a result of the outstanding swap agreements noted above, a 100 basis point increase or decrease in the level of interest rates would, respectively, decrease or increase the fair value of the fixed-rate debt by approximately $23.3$35.9 million. Such potential increasesincrease or decreasesdecrease in fair value are based on certain simplifying assumptions, including a constant level and rate of
fixed-rate debt for all maturities and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period. If the LIBOR rates were to increase (decrease) by 100 basis points, then the annual interest payments on the $400$350 million of variable-rate debt would have increased (decreased) by $4.7$3.5 million. Such potential increasesincrease or decreasesdecrease in interest payments are based on certain simplifying assumptions, including a constant level and rate of variable-rate debt for all maturities and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.
One ofLendingTree Loans' mortgage banking operations expose the Company's subsidiaries, Home Loan Center, is exposedCompany to interest rate risk for loans it originates and subsequently sellsoriginated until those loans are sold in the secondary market ("loans held for sale") and as a party to. In addition, LendingTree Loans provides interest rate lock commitments ("IRLCs") to fund mortgage loans at interest rates previously agreed upon by the subsidiary andwith the borrower for specified periods of time.time, which also expose it to interest rate risk.
The CompanyLendingTree Loans hedges the changes in fair value of thecertain loans held for sale primarily by using mortgage forward delivery contracts. These hedging relationships are documenteddesignated as fair value hedges. For loans held for sale that are hedged with forward sale commitments,delivery contracts, the carrying value isof the loans held for sale and the derivative instruments are adjusted for the change in marketfair value during
the time the hedge was deemed to be highly effective. The Company records changes in fair valueeffective portion of the derivative gain or loss as well as the offsetting hedged loans for sale as an adjustmentitem loss or gain attributable to the carrying basishedged risk are recognized in the statement of operations as a component of revenue when each loan is sold. The net of these adjustments represent the loan through current period earnings.ineffective portion of highly effective hedges which is also recorded as a component of revenue. If it is determined that the hedging relationship is not highly effective, as a hedge, hedge accounting is discontinued. When hedge accounting is discontinued, the affected loans held for sale are no longer adjusted for the changes in fair value. However, the changes in fair value of the derivative instruments no longer offset with changes in value of the previously hedged loans held for sale and the difference is reflectedare recognized in current earnings as a component of revenue. At December 31, 2004,The fair value of the amount ofderivative instruments are recorded in "Other current assets" and/or "Other accrued liabilities" in the accompanying consolidated balance sheets. In 2005, the Company recognized a $1.4 million loss related to hedge ineffectiveness on loans held for sale resultedand a $0.1 million gain related to changes in the Company recognizing $0.5 million in gains.fair value of derivative instruments when hedge accounting was discontinued.
IRLCs are accounted for as derivative instruments and, therefore, are required to be recorded at fair value, with changes in fair value reflected in current period earnings. To manage the interest rate risk associated with the IRLCs, the Company uses derivative instruments, including mortgage forward delivery contracts. These instruments do not qualify for hedge accounting. The changes in fair value of these instruments atfor the year ended December 31, 20042005 resulted in a net loss of $0.1$0.4 million and are includedwhich has been recognized as a component of revenue in the accompanying consolidated statement of operations.
The fair values of derivative financial instruments at LendingTree Loans are impacted by movements in market interest rates. Changes in the fair value of the derivative financial instruments would substantially be offset by changes in the fair value of the items for which risk is being mitigated. As of December 31, 2005 if market interest rates had increased by 100 basis points the aggregate fair value of the derivative financial instruments and the hedged items at LendingTree Loans would have decreased by $2.0 million. As of December 31, 2005 if market interest rates had decreased by 100 basis points the aggregate fair value of the derivative financial instruments and the hedged items at LendingTree Loans would have decreased by $1.0 million.
The Company formally designates and documents all hedging relationships as either fair value hedges or cash flow hedges, as applicable, and documents the objective and strategy for undertaking the hedge transaction.
Foreign Currency Exchange Risk
The Company conducts business in certain foreign markets, primarily in Canada and the European Union.Union and Canada. The Company's primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar, primarily the Euro, British Pound Sterling and Canadian Dollar. However, the exposure is mitigated since the Company has generally reinvested profits from international operations in order to grow the businesses.
As the Company increases its operations in international markets it becomes increasingly exposed to potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on the Company are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause the Company to adjust its financing and operating strategies.
As currency exchange rates change, translation of the income statements of the Company's international businesses into U.S. dollars affects year-over-year comparability of operating results. Historically, the Company has not hedged translation risks because cash flows from international operations were generally reinvested locally.
Foreign exchange gains and losses were not material to the Company's earnings in 20042005 and 2003.2004. However, the Company periodically reviews its strategy for hedging transaction risks. The Company's
objective in managing its foreign exchange risk is to minimize its potential exposure to the changes that exchange rates might have on its earnings, cash flows and financial position.
During the second quarter of 2003, one of the Company's foreign subsidiaries entered into a five-year foreign exchange forward contract with a notional amount of $38.6 million which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiary's functional currency. Foreign exchange re-measurement gains and losses related to the contract and liability are recognized each period in our statementthe statements of operations and are offsetting. The change in fair value of this foreign exchange forward contract at December 31, 20042005 resulted in an unrealized loss of $10.8 million.
During the fourth quarter of 2003, one of the Company's subsidiaries entered into a cross currency swap with a notional amount of Euro 39 million which is to mature on October 30, 2013 and is used to hedge against the change in value of an asset denominated in a currency other than the subsidiary's functional currency. This swap enables the Company to pay Euro at a rate of the three-month EURIBOR plus 0.50% on Euro 39 million. In exchange the Company receives 4.9% interest on $46.4 million. In addition, on April 14, 2004, one of the Company's subsidiaries entered into a cross currency swap with a notional amount of Euro 38.2 million which is to mature on April 7, 2014 and is used to hedge against the change in value of an asset in a similar manner to the swap described above. This swap enables the Company to pay Euro at a rate of the six-month EURIBOR plus 0.90% on Euro 38.2 million. In exchange the Company receives 5.47% interest on $45.9 million. At the date of maturity, these agreements call for the exchange of notional amounts. The change in fair value of these cross currency swaps at December 31, 2004 resulted in an unrealized loss of $12.8$5.1 million.
Equity Price Risk
The Company has a minimal investment in equity securities of publicly traded companies. These investments, as of December 31, 2004,2005, were considered available-for-sale and included in long-term assets with the unrealized gain deferred as a component of shareholders' equity. It is not customary for the Company to make significant investments in equity securities as part of its marketable securities investment strategy.
On August 4, 2004,Following the Spin-Off, derivative liabilities were created due to IAC's obligation to deliver shares of both IAC made an investment in eLong, Inc. ("eLong"), a Cayman Island company, whose principal business is the operation of an Internet based travel business in the People's Republic of China. The purchase priceand Expedia common stock upon conversion of the investment was approximately $59 million in cash that represented a 30% interest in eLong which is accounted for under the equity method at December 31, 2004. Concurrent with the original investment, eLong issued a warrantConvertible Notes and exercise of certain IAC warrants. Derivative assets were also created due to Expedia's contractual obligation to deliver shares of Expedia common stock to IAC to acquire such additional eLong shares as would be necessary to provide IAC with a minimum aggregate investmentupon conversion by the holders of 51% of eLong shares on a fully diluted basis for approximately $6.21 per share.
On October 28, 2004 eLong priced it initial public offering of shares. The initial public offering resulted in the warrant becoming subject to the mark-to-market provisions of SFAS 115, "Accounting for Certain Investments in DebtConvertible Notes and Equity Securities." As such, the Company has recorded an unrealized gain of $27.2 million, net of deferred taxes, related to the warrant that has been recorded in other comprehensive income at December 31, 2004.
On December 16, 2004, IAC notified eLong of its intent to exercise its warrant to acquire its additional eLong shares. The transaction was completed on January 10, 2005. Following theupon exercise of the warrant,warrants. Both the derivative liabilities and derivative assets are marked to market each quarter, and the changes in fair values, which are based upon changes in both IAC owns approximately 52%and Expedia common stock, are recognized in current earnings as a component of the outstanding capital stock of eLong on a fully diluted basis, representing approximately 96% of the total voting power of eLong. Accordingly, the Company will begin to consolidate the results of eLong effective January 10, 2005.
The Company has substantial investments in VUE as of December 31, 2004, including Preferred A interests and Preferred B interests with carrying values of approximately $614 million and $1.4 billion, respectively, and common interests with a carrying value of $782 million. The Company has reviewed the carrying value of these investments as of December 31, 2004 and believes they are not in excess of their fair value.other income (expense).
Item 8. Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
IAC/InterActiveCorp
We have audited the accompanying consolidated balance sheets of IAC/InterActiveCorp (formerly InterActiveCorp and USA Interactive) and subsidiaries as of December 31, 20042005 and 2003,2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004.2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of IAC/InterActiveCorp and subsidiaries at December 31, 20042005 and 2003,2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004,2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, on January 1, 2002, IAC/InterActiveCorp adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets."
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of IAC/InterActiveCorp's internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 20058, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 8, 2006
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Years Ended December 31, | | Years Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | 2002 | | 2005 | 2004 | 2003 | ||||||||||||||
| | (In thousands, except per share data) | | (In thousands, except per share data) | ||||||||||||||||||
Product sales | Product sales | $ | 3,295,899 | $ | 2,469,151 | $ | 2,313,680 | |||||||||||||||
Service revenue | Service revenue | $ | 3,595,898 | $ | 3,896,148 | $ | 2,656,043 | Service revenue | 2,457,772 | 1,719,128 | 1,509,809 | |||||||||||
Product sales | 2,596,782 | 2,431,970 | 1,924,882 | |||||||||||||||||||
Net revenue | 6,192,680 | 6,328,118 | 4,580,925 | Net revenue | 5,753,671 | 4,188,279 | 3,823,489 | |||||||||||||||
Cost of sales—product sales | Cost of sales—product sales | 1,979,131 | 1,487,618 | 1,396,077 | ||||||||||||||||||
Cost of sales—service revenue | Cost of sales—service revenue | 1,331,173 | 2,068,286 | 1,573,491 | Cost of sales—service revenue | 1,149,040 | 908,630 | 852,292 | ||||||||||||||
Cost of sales—product sales | 1,492,779 | 1,400,753 | 1,202,519 | |||||||||||||||||||
Gross profit | 3,368,728 | 2,859,079 | 1,804,915 | Gross profit | 2,625,500 | 1,792,031 | 1,575,120 | |||||||||||||||
Selling and marketing expense | Selling and marketing expense | 1,203,370 | 929,445 | 559,741 | Selling and marketing expense | 948,762 | 575,754 | 491,447 | ||||||||||||||
General and administrative expense | General and administrative expense | 746,853 | 711,781 | 495,386 | General and administrative expense | 666,044 | 493,663 | 443,006 | ||||||||||||||
Other operating expense | Other operating expense | 142,360 | 116,413 | 84,510 | Other operating expense | 122,851 | 87,254 | 65,736 | ||||||||||||||
Amortization of non-cash compensation expense | Amortization of non-cash compensation expense | 137,537 | 70,326 | 32,404 | ||||||||||||||||||
Amortization of cable distribution fees | Amortization of cable distribution fees | 70,590 | 68,902 | 58,926 | Amortization of cable distribution fees | 70,401 | 69,232 | 67,453 | ||||||||||||||
Amortization of non-cash distribution and marketing expense | Amortization of non-cash distribution and marketing expense | 18,030 | 51,432 | 37,344 | Amortization of non-cash distribution and marketing expense | — | 1,302 | 9,458 | ||||||||||||||
Amortization of non-cash compensation expense | 241,726 | 128,185 | 15,637 | |||||||||||||||||||
Amortization of intangibles | Amortization of intangibles | 347,457 | 268,504 | 145,667 | Amortization of intangibles | 186,511 | 185,388 | 186,677 | ||||||||||||||
Depreciation expense | Depreciation expense | 179,514 | 172,453 | 170,819 | Depreciation expense | 149,165 | 144,576 | 140,582 | ||||||||||||||
Restructuring | 1,542 | 21 | 54,130 | |||||||||||||||||||
Goodwill impairment | Goodwill impairment | 184,780 | — | 22,247 | Goodwill impairment | — | 184,780 | — | ||||||||||||||
Merger costs | Merger costs | — | 11,760 | 7,910 | Merger costs | — | — | 96 | ||||||||||||||
Operating income | 232,506 | 400,183 | 152,598 | |||||||||||||||||||
Operating income (loss) | 344,229 | (20,244 | ) | 138,261 | ||||||||||||||||||
Other income (expense): | Other income (expense): | |||||||||||||||||||||
Other income (expense): | Interest income | 141,104 | 170,181 | 147,528 | ||||||||||||||||||
Interest income | 191,679 | 175,822 | 114,599 | Interest expense | (77,674 | ) | (68,367 | ) | (80,108 | ) | ||||||||||||
Interest expense | (87,388 | ) | (92,913 | ) | (44,467 | ) | Gain on sale of VUE interests | 523,487 | — | — | ||||||||||||
Equity in income (losses) of VUE | 16,188 | (224,468 | ) | 6,107 | Equity in income (losses) of VUE | 21,960 | 16,188 | (224,468 | ) | |||||||||||||
Equity in income (losses) in unconsolidated affiliates and other | 25,691 | 3,767 | (115,640 | ) | Equity in income of unconsolidated affiliates and other | 38,579 | 34,534 | 11,215 | ||||||||||||||
Total other income (expense), net | Total other income (expense), net | 146,170 | (137,792 | ) | (39,401 | ) | Total other income (expense), net | 647,456 | 152,536 | (145,833 | ) | |||||||||||
Earnings from continuing operations before income taxes and minority interest | 378,676 | 262,391 | 113,197 | |||||||||||||||||||
Income tax expense | (179,186 | ) | (70,691 | ) | (65,127 | ) | ||||||||||||||||
Earnings (loss) from continuing operations before income taxes and minority interest | Earnings (loss) from continuing operations before income taxes and minority interest | 991,685 | 132,292 | (7,572 | ) | |||||||||||||||||
Income tax (expense) benefit | Income tax (expense) benefit | (391,069 | ) | (74,266 | ) | 24,214 | ||||||||||||||||
Minority interest in income of consolidated subsidiaries | Minority interest in income of consolidated subsidiaries | (13,729 | ) | (65,043 | ) | (46,073 | ) | Minority interest in income of consolidated subsidiaries | (2,229 | ) | (3,159 | ) | (5,933 | ) | ||||||||
Earnings from continuing operations before cumulative effect of accounting change | 185,761 | 126,657 | 1,997 | |||||||||||||||||||
Gain on contribution of USA Entertainment to VUE, net of tax | — | — | 2,378,311 | |||||||||||||||||||
Income (loss) from discontinued operations, net of tax | (20,900 | ) | 40,739 | 34,184 | ||||||||||||||||||
Earnings before cumulative effect of accounting change | 164,861 | 167,396 | 2,414,492 | |||||||||||||||||||
Cumulative effect of accounting change, net of tax | — | — | (461,389 | ) | ||||||||||||||||||
Earnings from continuing operations | Earnings from continuing operations | 598,387 | 54,867 | 10,709 | ||||||||||||||||||
Gain on sale of EUVÍA, net of tax | Gain on sale of EUVÍA, net of tax | 70,152 | — | — | ||||||||||||||||||
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | 207,611 | 109,994 | 156,687 | ||||||||||||||||||
Earnings before preferred dividends | Earnings before preferred dividends | 164,861 | 167,396 | 1,953,103 | Earnings before preferred dividends | 876,150 | 164,861 | 167,396 | ||||||||||||||
Preferred dividends | Preferred dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | Preferred dividends | (7,938 | ) | (13,053 | ) | (13,055 | ) | ||||||||
Net earnings available to common shareholders | Net earnings available to common shareholders | $ | 151,808 | $ | 154,341 | $ | 1,941,344 | Net earnings available to common shareholders | $ | 868,212 | $ | 151,808 | $ | 154,341 | ||||||||
Earnings (loss) per share from continuing operations before cumulative effect of accounting change available to common shareholders: | ||||||||||||||||||||||
Basic earnings (loss) per common share | $ | 0.25 | $ | 0.19 | $ | (0.02 | ) | |||||||||||||||
Diluted earnings (loss) per common share | $ | 0.23 | $ | 0.17 | $ | (0.04 | ) | |||||||||||||||
Earnings per share before cumulative effect of accounting change available to common shareholders: | ||||||||||||||||||||||
Basic earnings per common share | $ | 0.22 | $ | 0.26 | $ | 5.64 | ||||||||||||||||
Diluted earnings per common share | $ | 0.20 | $ | 0.23 | $ | 5.62 | ||||||||||||||||
Earnings (loss) per share from continuing operations: | Earnings (loss) per share from continuing operations: | |||||||||||||||||||||
Basic earnings (loss) per common share | $ | 1.79 | $ | 0.12 | $ | (0.01 | ) | |||||||||||||||
Diluted earnings (loss) per common share | $ | 1.68 | $ | 0.11 | $ | (0.01 | ) | |||||||||||||||
Net earnings per share available to common shareholders: | Net earnings per share available to common shareholders: | Net earnings per share available to common shareholders: | ||||||||||||||||||||
Basic earnings per common share | $ | 0.22 | $ | 0.26 | $ | 4.55 | ||||||||||||||||
Diluted earnings per common share | $ | 0.20 | $ | 0.23 | $ | 4.54 | ||||||||||||||||
Basic earnings per common share | $ | 2.64 | $ | 0.44 | $ | 0.51 | ||||||||||||||||
Diluted earnings per common share | $ | 2.46 | $ | 0.41 | $ | 0.51 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2004 | December 31, 2003 | ||||||
---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 1,157,462 | $ | 899,062 | ||||
Restricted cash and cash equivalents | 41,377 | 31,356 | ||||||
Marketable securities | 2,409,745 | 2,419,735 | ||||||
Accounts and notes receivable, net of allowance of $22,835 and $30,999, respectively(*) | 550,867 | 429,424 | ||||||
Loans available for sale, net | 206,256 | — | ||||||
Inventories, net | 240,977 | 215,995 | ||||||
Deferred income taxes | 110,039 | 65,071 | ||||||
Other current assets | 168,029 | 154,333 | ||||||
Total current assets | 4,884,752 | 4,214,976 | ||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Computer and broadcast equipment | 801,712 | 686,899 | ||||||
Buildings and leasehold improvements | 166,202 | 155,212 | ||||||
Furniture and other equipment | 161,932 | 154,378 | ||||||
Land | 21,168 | 21,172 | ||||||
Projects in progress | 71,283 | 30,962 | ||||||
1,222,297 | 1,048,623 | |||||||
Less: accumulated depreciation and amortization | (707,780 | ) | (575,446 | ) | ||||
Total property, plant and equipment | 514,517 | 473,177 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 11,433,746 | 11,273,635 | ||||||
Intangible assets, net | 2,333,663 | 2,513,889 | ||||||
Long-term investments | 1,609,335 | 1,426,502 | ||||||
Preferred interest exchangeable for common stock | 1,428,530 | 1,428,530 | ||||||
Cable distribution fees, net | 80,525 | 128,971 | ||||||
Note receivables and advances, net of current portion | 615 | 14,507 | ||||||
Deferred charges and other(*) | 112,842 | 93,928 | ||||||
Non-current assets of discontinued operations | 340 | 340 | ||||||
Total other assets | 16,999,596 | 16,880,302 | ||||||
TOTAL ASSETS | $ | 22,398,865 | $ | 21,568,455 | ||||
| December 31, 2005 | December 31, 2004 | |||||
---|---|---|---|---|---|---|---|
| (In thousands, except share data) | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 987,080 | $ | 999,698 | |||
Restricted cash and cash equivalents | 93,561 | 41,377 | |||||
Marketable securities | 1,488,058 | 2,409,745 | |||||
Accounts and notes receivable, net of allowance of $31,093 and $19,150, respectively | 487,968 | 353,579 | |||||
Loans available for sale, net | 372,512 | 206,256 | |||||
Inventories, net | 337,186 | 240,917 | |||||
Deferred income taxes | 66,672 | 107,220 | |||||
Other current assets | 154,453 | 440,028 | |||||
Current assets of discontinued operations | 6,038 | 316,947 | |||||
Total current assets | 3,993,528 | 5,115,767 | |||||
Property, plant and equipment, net | 567,408 | 427,257 | |||||
Goodwill | 7,351,700 | 5,361,825 | |||||
Intangible assets, net | 1,558,188 | 1,054,302 | |||||
Long-term investments | 122,313 | 1,469,020 | |||||
Preferred interest exchangeable for common stock | — | 1,428,530 | |||||
Other non-current assets | 324,158 | 172,696 | |||||
Non-current assets of discontinued operations | 470 | 7,369,468 | |||||
TOTAL ASSETS | $ | 13,917,765 | $ | 22,398,865 | |||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | December 31, 2004 | December 31, 2003 | | December 31, 2005 | December 31, 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | | (In thousands, except share data) | ||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
CURRENT LIABILITIES: | CURRENT LIABILITIES: | CURRENT LIABILITIES: | ||||||||||||||
Current maturities of long-term obligations and short-term borrowings | Current maturities of long-term obligations and short-term borrowings | $ | 565,273 | $ | 2,850 | Current maturities of long-term obligations and short-term borrowings | $ | 375,276 | $ | 562,953 | ||||||
Accounts payable, trade | Accounts payable, trade | 811,874 | 687,977 | Accounts payable, trade | 327,147 | 259,510 | ||||||||||
Accounts payable, client accounts | Accounts payable, client accounts | 176,921 | 142,002 | Accounts payable, client accounts | 269,344 | 176,921 | ||||||||||
Accrued distribution fees | 39,703 | 39,142 | ||||||||||||||
Deferred merchant bookings | 361,199 | 218,822 | ||||||||||||||
Deferred revenue | Deferred revenue | 104,611 | 180,229 | Deferred revenue | 123,267 | 99,258 | ||||||||||
Income tax payable | 77,528 | 96,817 | ||||||||||||||
Income taxes payable | Income taxes payable | 517,016 | 56,672 | |||||||||||||
Other accrued liabilities | Other accrued liabilities | 499,300 | 494,280 | Other accrued liabilities | 601,009 | 426,268 | ||||||||||
Liabilities held for sale | Liabilities held for sale | — | 295,773 | |||||||||||||
Current liabilities of discontinued operations | Current liabilities of discontinued operations | 9,306 | 16,062 | Current liabilities of discontinued operations | 19,938 | 1,015,083 | ||||||||||
Total current liabilities | 2,645,715 | 1,878,181 | Total current liabilities | 2,232,997 | 2,892,438 | |||||||||||
Long-term obligations, net of current maturities | Long-term obligations, net of current maturities | 796,715 | 1,120,097 | Long-term obligations, net of current maturities | 959,410 | 796,715 | ||||||||||
Other long-term liabilities | Other long-term liabilities | 151,580 | 67,981 | Other long-term liabilities | 222,558 | 101,332 | ||||||||||
Non-current liabilities of discontinued operations | Non-current liabilities of discontinued operations | 928 | 423,521 | |||||||||||||
Deferred income taxes | Deferred income taxes | 2,479,099 | 2,446,394 | Deferred income taxes | 1,265,530 | 2,130,386 | ||||||||||
Common stock exchangeable for preferred interest | Common stock exchangeable for preferred interest | 1,428,530 | 1,428,530 | Common stock exchangeable for preferred interest | — | 1,428,530 | ||||||||||
Minority interest | Minority interest | 291,922 | 211,687 | Minority interest | 5,514 | 20,639 | ||||||||||
SHAREHOLDERS' EQUITY: | SHAREHOLDERS' EQUITY: | SHAREHOLDERS' EQUITY: | ||||||||||||||
Preferred stock $.01 par value; authorized 100,000,000 shares; 13,118,182 issued and outstanding | 131 | 131 | ||||||||||||||
Common stock $.01 par value; authorized 1,600,000,000 shares; issued 696,983,299 and 679,006,913 shares, respectively, and outstanding 633,019,550 and 631,022,816 shares, respectively, including 308,652 and 452,035 of restricted stock, respectively | 6,970 | 6,790 | ||||||||||||||
Class B convertible common stock $.01 par value; authorized 400,000,000 shares; issued and outstanding 64,629,996 shares | 646 | 646 | ||||||||||||||
Preferred stock $.01 par value; authorized 100,000,000 shares; 846 and 13,118,182 shares issued and outstanding | Preferred stock $.01 par value; authorized 100,000,000 shares; 846 and 13,118,182 shares issued and outstanding | — | 131 | |||||||||||||
Common stock $.001 par value; authorized 1,600,000,000 shares; issued 398,992,572 shares and outstanding 292,221,855 shares, including 144,698 shares of restricted stock | Common stock $.001 par value; authorized 1,600,000,000 shares; issued 398,992,572 shares and outstanding 292,221,855 shares, including 144,698 shares of restricted stock | 399 | — | |||||||||||||
Class B convertible common stock $.001 par value; authorized 400,000,000 shares; issued 32,314,998 shares and outstanding 25,599,998 shares | Class B convertible common stock $.001 par value; authorized 400,000,000 shares; issued 32,314,998 shares and outstanding 25,599,998 shares | 32 | — | |||||||||||||
Common stock $.01 par value; authorized 1,600,000,000 shares; issued 348,491,650 shares and outstanding 316,509,775 shares, including 154,326 shares of restricted stock | Common stock $.01 par value; authorized 1,600,000,000 shares; issued 348,491,650 shares and outstanding 316,509,775 shares, including 154,326 shares of restricted stock | — | 3,485 | |||||||||||||
Class B convertible common stock $.01 par value; authorized 400,000,000 shares; issued and outstanding 32,314,998 shares | Class B convertible common stock $.01 par value; authorized 400,000,000 shares; issued and outstanding 32,314,998 shares | — | 323 | |||||||||||||
Additional paid-in capital | Additional paid-in capital | 14,058,797 | 13,634,926 | Additional paid-in capital | 14,341,668 | 14,062,605 | ||||||||||
Retained earnings | Retained earnings | 2,428,760 | 2,276,952 | Retained earnings | 128,076 | 2,428,760 | ||||||||||
Accumulated other comprehensive income | Accumulated other comprehensive income | 81,051 | 36,896 | Accumulated other comprehensive income | 26,073 | 81,051 | ||||||||||
Treasury stock 63,963,749 and 47,984,097 shares, respectively | (1,966,053 | ) | (1,535,758 | ) | ||||||||||||
Treasury stock 106,770,717 and 31,981,875 shares, respectively | Treasury stock 106,770,717 and 31,981,875 shares, respectively | (5,260,422 | ) | (1,966,053 | ) | |||||||||||
Note receivable from key executive for common stock issuance | Note receivable from key executive for common stock issuance | (4,998 | ) | (4,998 | ) | Note receivable from key executive for common stock issuance | (4,998 | ) | (4,998 | ) | ||||||
Total shareholders' equity | 14,605,304 | 14,415,585 | Total shareholders' equity | 9,230,828 | 14,605,304 | |||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 22,398,865 | $ | 21,568,455 | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 13,917,765 | $ | 22,398,865 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | | Class B Convertible Common Stock | | | | | Note Receivable from Key Executive for Common Stock Issuance | | | | | | | | | | | | | | | | Note Receivable From Key Executive for Common Stock Issuance | |||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Preferred Stock | Common Stock | | | | | | | | | | Class B Convertible Common Stock $.001 Par Value | | | Class B Convertible Common Stock $.01 Par Value | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Retained Earnings | Accum. Other Comp. Income (Loss) | Class B Convertible Common Stock | Treasury Stock | Note Receivable from Key Executive for Common Stock Issuance | | Preferred Stock $.01 Par Value | Common Stock $.001 Par Value | Common Stock $.01 Par Value | | | | | Note Receivable From Key Executive for Common Stock Issuance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | Shares | $ | Shares | Addit. Paid-in Capital | Retained Earnings | | Class B Convertible Common Stock $.001 Par Value | | Note Receivable From Key Executive for Common Stock Issuance | Class B Convertible Common Stock $.01 Par Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2001 | $ | 3,945,501 | — | — | $ | 3,217 | 321,475 | $ | 3,918,401 | $ | (141,411 | ) | $ | (4,998 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year ended December 31, 2002 | 1,953,103 | — | — | — | — | — | — | — | 1,953,103 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase in unrealized gains in available for sale securities | 3,416 | — | — | — | — | — | — | — | — | 3,416 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | 23,886 | — | — | — | — | — | — | — | — | 23,886 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock $.01 Par Value | Common Stock $.001 Par Value | Addit. Paid-in Capital | Retained Earnings | Common Stock $.01 Par Value | Retained Earnings | Accum Other Comp. Income | Treasury Stock | Class B Convertible Common Stock $.001 Par Value | Note Receivable From Key Executive for Common Stock Issuance | Class B Convertible Common Stock $.01 Par Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 1,980,405 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | Addit. Paid-in Capital | Retained Earnings | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Expedia transaction | 1,497,894 | 131 | 13,118 | 206 | 20,583 | — | — | 1,497,557 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options | 144,521 | — | — | 92 | 9,208 | — | — | 144,429 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to stock options exercised | 7,620 | — | — | — | — | — | — | 7,620 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock in connection with other transactions | 61,871 | — | — | 22 | 2,369 | — | — | 61,849 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for LLC Exchange | 178,650 | — | — | 71 | 7,080 | — | — | 178,579 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for Holdco Exchange | 750,695 | — | — | 316 | 31,620 | 16 | 1,597 | 750,363 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock and warrants in VUE transaction | 810,873 | — | — | — | — | — | — | 810,873 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock exchangeable for preferred interest | (1,428,530 | ) | — | — | — | — | — | — | (1,428,530 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (11,759 | ) | — | — | — | — | — | — | — | (11,759 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | (6,278 | ) | — | — | — | — | — | — | — | — | — | (6,278 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2002 | $ | 7,931,463 | $ | 131 | 13,118 | $ | 3,924 | 392,335 | $ | 646 | 64,630 | $ | 5,941,141 | $ | 2,122,611 | $ | 15,697 | $ | (147,689 | ) | $ | (4,998 | ) | $ | 7,931,463 | $ | 131 | 13,118 | $ | — | — | $ | — | — | $ | 1,961 | 196,167 | $ | 323 | 32,315 | $ | 5,943,427 | $ | 2,122,611 | $ | 15,697 | $ | (147,689 | ) | $ | (4,998 | ) | ||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year ended December 31, 2003 | 167,396 | — | — | — | — | — | — | — | 167,396 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings for the year ended December 31, 2003 | 167,396 | — | — | — | — | — | — | — | — | — | — | — | 167,396 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decrease in unrealized gains in available for sale securities | (3,010 | ) | — | — | — | — | — | — | — | — | (3,010 | ) | — | — | (3,010 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (3,010 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | 24,649 | — | — | — | — | — | — | — | — | 24,649 | — | — | 24,649 | — | — | — | — | — | — | — | — | — | — | — | — | 24,649 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss on derivative contracts | (440 | ) | — | — | — | — | — | — | — | — | (440 | ) | — | — | (440 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (440 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 188,595 | 188,595 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Ticketmaster merger | 867,799 | — | — | 455 | 45,471 | — | — | 867,344 | — | — | — | — | 867,799 | — | — | — | — | — | — | 227 | 22,736 | — | — | 867,572 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the uDate transaction | 132,892 | — | — | 55 | 5,480 | — | — | 132,837 | — | — | — | — | 132,892 | — | — | — | — | — | — | 27 | 2,740 | — | — | 132,865 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Hotels.com merger | 1,179,308 | — | — | 440 | 44,315 | — | — | 1,178,868 | — | — | — | — | 1,179,308 | — | — | — | — | — | — | 222 | 22,158 | — | — | 1,179,086 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Liberty preemptives | 1,165,879 | — | — | 487 | 48,701 | — | — | 1,165,392 | — | — | — | — | 1,165,879 | — | — | — | — | — | — | 244 | 24,351 | — | — | 1,165,635 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Expedia transaction | 3,569,400 | — | — | 1,008 | 100,762 | — | — | 3,568,392 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Expedia.com merger | 3,569,400 | — | — | — | — | — | — | 504 | 50,381 | — | — | 3,568,896 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the LendingTree transaction | 720,685 | — | — | 188 | 18,765 | — | — | 720,497 | — | — | — | — | 720,685 | — | — | — | — | — | — | 94 | 9,383 | — | — | 720,591 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of securities in connection with the Hotwire.com transaction | 5,848 | — | — | — | — | — | — | 5,848 | — | — | — | — | 5,848 | — | — | — | — | — | — | — | — | — | — | 5,848 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon on exercise of warrants | 11,461 | — | — | 5 | 500 | — | — | 11,456 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 4,111 | — | — | 1 | 67 | — | — | 4,110 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, restricted stock and other | 264,257 | — | — | 227 | 22,611 | — | — | 264,030 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to stock options exercised | 107,855 | — | — | — | — | — | — | 107,855 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, vesting of restricted stock units and other | 279,829 | — | — | — | — | — | — | 116 | 11,588 | — | — | 279,713 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to the exercise of stock options, vesting of restricted stock units and other | 107,855 | — | — | — | — | — | — | — | — | — | — | 107,855 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase and cancellation of warrants | (440,044 | ) | — | — | — | — | — | — | (440,044 | ) | — | — | — | — | (440,044 | ) | — | — | — | — | — | — | — | — | — | — | (440,044 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (13,055 | ) | — | — | — | — | — | — | — | (13,055 | ) | — | — | — | (13,055 | ) | — | — | — | — | — | — | — | — | — | — | — | (13,055 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization of non-cash compensation | 107,200 | — | — | — | — | — | — | 107,200 | — | — | — | — | 107,200 | — | — | — | — | — | — | — | — | — | — | 107,200 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | (1,388,069 | ) | — | — | — | — | — | — | — | — | — | (1,388,069 | ) | — | (1,388,069 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | (1,388,069 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2003 | $ | 14,415,585 | $ | 131 | 13,118 | $ | 6,790 | 679,007 | $ | 646 | 64,630 | $ | 13,634,926 | $ | 2,276,952 | $ | 36,896 | $ | (1,535,758 | ) | $ | (4,998 | ) | $ | 14,415,585 | $ | 131 | 13,118 | $ | — | — | $ | — | — | $ | 3,395 | 339,504 | $ | 323 | 32,315 | $ | 13,638,644 | $ | 2,276,952 | $ | 36,896 | $ | (1,535,758 | ) | $ | (4,998 | ) | ||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year ended December 31, 2004 | 164,861 | — | — | — | — | — | — | — | 164,861 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings for the year ended December 31, 2004 | 164,861 | — | — | — | — | — | — | — | — | — | — | — | 164,861 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase in unrealized gains in available for sale securities | 17,104 | — | — | — | — | — | — | — | — | 17,104 | — | — | 17,104 | — | — | — | — | — | — | — | — | — | — | — | — | 17,104 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | 28,021 | — | — | — | — | — | — | — | — | 28,021 | — | — | 28,021 | — | — | — | — | — | — | — | — | — | — | — | — | 28,021 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net increase in loss on derivative contracts | (970 | ) | — | — | — | — | — | — | — | — | (970 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss on derivative contracts | (970 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (970 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 209,016 | 209,016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, restricted stock and other | 170,485 | — | — | 180 | 17,976 | — | — | 170,305 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to stock options exercised and restricted stock | 12,352 | — | — | — | — | — | — | 12,352 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, vesting of restricted stock units and other | 170,485 | — | — | — | — | — | — | 90 | 8,988 | — | — | 170,395 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to the exercise of stock options, vesting of restricted stock units and other | 12,352 | — | — | — | — | — | — | — | — | — | — | 12,352 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (13,053 | ) | — | — | — | — | — | — | — | (13,053 | ) | — | — | — | (13,053 | ) | — | — | — | — | — | — | — | — | — | — | — | (13,053 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization of non-cash compensation | 241,214 | — | — | — | — | — | — | 241,214 | — | — | — | — | 241,214 | — | — | — | — | — | — | — | — | — | — | 241,214 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | (430,295 | ) | — | — | — | — | — | — | — | — | — | (430,295 | ) | — | (430,295 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | (430,295 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2004 | $ | 14,605,304 | $ | 131 | 13,118 | $ | 6,970 | 696,983 | $ | 646 | 64,630 | $ | 14,058,797 | $ | 2,428,760 | $ | 81,051 | $ | (1,966,053 | ) | $ | (4,998 | ) | $ | 14,605,304 | $ | 131 | 13,118 | $ | — | — | $ | — | — | $ | 3,485 | 348,492 | $ | 323 | 32,315 | $ | 14,062,605 | $ | 2,428,760 | $ | 81,051 | $ | (1,966,053 | ) | $ | (4,998 | ) | ||||||||||||||||||||||||||
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
| | | | | | | | | | | | | | | | Note Receivable From Key Executive for Common Stock Issuance | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Class B Convertible Common Stock $.001 Par Value | | | Class B Convertible Common Stock $.01 Par Value | | | | | |||||||||||||||||||||||||||||||
| | Preferred Stock $.01 Par Value | Common Stock $.001 Par Value | Common Stock $.01 Par Value | | | | | ||||||||||||||||||||||||||||||||||||
| | | | Accum Other Comp. Income | | |||||||||||||||||||||||||||||||||||||||
| | Addit. Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | Shares | $ | Shares | $ | Shares | $ | Shares | $ | Shares | |||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
Net earnings for the year ended December 31, 2005 | 876,150 | — | — | — | — | — | — | — | — | — | — | — | 876,150 | — | — | — | ||||||||||||||||||||||||||||
Increase in unrealized losses in available for sale securities | (22,709 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (22,709 | ) | — | — | ||||||||||||||||||||||||||
Foreign currency translation | (31,715 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (31,715 | ) | — | — | ||||||||||||||||||||||||||
Net loss on derivative contracts | (554 | ) | — | — | — | — | — | — | — | — | — | — | — | — | (554 | ) | — | — | ||||||||||||||||||||||||||
Comprehensive income | 821,172 | |||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, vesting of restricted stock units and other | 32,427 | — | — | 7 | 7,150 | — | — | 54 | 5,458 | — | — | 32,366 | — | — | — | — | ||||||||||||||||||||||||||||
Income tax benefit related to the exercise of stock options, vesting of restricted stock units and other | 75,820 | — | — | — | — | — | — | — | — | — | — | 75,820 | — | — | — | — | ||||||||||||||||||||||||||||
Dividends on preferred stock | (7,938 | ) | — | — | — | — | — | — | — | — | — | — | — | (7,938 | ) | — | — | — | ||||||||||||||||||||||||||
Amortization of non-cash compensation | 192,266 | — | — | — | — | — | — | — | — | — | — | 192,266 | — | — | — | — | ||||||||||||||||||||||||||||
Sale of VUE interests | 33,627 | — | — | — | — | — | — | — | — | — | — | 1,428,530 | — | — | (1,394,903 | ) | — | |||||||||||||||||||||||||||
Issuance of securities in connection with the Ask acquisition | 1,736,788 | — | — | — | — | — | — | 379 | 37,856 | — | — | 1,736,409 | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of common stock in connection with conversion of convertible notes and exercise of certain warrants | 3,507 | — | — | — | 37 | — | — | — | — | — | — | 3,507 | — | — | — | — | ||||||||||||||||||||||||||||
Recapitalization of common stock(a) | — | — | — | 392 | 391,806 | 32 | 32,315 | (3,918 | ) | (391,806 | ) | (323 | ) | (32,315 | ) | 3,817 | — | — | — | — | ||||||||||||||||||||||||
Redemption of preferred stock | (655,727 | ) | (131 | ) | (13,117 | ) | — | — | — | — | — | — | — | — | (655,596 | ) | — | — | — | — | ||||||||||||||||||||||||
Spin-Off of Expedia to shareholders | (5,812,352 | ) | — | — | — | — | — | — | — | — | — | — | (2,643,456 | ) | (3,168,896 | ) | — | — | — | |||||||||||||||||||||||||
Recognition of derivatives related to convertible notes and certain warrants, net | 105,400 | — | — | — | — | — | — | — | — | — | — | 105,400 | — | — | — | — | ||||||||||||||||||||||||||||
Purchase of treasury stock | (1,899,466 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | (1,899,466 | ) | — | ||||||||||||||||||||||||||
Balance as of December 31, 2005 | $ | 9,230,828 | $ | — | 1 | $ | 399 | 398,993 | $ | 32 | 32,315 | $ | — | — | $ | — | — | $ | 14,341,668 | $ | 128,076 | $ | 26,073 | $ | (5,260,422 | ) | $ | (4,998 | ) | |||||||||||||||
Accumulated other comprehensive income, net of tax is comprised of unrealized (losses) gains on available for sale securities of $(5,160), $17,549 $445, and $3,455,$445, at December 31, 2005, 2004, 2003, and 2002,2003, respectively, foreign currency translation adjustments of $33,197, $64,912 $36,891, and $12,242,$36,891 at December 31, 2005, 2004, 2003, and 2002,2003, respectively, and net losses from derivativesderivative contracts of $(1,964), $(1,410) and $(440) at December 31, 2005, 2004, and 2003, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IAC/INTERACTIVECORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| (In thousands) | ||||||||||
Cash flows from operating activities: | |||||||||||
Earnings from continuing operations before cumulative effect of accounting change | $ | 185,761 | $ | 126,657 | $ | 1,997 | |||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 526,971 | 440,957 | 316,486 | ||||||||
Goodwill impairment | 184,780 | — | 22,247 | ||||||||
Amortization of non-cash distribution and marketing expense | 18,030 | 51,432 | 37,344 | ||||||||
Amortization of non-cash compensation expense | 241,726 | 128,185 | 15,637 | ||||||||
Amortization of cable distribution fees | 70,590 | 68,902 | 58,926 | ||||||||
Amortization of deferred financing costs | 161 | 2,641 | 2,042 | ||||||||
Deferred income taxes | (29,277 | ) | (169,655 | ) | (44,253 | ) | |||||
Loss on retirement of bonds | — | 8,639 | 1,970 | ||||||||
Equity in (income) losses of unconsolidated affiliates, including VUE | (32,042 | ) | 220,823 | 123,608 | |||||||
Non-cash interest income | (41,703 | ) | (43,250 | ) | (22,448 | ) | |||||
Minority interest | 13,729 | 65,043 | 46,073 | ||||||||
Increase in cable distribution fees | (22,348 | ) | (28,349 | ) | (74,314 | ) | |||||
Changes in current assets and liabilities: | |||||||||||
Accounts receivable and notes | (70,427 | ) | (73,303 | ) | 58,537 | ||||||
Inventories | (23,079 | ) | (6,083 | ) | (820 | ) | |||||
Prepaids and other assets | (2,071 | ) | (20,309 | ) | (3,267 | ) | |||||
Accounts payable and accrued liabilities | 151,764 | 409,493 | 129,442 | ||||||||
Deferred revenue | 26,023 | 75,697 | 39,391 | ||||||||
Deferred merchant bookings | 54,872 | 69,474 | 15,957 | ||||||||
Funds collected by Ticketmaster on behalf of clients, net | 15,335 | 1,683 | 26,381 | ||||||||
Other, net | 4,433 | (24,009 | ) | 27,545 | |||||||
Net cash provided by operating activities | 1,273,228 | 1,304,668 | 778,481 | ||||||||
Cash flows (used in) provided by investing activities: | |||||||||||
Acquisitions, net of cash acquired | (486,033 | ) | (1,092,009 | ) | (560,465 | ) | |||||
Capital expenditures | (223,787 | ) | (186,865 | ) | (162,055 | ) | |||||
Recoupment of advance to Universal | — | — | 39,422 | ||||||||
Purchase of marketable securities | (3,373,143 | ) | (7,197,329 | ) | (3,120,682 | ) | |||||
Proceeds from sale of marketable securities | 3,370,147 | 6,700,291 | 1,898,998 | ||||||||
(Increase) decrease in long-term investments and notes receivable | (46,764 | ) | 735 | 33,118 | |||||||
Proceeds from VUE Transaction | — | — | 1,618,710 | ||||||||
Proceeds from sale of broadcast stations | — | — | 589,625 | ||||||||
Other, net | 6,386 | 5,105 | (20,034 | ) | |||||||
Net cash (used in) provided by investing activities | (753,194 | ) | (1,770,072 | ) | 316,637 | ||||||
Cash flows (used in) provided by financing activities: | |||||||||||
Borrowings | 23,378 | — | 29,159 | ||||||||
Principal payments on long-term obligations | (4,339 | ) | (28,033 | ) | (81,015 | ) | |||||
Purchase of treasury stock by IAC and subsidiaries | (430,295 | ) | (1,485,955 | ) | (6,278 | ) | |||||
Payment of mandatory tax distribution to LLC partners | — | — | (154,083 | ) | |||||||
Repurchase of 1998 Senior Notes | — | (101,379 | ) | 697,000 | |||||||
Purchase of Vivendi warrants | — | (407,398 | ) | — | |||||||
Tax withholding payments on retired Expedia warrants | — | (32,247 | ) | — | |||||||
Proceeds from subsidiary stock, including stock options | — | 57,358 | 87,842 | ||||||||
Proceeds from issuance of common stock, including stock options | 147,283 | 1,430,053 | 151,708 | ||||||||
Preferred dividends | (13,053 | ) | (13,055 | ) | (10,222 | ) | |||||
Other, net | 17,380 | 13,016 | (41,590 | ) | |||||||
Net cash (used in) provided by financing activities | (259,646 | ) | (567,640 | ) | 672,521 | ||||||
Net cash used in discontinued operations | (17,528 | ) | (85,632 | ) | (172,832 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 15,540 | 19,624 | 11,131 | ||||||||
Net increase (decrease) in cash and cash equivalents | 258,400 | (1,099,052 | ) | 1,605,938 | |||||||
Cash and cash equivalents at beginning of period | 899,062 | 1,998,114 | 392,176 | ||||||||
Cash and cash equivalents at end of period | $ | 1,157,462 | $ | 899,062 | $ | 1,998,114 | |||||
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Cash flows from operating activities attributable to continuing operations: | |||||||||||
Earnings before preferred dividends | $ | 876,150 | $ | 164,861 | $ | 167,396 | |||||
Less: discontinued operations, net of tax | (277,763 | ) | (109,994 | ) | (156,687 | ) | |||||
Earnings from continuing operations | 598,387 | 54,867 | 10,709 | ||||||||
Adjustments to reconcile earnings from continuing operations to net cash (used in) provided by operating activities attributable to continuing operations: | |||||||||||
Depreciation and amortization of intangibles | 335,676 | 329,964 | 327,259 | ||||||||
Goodwill impairment | — | 184,780 | — | ||||||||
Amortization of non-cash compensation expense | 137,537 | 70,326 | 32,404 | ||||||||
Amortization of cable distribution fees | 70,401 | 69,232 | 67,453 | ||||||||
Amortization of non-cash distribution and marketing expense | — | 1,302 | 9,458 | ||||||||
Deferred income taxes | (1,068,829 | ) | (10,585 | ) | (113,174 | ) | |||||
Gain on sales of loans held for sale | (179,026 | ) | (7,859 | ) | — | ||||||
Loss on retirement of bonds | — | — | 8,639 | ||||||||
Gain on sale of VUE interests | (523,487 | ) | — | — | |||||||
Equity in (income) losses of unconsolidated affiliates, including VUE, net of dividends | (44,346 | ) | (31,867 | ) | 220,832 | ||||||
Non-cash interest income | (17,573 | ) | (41,703 | ) | (36,468 | ) | |||||
Minority interest in income of consolidated subsidiaries | 2,229 | 3,159 | 5,933 | ||||||||
Increase in cable distribution fees | (24,011 | ) | (20,093 | ) | (27,324 | ) | |||||
Changes in current assets and liabilities: | |||||||||||
Accounts and notes receivable | (60,562 | ) | (33,455 | ) | (30,584 | ) | |||||
Origination of loans held for sale, net of principal payments | (7,381,439 | ) | (246,249 | ) | — | ||||||
Proceeds from sales of loans held for sale | 7,394,209 | 229,865 | — | ||||||||
Inventories | 1,816 | (23,019 | ) | (6,138 | ) | ||||||
Prepaids and other assets | (34,139 | ) | (5,713 | ) | 1,752 | ||||||
Accounts payable and accrued liabilities | 606,566 | (78,365 | ) | 127,309 | |||||||
Deferred revenue | 33,557 | 28,487 | 61,716 | ||||||||
Funds collected by Ticketmaster on behalf of clients, net | 70,889 | 15,335 | 1,683 | ||||||||
Other, net | 9,849 | 15,247 | (40,544 | ) | |||||||
Net cash (used in) provided by operating activities attributable to continuing operations | (72,296 | ) | 503,656 | 620,915 | |||||||
Cash flows from investing activities attributable to continuing operations: | |||||||||||
Acquisitions, net of cash acquired | (693,388 | ) | (234,743 | ) | (387,124 | ) | |||||
Capital expenditures | (241,469 | ) | (167,790 | ) | (138,511 | ) | |||||
Purchases of marketable securities | (2,158,694 | ) | (3,368,128 | ) | (5,937,941 | ) | |||||
Proceeds from sales and maturities of marketable securities | 3,124,145 | 2,647,501 | 5,370,883 | ||||||||
(Increase) decrease in long-term investments and notes receivable | (32,363 | ) | 13,284 | (9,225 | ) | ||||||
Proceeds from sale of VUE interests | 1,882,291 | — | — | ||||||||
Proceeds from sale of EUVÍA | 183,016 | — | — | ||||||||
Other, net | 21,934 | 7,839 | 36,586 | ||||||||
Net cash provided by (used in) investing activities attributable to continuing operations | 2,085,472 | (1,102,037 | ) | (1,065,332 | ) | ||||||
Cash flows from financing activities attributable to continuing operations: | |||||||||||
Borrowings | 80,000 | — | — | ||||||||
Borrowings under warehouse lines of credit | 7,217,327 | 243,723 | — | ||||||||
Repayments of warehouse lines of credit | (7,054,488 | ) | (218,522 | ) | — | ||||||
Principal payments on long-term obligations | (400,200 | ) | (1,479 | ) | (28,033 | ) | |||||
Purchase of treasury stock | (1,848,258 | ) | (430,295 | ) | (1,387,463 | ) | |||||
Repurchase of notes | — | — | (101,379 | ) | |||||||
Purchase of Vivendi warrants | — | — | (407,398 | ) | |||||||
Tax withholding payments on retired Expedia warrants | — | — | (32,247 | ) | |||||||
Issuance of common stock, net of withholding taxes for stock options | (19,887 | ) | 147,283 | 1,430,053 | |||||||
Redemption of preferred stock | (655,727 | ) | — | — | |||||||
Preferred dividends | (9,569 | ) | (13,053 | ) | (13,055 | ) | |||||
Other, net | (14,528 | ) | 8,689 | 14,232 | |||||||
Net cash used in financing activities attributable to continuing operations | (2,705,330 | ) | (263,654 | ) | (525,290 | ) | |||||
Total cash used in continuing operations | (692,154 | ) | (862,035 | ) | (969,707 | ) | |||||
Net cash provided by operating activities attributable to discontinued operations | 753,658 | 736,692 | 567,365 | ||||||||
Net cash (used in) provided by investing activities attributable to discontinued operations | (1,236 | ) | 350,395 | (704,132 | ) | ||||||
Net cash (used in) provided by financing activities attributable to discontinued operations | (45,738 | ) | 5,639 | (42,350 | ) | ||||||
Total cash provided by (used in) discontinued operations (Revised—See Note 2) | 706,684 | 1,092,726 | (179,117 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (27,148 | ) | 9,390 | 14,588 | |||||||
Net (decrease) increase in cash and cash equivalents | (12,618 | ) | 240,081 | (1,134,236 | ) | ||||||
Cash and cash equivalents at beginning of period | 999,698 | 759,617 | 1,893,853 | ||||||||
Cash and cash equivalents at end of period | $ | 987,080 | $ | 999,698 | $ | 759,617 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IAC/INTERACTIVECORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: 1—ORGANIZATION
IAC/InterActiveCorp operates leading and diversified businesses in sectors being transformed by the internet, online and offline... ouroffline...our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. IAC currently operates a diversified portfolio of specialized and global brands in the travel, retailing, ticketing, personals, media, financial services, real estatefollowing sectors:
IAC enables billions of dollars of consumer-direct transactions and advertising for products and services via the internet and telephone.interactive distribution channels. IAC/InterActiveCorp is referred to herein as either IAC or the Company.
Prior to the commencement of trading on August 9, 2005, IAC consistscompleted the separation of the following segments:
On December 21, 2004, IAC announced its plan to separatetravel businesses into twoan independent public companies in order to better achieve certain strategic objectives of its various businesses. In these Consolidated Financial Statements, wecompany. We refer to this transaction as the "Spin-Off" and to the new company that will hold theholds IAC's former travel and travel-related businesses ofas "Expedia." Immediately prior to the Spin-Off, IAC as "New Expedia." Followingeffected a one-for-two reverse stock split. Since the completion of the Spin-Off:
In June 2005, the Company sold its 48.6% ownership in EUVÍA. In addition, during the second quarter of 2005, TV Travel Shop ceased operations.
Accordingly, the results of operations, statements of position and cash flows of Expedia, EUVÍA and TV Travel Shop have been presented as discontinued operations for all periods presented. Further, all IAC common stock share information and related per share prices have been adjusted to reflect IAC's one-for-two reverse stock split.
2005 Developments
On July 19, 2005, IAC completed the acquisition of Ask Jeeves, Inc. ("Ask"), a leading provider of world-class information retrieval technologies, brands and services that are available to consumers across a range of platforms, including destination websites, downloadable search-based applications and portals. Under the terms of the agreement, IAC issued 1.2668 shares (or 0.6334 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of Ask common stock in a tax-free transaction valued as of the date of the agreement at approximately $1.7 billion net of cash acquired. On May 5, 2005, IAC completed the buy back of 26.4 million shares of IAC common stock through its previously authorized share repurchase programs. These shares represent approximately sixty percent of the number of fully diluted shares IAC issued for the Ask acquisition, thus effectively offsetting a substantial portion of the dilution from the Ask transaction. Ask
is reported in IAC's Media & Advertising sector and reporting segment. Ask recently changed its corporate name to IAC Search & Media, Inc. ("IAC Search & Media"), which change will have no impact on its various brand names.
On June 7, 2005, IAC completed a transaction with NBC Universal in which IAC will retain)sold its common and TripAdvisor, which during 2004 was operatedpreferred interests in Vivendi Universal Entertainment LLLP ("VUE"), a joint venture formed in May 2002 between the Company and managed throughVivendi Universal, S.A., for approximately $3.4 billion in aggregate consideration.
On April 1, 2005, IAC Localcompleted its acquisition of Cornerstone Brands, Inc. ("Cornerstone Brands"), a portfolio of leading print catalogs and Media Services; and
IAC Travel
IAC formed IAC Travel, or IACT, in September 2003 from its existing travel businesses, together with subsequently acquired travel businesses, such as Hotwire, following their respective dates of acquisition. Below is a brief description of IACT's principal brands and businesses.
Expedia.com makes a large variety of travelonline retailing sites that sell home products and services availableleisure and casual apparel, for approximately $715 million, principally in cash. Cornerstone Brands is reported in the U.S. segment of IAC's Retailing sector.
Retailing
U.S.
Retailing U.S. markets and sells a wide range of third party and private label merchandise directly to consumers through its U.S.-based website,www.expedia.com, as well as through localized versionstelevision home shopping programming, which consists of its website in Canada, France, Germany, Italy, the Netherlands and the United Kingdom, many of which are leading online travel service companies in their respective country. IAC Travel also operateswww.anyway.com, a
leading online travel company in France. The Expedia-branded websites also operate the travel channel on the MSN.com website in the U.S. and MSN websites in Canada, the United Kingdom, Italy, France and Germany. Expedia-branded websites target many different types of consumers, from families booking a summer vacation to individual travelers arranging a quick weekend getaway, in order to provide the vast majority of travelers with the ability to research, plan and obtain their travel needs. Consumers can search for, compare information (including pricing and availability) and book travel products and services on Expedia-branded websites, including airline tickets, lodging, car rentals, cruises and many destination services, such as attractions and tours, from a large number of suppliers, on a stand-alone and package basis.
Hotels.com makes available a large variety of lodging operations to customers, who can plan, shop for and book lodging accommodations, from traditional hotels to vacation rentals, at over 15,000 properties worldwide. Hotels.com seeks to provide customers with premium content through its US-based website,www.hotels.com (as well as localized versions in the Americas, Europe, Asia-Pacific and South Africa), its vacation rentals website atwww.vacationspot.com and its toll-free call centers. Hotels.com is pursuing a strategy focused on differentiating its service offerings by positioning itself as a hotel expert with premium content about lodging properties, while simultaneously moving away from its historical focus solely on discount pricing.
Hotwire.com is a leading discount travel website that makes available airline tickets, hotel rooms, rental cars, cruises and vacation packages. Hotwire's opaque approach matches the needs of two groups: price sensitive consumers willing to be flexible to save money; and suppliers who have excess seats, rooms and cars they wish to fill without affecting the public's perception of their brands. Hotwire customers enjoy significant discounts by electing to book travel services "opaquely," without knowing certain itinerary details such as brand, time of departure and exact hotel location, while suppliers create value from excess inventory without diluting their core brand-loyal customer base. Hotwire works with many domestic and international airlines, including the U.S. full-service major airlines, top hotels in hundreds of cities and resort destinations in the U.S., Europe, Canada, Mexico and the Caribbean and major car rental companies nationwide.
Interval International, or Interval, is a leading membership-services company providing timeshare exchange and other value-added programs to its timeshare-owning members and resort developers worldwide.
IAC Travel's other principal brands and businesses include (i) WWTE, IAC Travel's private label program, which makes travel products and services available to consumers through third party company-branded websites using IAC Travel's industry leading technology platform, (ii) Expedia!fun, a network of in-destination travel desks located at hotels and resorts in Florida, Hawaii and Mexico that offer travelers the opportunity to obtain tours, attractions, airport transfer services and other travel-related services, (iii) Classic Customs Vacations, or CCV, which makes premium custom Hawaiian, Mexican, Caribbean and European travel packages available principally to a network of travel agents throughout the United States and (iv) Expedia Corporate Travel, a full-service travel management company that makes travel products and services available to corporate customers in the U.S. and in Europe.
Electronic Retailing
HSN U.S.sells a variety of consumer goods and services, primarily through the HSN and America's Store television networks and HSN.com, as well as through consumernetworks; catalog services, which consist primarily of the Cornerstone Brands portfolio of leading print catalogs; and infomercials. The HSNwebsites, which consist of HSN.com and America's Store television networks both broadcast live, customer-interactive electronic retail sales programming 24 hours a day, seven days a week. HSN.com serves as an alternative storefront that allows consumers to shop online for merchandise featured on the HSN and America's Store television networks, as well as a significant amount of additional inventory available only through HSN.com.branded websites operated by Cornerstone Brands.
HSN International consisted, as of December 31, 2004,
International consists of HSE-Germany, EUVÍA and Quiz TV (which operates an interactive game show and quiz show television channel based in London, England), as well as minority interests in have home shopping businesses in Italy, China and Japan. HSE-Germanywhich operates a German-language television home shopping business that is broadcast 24 hours a day, seven days a week, to millions of households in Germany, Austria and Switzerland. EUVÍA operates twoSwitzerland, as well as minority interests in home shopping businesses 9Live,in Japan and China.
Services
Ticketing
Ticketing consists of Ticketmaster, a gameleading provider of online and quiz show oriented television channel, and Sonnenklar, a travel-oriented shopping television channel.
Ticketing
offline ticketing services. Ticketmaster and its affiliated brands and businesses provide online and offline ticketingthese services through Ticketmaster-owned affiliated websites, operator staffed call centers and independent retail outlets, serving many of the foremost venues, entertainment facilities, promoters and professional sports franchises in the United States and abroad, including inAustralia, Canada, Denmark, Finland, Germany, Ireland, the Netherlands, New Zealand, Norway, Sweden and the United Kingdom. Ticketmaster hasis also entered intoa party to a joint venturesventure with a third partiesparty to provide ticket distribution services in AustraliaMexico and Mexico.licenses its technology in Mexico and other Latin American countries. In April 2005, Ticketmaster acquired the remaining interest in its Australian joint venture. Accordingly, the Company began to consolidate the results of the Australian joint venture effective April 2005.
Lending
Lending consists of businesses that offer lending and lending-related products and services through online exchanges that connect consumers and service providers in the lending industry, other Lending-
owned and affiliated websites and the telephone. Lending's businesses also originate, process, approve and fund various residential real estate loans under two brand names, LendingTree Loans and Home Loan Center (collectively, "LendingTree Loans").
Real Estate
Real Estate primarily consists of RealEstate.com, an online network that connects consumers with real estate agents and brokerages around the country, as well as iNest, an online provider of real estate services in the case of newly constructed homes.
Teleservices
Teleservices consists of PRC, LLC, a leading provider of contact center outsourcing services, managing customer relationships for brand-focused corporations through its global network of centers. PRC uses its industry-specific business process expertise and enabling technologies to support the brand experience and customer relationship management strategies of its clients.
Home Services
Home Services consists primarily of ServiceMagic, a leading online marketplace that connects consumers with pre-screened, customer-rated home service professionals by way of its various patent-pending, proprietary technologies. ServiceMagic acquired ImproveNet in August 2005 and these two businesses have integrated their operations.
PersonalsMedia & Advertising
Media & Advertising consists of IAC Search & Media, formerly known as Ask Jeeves, Inc., a provider of information search and related services, and Citysearch, a network of local city guide websites. IAC Search & Media provides information search services to computer users through Ask-Global, which includes Ask.com and other proprietary websites; provides downloadable consumer applications, distributes search boxes and operates content-rich portals through IAC Consumer Applications and Portals; and provides advertising services through IAC Advertising Solutions.
Membership & Subscriptions
Vacations
�� Vacations consists of Interval, a leading membership-services company providing timeshare exchange and other value-added programs to its timeshare-owning members and resort developers worldwide.
Personals
Personals consistconsists primarily of Match.com, as well as uDate.com and related brands. These brands, and their networks serviced approximately 983,000 subscribers asall of December 31, 2004 andwhich offer single adults a convenientprivate and privateconvenient environment for meeting other singlessingle adults through their respective websites, as well as through Match.com's affiliated networks.
IAC Local and Media ServicesDiscounts
IAC Local and Media ServicesDiscounts consists of Citysearch, Entertainment Publications, Evite, ServiceMagic and TripAdvisor. Citysearch is a network of local city guide websites that offer primarily original local content for major cities in the United States and abroad, as well as practical transactional tools. Entertainment Publications is a leading marketer of coupon books, discounts, merchant promotions and Sally Foster Gift Wrap. Entertainment Publications serves many major markets and does business with tens of thousands of local merchants, as well as national retailers. Evite primarily provides free online invitation services, as well as user specific recommendation platforms for restaurants, bars and clubs and a searchable database of over 59,000 live events. TripAdvisor is a comprehensive online travel search engine and directory that aggregates unbiased articles, guidebook reviews and user comments on cities, hotels and activities in a variety of given destinations from a number of online sources. ServiceMagic is a leading online marketplace that connects consumers with pre-screened, customer-rated home service professionals.
Financial Services and Real Estate
Financial Services and Real Estate consists of LendingTree, and the brands and businesses it operates. As of December 31, 2004, LendingTree's primary businesses were online exchanges that connect consumers and service providers in the lending and real estate industries and offer related services and products. In December 2004, LendingTree acquired Home Loan Center, a consumer direct lender now known as Lending Tree Loans, which originates, processes, approves and funds loans in its own name.
Teleservices
PRC provides outsourced customer lifecycle management solutions, both domestically and internationally, to a diversified portfolio of companies PRC uses its industry specific business process expertise and enabling technologies to support the brand experience and customer relationship management strategies of its clients.
Recent Developments
On April 27, 2004, the Company completed its acquisition of TripAdvisor, Inc., a leading online travel search engine and directory. See Note 4 for further discussion.
On September 1, 2004, the Company completed its acquisition of ServiceMagic, Inc., a leading online service marketplace. See Note 4 for further discussion.
On December 14, 2004, LendingTree completed its acquisition of Home Loan Center, Inc. ("HLC"), a consumer direct lender now known as Lending Tree Loans, which originates processes, approves and funds loans in its own name. See Note 4 for further discussion.
Discontinued Operations
DuringAs noted above, the results of operations and statements of position of Expedia, EUVÍA and TV Travel Shop are presented as discontinued operations for all periods presented. In addition, during the second quarter of 2003, USA Electronic Commerce Solutions ("ECS"), Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations. Accordingly, the results of operations, and statementstatements of position and cash flows of these businesses are presented as discontinued operations for all periods presented. In addition, through May 7, 2002, the Company's results also included the USA Entertainment Group, consisting 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. The USA Entertainment Group was contributed to a joint venture with Vivendi Universal, S.A. ("Vivendi") on May 7, 2002 (the "VUE Transaction"). Accordingly, the results of operations and statement of position of USA Entertainment are presented as a discontinued operation through May 7, 2002.
NOTE 2: 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and all entities that are wholly-owned by the Company and entities that are not variable interest entities but are voting-controlled subsidiaries or affiliates of the Company. The Company consolidates EUVÍA based upon a pooling agreement allowing for the Company to elect a majority of the Board of Directors and to
control the operations of EUVÍA. Significant intercompanyIntercompany 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 including(including IAC's ownership in Vivendi Universal Entertainment LLLP ("VUE"),VUE until its sale in June 2005) 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.
In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation 46, ("FIN 46"), "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 significantly changed the accounting for and disclosure of variable interest entities. Under FIN 46, a business enterprise that has a controlling financial interest in a variable interest entity would include the variable interest entity's assets, liabilities and results of operations in its consolidated financial statements. This InterpretationFIN 46 is different from what had been the general practice of consolidating only those entities in which an enterprise has a controlling voting interest. In December 2003, the FASB issued a revision to FIN 46 ("FIN 46R") and delayed the required implementation date of FIN 46 for entities that are not special purpose entities until March 2004. The Company adopted FIN 46R as of March 31, 2004. The adoption of FIN 46 and FIN 46R did not have a material effect on the Company's consolidated financial position or results of operations.
Revenue Recognition
IAC Travel
Merchant Hotel
Expedia, Hotels.com and Hotwire all generate merchant hotel revenues. Merchant hotel revenues at Expedia and Hotels.com are billed to customers at the time of booking and are included in deferred revenue/deferred merchant bookings until the customers' stay occurs, at which point revenues are recognized. Hotwire recognizes net revenue when the customer completes a transaction on its website since all transactions are nonrefundable and generally noncancelable and Hotwire has no significant post-delivery obligations. A reserve for chargebacks and cancellations is recorded at the time of the transaction based on historical experience.
As a result of the integration of the Expedia and Hotels.com merchant hotel businesses, Hotels.com conformed its merchant hotel business practices with those of the other IAC Travel businesses. As a result, beginning January 1, 2004, IAC commenced prospectively reporting revenue for Hotels.com on a net basis, consistent with Expedia's historical practice, 2003 and 2002 results have not been reclassified and are not comparable to the results presented in 2004. Prior to 2004, Hotels.com presented merchant hotel revenue at the gross amount charged to its customers while Expedia presented merchant hotel revenue net of the amount paid to the hotel property for the room. There has been no impact to operating income from the change in reporting.
The determination of gross versus net presentation is based principally on each company's consideration of Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent", including the weighing of the relevant qualitative factors regarding the companies' status as the primary obligor, and the extent of their pricing latitude and inventory risk. The method of merchant revenue presentation by the companies does not impact operating profit, net income, earnings per share or cash flows, but rather revenues and cost of sales.
The principal factor in determining gross versus net presentation by each company was the consideration of their relationship with the customer as the primary obligor. Each of the companies provides extensive customer service and support for its customers. Effective January 1, 2004, both Expedia and Hotels.com believe that the supplier hotel is principally liable to its merchant hotel customers in all situations where the customer does not receive hotel services booked through Expedia or Hotels.com, namely in the event that merchant hotel products and services made available by Expedia or Hotels.com is unavailable, or that the room, or the hotel itself, does not have the amenities or is not of the general caliber described in the promotional materials. Each company provides customer service support to help resolve issues, even though such customer support could typically involve issues for which each company is not principally liable.
Hotels.com and Expedia generally have latitude to establish and change prices charged to customers.
Each company generally contracts in advance with hotels and other lodging properties at negotiated discount prices. Historically Hotels.com contracts specifically identified the number of rooms and the negotiated discount prices of the rooms to which Hotels.com would have access over the terms of the contracts, which generally range from 1 to 3 years, while Expedia contracts were not specific in the number of rooms and the rates of the rooms to which Expedia would have access over the terms of their contracts. The two companies began primarily using a combined agreement in 2004, which is a blend of the two agreements. Unbooked hotel room allotments may be returned by each company with no obligation to the hotel properties within a period specified in each contract. Each company bears the risk of loss for all rooms cancelled by a customer subsequent to the cutoff period. However, each company has mitigated its risk of loss, principally by charging its customers a cancellation fee, and to date, losses have been insignificant.
Due to the difference in revenue recognition in the periods prior to January 1, 2004, Hotels.com and Expedia classified credit card merchant fees, call center and data center costs differently in the prior periods. Based on Hotels.com gross revenue presentation, its "costs of goods" sold included the cost of the room. Credit card merchant fees, call center and data center costs support, but are not a component of, the cost of sales, and thus were treated as operating expenses below gross profit. Based on Expedia's net revenue presentation, credit card merchant fees, call center and data center costs, sales commissions and fees paid to fulfillment vendors for issuing airline tickets and related customer services are treated as cost of sales. Effective January 1, 2004, these costs at Hotels.com are being recorded consistently with those of Expedia.
Merchant Air
Expedia generates revenue from merchant air transactions, whereby it is the merchant of record and determines the ticket price. The cost of the airline ticket is transmitted by Expedia to the airlines via the Airlines Reporting Corporation, an industry-administered clearinghouse, within a week after the customer completes the transaction with Expedia. Cash paid by the customer at the time of the reservation is recorded as deferred merchant bookings until the flight occurs and the cost of the airline
ticket is included in prepaid merchant bookings. When the flight occurs, Expedia records the difference between the deferred merchant bookings and the prepaid merchant bookings as revenue on a net basis.
Hotwire generates revenue from merchant air transactions as well. Net revenues are recognized when the customer completes a transaction on its website since all transactions are nonrefundable and generally noncancelable and Hotwire has no significant post-delivery obligations. A reserve for chargebacks and cancellations is recorded at the time of the transaction based on historical experience.
Agency Hotel, Air, Car and Cruise
Agency revenues are derived from airline ticket transactions, certain hotel transactions as well as cruise and car rental reservations. Airline ticket transactions of Expedia comprise a substantial portion of these revenues, and represent both commissions and fees related to the booking of airline tickets. Airline ticket commissions are determined by individual airlines and are billed and collected through the Airline Reporting Corporation. Fees from the booking of airline tickets also include (i) performance based revenues from Expedia's global distribution partners; (ii) Express Fee revenues where Expedia charges customers for processing and delivering a paper ticket via express mail if the customer chooses not to have an electronic ticket or an electronic ticket is not available; (iii) since December 2002 service fees on certain tickets; and (iv) corporate transaction service fees for providing travel booking services to its corporate customers. In addition, certain contracts with suppliers contain override commissions typically related to achieving performance targets.
Agency revenues are recognized on air transactions when the reservation is made and secured by a credit card. A cancellation allowance is recognized on these revenues based on historical experience. Expedia and Hotels.com recognize agency revenues on hotel and car rental reservations, and Expedia cruise reservations, either on an accrual basis for payments from a commission clearinghouse or on receipt of commissions from an individual supplier. Override commissions are recognized at the end of each period based upon the company's attainment of a certain target level. Agency revenues are presented on a net basis.
Exchange and Membership Revenues, Deferred Membership Revenue and Deferred Membership Costs
Revenue, net of sales incentives, from Interval membership agreements is deferred and recognized over the terms of the applicable agreements, ranging from one to five years, on a straight-line basis. Membership agreements are cancelable and refundable on a pro-rata basis. Direct costs of acquiring membership agreements and direct costs of sales related to deferred membership revenues are also deferred and amortized on a straight-line basis over the applicable membership terms.
Revenues from exchange fees are recognized when Interval provides confirmation of the vacation ownership exchange, at which time the fee is nonrefundable.
Electronic Retailing
Revenues from electronic retailing primarily consist of merchandise sales and are reduced by incentive discounts and sales returns to arrive at net sales. Domestically, revenuesRevenues are recorded upon credit card transaction settlement,when products are shipped, which for salesmerchandise shipped from ourCompany operated facilities, is measured upon receipt of a shipment confirmation from its warehouse facilities, occurs when the order is allocated from available inventory. Credit card transaction settlementfacility, and for products shipped directly by our vendors to our customers, occurs when the Company receivesupon receipt of a shipment confirmation from the vendor. Revenues for internationalRetailing U.S.'s sales are recorded upon shipment. HSN's sales policy
allows customers to generally return most merchandise to be returned at the customer's discretion within(within 30 days of receipt in the datecase of receipt.HSN merchandise) for a full refund or exchange, subject in some cases to restocking fees and exceptions for custom merchandise in the case of Cornerstone Brands. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are provided based upon past experience. The cost of merchandise to be returned is estimated by applying each month's historical gross margin percentage to a multi-year analysis of estimated sales return rates. Shipping and handling return accruals are estimated using historical percentages of shipping and handling revenue to sales. The Company believes that actual returns onof HSN product sales have not materially varied from estimates in any of the financial statement periods presented. HSN'sRetailing U.S.'s estimated return rates decreased towere 16.5% in 2005, 16.2% in 2004 fromand 17.7% in 2003. During 2005, Retailing conformed its revenue recognition policies to record revenue when products are shipped. During 2004 and 2003, and from 18.6%Retailing U.S. recognized revenue upon credit card authorization, which occurred only if the goods were in 2002. Revenue from international electronic retailing also includes EUVÍA, which generates call-in revenue and commissions from travel sales. Call-in revenue primarily consists of revenue from telephone calls generated via a game and quiz show format with the revenue from the calls being recognized when the call is received. Travel revenue primarily consists of commissions earned from tour operators, where EUVÍA acts as an agent for third party tour operators. The commissions are recorded at the time travel commences which is when collection is assured.stock.
TicketingServices
Ticketing
Revenue from Ticketmaster is recorded on a net basis and primarily consists of revenue from ticketing operations which is recognized as tickets are sold, as the Company acts as an agent in these transactions. Interest income is earned on funds that are collected from ticket purchasers and invested until remittance to the applicable clients. As the process of collecting, holding and remitting of these funds is a critical component of providing service to these clients, the interest earned on these funds is included in revenues.
Lending
Personals
Subscription fee revenue is generated from customers who subscribe to online matchmaking services on Match.com and other personals web sites. Subscription fee revenue is recognized over the period the services are provided.
Local and Media Services
Entertainment Publications
Product revenue primarily represents the sale of coupon books, gift-wrap and other products to schools, community groups and other organizations. Under the terms of typical sales arrangements, coupon books are provided on consignment and revenue earned on such arrangements is recognized upon receipt of proceeds from the consignee, which is when collection is assured. Gift-wrap and other product revenues are recognized when the products are delivered.
TripAdvisor
TripAdvisor's revenue is generated from click-through fees charged to its travel partners for consumer leads sent to the travel partner's websites. Revenue is recognized as the click-throughs are made to the related travel partner's website.
ServiceMagic
ServiceMagic's lead acceptance revenue is generated and recognized when an in-network home service professional is delivered a targeted customer lead. Additionally, ServiceMagic's activation revenue is generated and recognized through the enrollment and activation of a new home service
professional, which is initially deferred and recognized over the estimated economic life of the network member.
Financial Services and Real Estate
LendingTree
LendingTree's exchange revenue principally represents transmission fees and closed-loan fees paid by lenders that received a transmitted loan request or closed a loan for a consumer that originated through the website,www.lendingtree.com.one of LendingTree's websites or affiliates. Transmission fees are recognized at the time qualification forms are transmitted, while closed-loan fees are recognized at the time the lender reports the closed loan to LendingTree, which may be several months after the qualification form is transmitted. Additionally, LendingTree earns revenue from cooperative brokerage fees paid by real estate professionals participating on our exchange. The fees are primarily earned either upon the transmission of a consumer's information to a participating real estate professional or when such transmission results in the purchase or sale of a home. Transmission revenue is recognized at the time the consumers' information is transmitted to a real estate professional. For fees earned when the transaction results in the purchase or sale of a home, we recognize revenue when the participating real estate professional reports the transaction to us as closed.
Home Loan CenterLendingTree Loans
HLC'sLendingTree Loans' revenues are primarily derived from the origination and sale of loans. Mortgage and home equity loans are funded through warehouse lines of credit and sold to loan purchasers typically within thirty days. AThe gain or loss resulting fromon the sale of a loanloans to investors is recognized at the date the loan isloans are sold and is based on the difference between the sale proceeds received and the
carrying value of the loans, which includes deferred loan origination fees less certain direct origination costs and other processing costs. HLCLendingTree Loans sells its loans on a servicing released basis meaning HLCin which LendingTree Loans gives up the right to service the loan on an ongoing basis, thereby earning an additional premium upon sale. The recognition of gain or loss on the sale of loans is accounted for in accordance with SFASStatement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Real Estate
Real Estate earns revenue from subscription and cooperative brokerage fees paid by real estate professionals participating on its exchange. Subscription fees are primarily recognized on the expiration of the access to consumer leads on Real Estate's website, which access is generally a one month duration. Cooperative brokerage fees are recognized when the transmission of a consumer's information results in the purchase or sale of a home and the transaction is reported closed by the participating real estate professional.
Teleservices
PRC recognizes revenue when services are performed. Revenue generated from up-front fees are deferred and recognized over the term of the contract.
Home Services
ServiceMagic's lead acceptance revenue is generated and recognized when an in-network home service professional is delivered a targeted customer lead. Additionally, ServiceMagic's activation revenue is generated and recognized through the enrollment and activation of a new home service professional, which is initially deferred and recognized over the estimated economic life of the network member.
Media & Advertising
The Media & Advertising segment generates revenue from the following main sources: sales, syndication and display of paid listings, branded advertising and other syndicated services; licensing of its search technologies and advertising sales and services. There are several pricing plans for Internet advertisements, and the way in which ad revenue is earned varies among them. Depending upon the pricing terms, revenue might be earned every time a graphic ad is displayed, every time a user clicks on an ad, every time a user indicates interest in the advertised topic or every time a user clicks-through on the ad and takes a specified action on the destination site.
Membership & Subscriptions
Vacations
Revenue, net of sales incentives, from Interval membership agreements is deferred and recognized over the terms of the applicable agreements, ranging from one to five years, on a straight-line basis. Generally, membership agreements are cancelable and refundable on a pro-rata basis. Direct costs of acquiring membership agreements and direct costs of sales related to deferred membership revenues are also deferred and amortized on a straight-line basis over the applicable membership terms.
Revenues from exchange fees are recognized when Interval provides confirmation of the vacation ownership exchange, at which time the fee is nonrefundable.
Personals
Subscription fee revenue is generated from customers who subscribe to online matchmaking services on Match.com and the Company's other personals web sites. Subscription fee revenue is recognized over the period the services are provided.
Discounts
Product revenue primarily represents the sale of coupon books, gift-wrap and other products through schools, community groups and other organizations. Under the terms of typical sales arrangements, coupon books are provided on consignment and revenue earned on such arrangements is recognized upon receipt of proceeds from the consignee, which is when collection is assured. Gift-wrap and other product revenues are recognized when the products are delivered.
Other
Revenues from all other sources are recognized either upon delivery or when the service is provided.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are recorded as revenue. The costs associated with shipping goods to customers are recorded as cost of sales.
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 agenciesagency securities and certificates of depositcommercial paper with original maturities of less than 91 days.
days and money market instruments.
Restricted Cash
Restricted cash isrelates primarily used to collateralizethe remaining proceeds from the New York City Industrial Development Agency Liberty Bonds (IAC/InterActiveCorp Project), Series 2005 ("Liberty Bonds") financing and the collateralization of outstanding letters of credit, credit facilities and outstanding currency swap agreements. In addition, restricted cash also includes escrow deposits made by customers of LendingTree Settlement Services and LendingTree Loans which are not available for use in operations. The letters of creditCompany expects that the remaining proceeds from the Liberty Bonds financing will be spent during the year ending December 31, 2006 as qualified expenditures arise and are extended to certain hotel properties to secure payment for the potential purchase of hotel rooms. There have been no claims made against any letters of credit. The currency swap agreements are entered into in order to protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates.settled.
Marketable Securities
The Company accounts for marketable securities in accordance with Statement of Financial Accounting StandardSFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). The Company invests in certain marketable securities, which consist primarily of short-to intermediate-termshort-to-intermediate-term fixed income
securities issued by the U.S. government, U.S. government agencies and municipalities.municipalities, foreign sovereignties and high-quality corporate securities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations, or satisfy other cash requirements as needed. The Company also invests in certain auction rate preferred equity and debt securities that have been classified as marketable securities in the accompanying consolidated balance sheets. All marketable securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, included in accumulated other comprehensive income as a separate component of shareholders' equity. The specific-identification method is used to determine the cost of all securities and the basis by which amounts are reclassified from accumulated other comprehensive income into earnings.
The fair value of the investments is based on the quoted market price of the securities at the balance sheet dates. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments. In the event that the cost of an investment exceeds its fair value, the Company evaluates, among other factors, the duration and extent to which the fair value is less than cost; the financial condition and near-term prospects of the issuer, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and the Company's intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. In the first quarter of 2005, the Company recognized $15.0 million of losses that were deemed to be other-than-temporary related to marketable securities that were expected to be sold by the Company to fund its cash needs related to: the repurchase of 26.4 million shares of IAC common stock associated with the acquisition of IAC Search & Media; the acquisition of Cornerstone Brands; and, the redemption of substantially all of IAC's preferred stock for $656 million in connection with the Spin-Off. There were no material impairment charges recorded during 2004 2003 and 2002.2003. See Note 1911 for further discussion.
Accounts Receivable
Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. HSN provides extended payment terms to its customers, known as Flexpay. Flexpay is offered on certain products sold by HSN. Revenue is recognized at the time of the sale, at which time HSN collects the first payment, sales tax and all shipping and handling fees. Subsequent collections are due from customers in 30-day increments payable automatically by credit card. HSN offers Flexpay programs ranging from 2 to 6 interest-free payments. Flexpay receivables consist of outstanding balances owed by customers, less a reserve for uncollectible balances. The balance of Flexpay receivables, net of allowance, at December 31, 2005 and 2004 was $119.4 million and $113.0 million, respectively.
Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the specific customer's current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible,uncollectible.
Loans Held for Sale
LendingTree Loans originates residential loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first and payments subsequently receivedsecond mortgage loans that are secured by residential real estate throughout the United States. Loans held for sale are carried at the lower of cost or fair value determined on such receivablesan aggregate basis. The cost basis of loans held for sale includes the capitalized cost associated with the interest rate lock commitments, deferred origination fees, deferred origination costs and the effects of hedge accounting. The fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality. Loans held for sale are creditedpledged as collateral under LendingTree Loans' warehouse lines of credit. The Company's LendingTree Loans business relies substantially on the secondary mortgage market as all of the loans that are funded are sold into this market.
Loan origination fees (income) and costs related to loans originated for sale (including direct costs of origination as well as payroll and administration costs associated with the origination process) are capitalized and deferred until the loan is sold. Upon sale of the loan, the origination fees and costs are recognized as a component of the gain on sale of loans. Origination costs related to unsuccessful loans are recorded as operating expenses in the period in which it is determined that the loans will not close.
Interest on mortgage loans held for sale is recorded to income as earned. Interest is only accrued if deemed collectible.
LendingTree Loans sells the loans it originates to investors on a servicing released basis without recourse, so the risk of loss or default by the borrower is generally transferred to the allowanceinvestor. However, LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. To the extent LendingTree Loans does not comply with such representations, or there are early payment defaults, LendingTree Loans may be required to repurchase loans or indemnify the investors for doubtful accounts.
HSN provides extended payment termslosses. In connection with a majority of its loan sales agreements, LendingTree Loans is also responsible for a minimum number of payments to its customers, known as Flexpay. Flexpay is offeredbe made on certain products soldeach loan. In the event the minimum number of payments are not made by HSN. Revenue is recognized at the timeborrower, LendingTree Loans may be required to refund a portion of the sale, at which time HSN collectspremium paid to it by the first payment, sales taxloan investor. As such, LendingTree Loans records reserves for estimated losses based on historical loss frequency, loss severity data and all shippingcurrent unpaid balances of the loans sold and handling fees. Subsequent collections are dueis calculated by loan type. In determining the exposure associated with defaults of representations made to investors, management evaluates the loans as a group. As of December 31, 2005 and 2004, the LendingTree Loans loss reserve was $3.1 million and $1.1 million, respectively. For the year ended December 31, 2005 and for the period from customers in 30-day increments payable automatically by credit card. HSN offers Flexpay programs ranging from 2acquisition to 6 payments. Flexpay receivables consist of outstanding balances owed by customers, less a reserve for uncollectible balances. The balance of Flexpay receivables, net of allowance, at December 31, 2004, and 2003 was $113.0LendingTree Loans charged approximately $4.7 million and $94.2$0.2 million, respectively.respectively, of reserves to operating expense. In 2005, $2.7 million was written-off against the reserves and no amounts were written-off against the reserves in 2004. Actual losses are charged to the reserve when incurred and management evaluates the adequacy of the reserve calculations quarterly.
Inventories, net
Inventories, which primarily consist of finished goods, are valued at the lower of cost or market, with the cost being determined based upon 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. Inventories are presented net of an allowanceallowances of $37.9$41.9 million and $34.6$37.9 million at December 31, 20042005 and 2003,2004, respectively.
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 forrecorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives. Amortization of assets recorded under capital leases is included in depreciation expense.
Asset Category | ||
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Computer and broadcast equipment | 1 to 10 Years | |
Buildings | 10 to 40 Years | |
Leasehold improvements | ||
Furniture and other equipment |
Goodwill and Indefinite-Lived Purchased Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"Assets" ("SFAS No. 142"), goodwill acquired in business combinations is assigned to reporting units that are expected to benefit from the synergies of the combination as of the acquisition date. The Company assesses goodwill and indefinite-lived purchased intangible assets for impairment annually at the beginningas of the fourth quarter,October 1, or more frequently if events and circumstances indicate impairment may have occurred in accordance with SFAS No. 142.occurred. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, IAC records an impairment loss equal to the difference. SFAS No. 142 also requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. IAC recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value.
Long-Lived Assets and Purchased Intangible Assets with Definite Lives
The Company's accounting policy regarding the assessment of the recoverability of the carrying value of long-lived assets, including property, plant and equipment and purchased intangible assets with finitedefinite lives, 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. Amortization of intangibles is recorded on a straight-line basis over their estimated lives.
Cable Distribution Fees
Cable distribution fees relate to upfront fees paid in connection with multi-year cable contracts for carriage of HSN'sRetailing's domestic and international programming. These fees are amortized on a straight-line basis over the terms of the respective contracts.
Derivative Instruments
In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates and foreign exchange rates using financial instruments deemed appropriate by management. As part of its risk management strategy, the Company uses derivative instruments, including interest rate swaps and forward contracts, to hedge certain interest rate and foreign exchange exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, respectively, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Derivative positions are used only to manage underlying exposures of IAC. IAC does not use derivative financial instruments for speculative purposes. The Company formally designates and documents all of its hedging relationships as either fair value hedges or cash flow hedges, as applicable, and documents the objective and strategy for undertaking the hedge transactions. IAC applies hedge accounting based upon the criteria established by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Company recognizes all derivative instruments at fair value. Changes in the fair value (i.e., gains or losses) of the derivatives are recorded each period in the statement of operations or other comprehensive income (loss). For a derivative designated as a cash flow hedge, the gain or loss on the derivative is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into the statement of operations when the hedged transaction affects earnings. For a derivative designated as a fair value hedge, the gain or loss on the derivative in the period of change and the offsetting loss or gain of the hedged item attributed to the hedged risk are recognized in the statement of operations. See Note 17 for a full description of IAC's derivative financial instruments, including derivatives created in the Spin-Off.
Advertising
Advertising costs are expensed in the period incurred (when the advertisement first runs for production costs that are initially capitalized) and principally represent offline costs, including television and radio advertising, and online advertising costs, including fees paid to search engines and distribution partners. Advertising expense for the years ended December 31, 2005, 2004 and 2003 and 2002 was $643.5$395.3 million, $431.2$224.4 million and $249.9$148.4 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. A valuation allowance is provided
on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. The Company records interest on potential tax contingencies as a component of income tax expense and records interest net of any applicable related income tax benefit.
Earnings (Loss) Per Share
Basic earnings per share ("Basic EPS") is computed by dividing net incomeearnings available to common shareholders 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 or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.
Foreign Currency Translation and Transaction Gains and Losses
The financial position and operating results of substantially 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 as of 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 are included as a component of accumulated other comprehensive income (loss), a separate component of shareholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the consolidated statements of operations.
Foreign currency transaction net gains for the years ended December 31, 2005, 2004 and 2003 were $6.0 million, $10.8 million and $0.6 million, respectively, and are included in "Equity in income of unconsolidated affiliates and other" in the accompanying consolidated statements of operations.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Compensation—Transition and Disclosure" ("SFAS No. 148"), which amends FASB StatementSFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The Company adopted the expense recognition provision of SFAS No. 123 and is providing expense for stock basedstock-based compensation for grants made on andor after January 1, 2003 on a prospective basis as provided by SFAS No. 148, and will continue to provideprovides pro forma information in the notes to financial statements to provide thepresent its results as if all equity awards issued in years prior yearsto 2003 were being expensed. The Company will continue to account for stock based compensation granted prior to January 1, 2003 in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees." For restricted stock units issued, the value of the instrument is measured at the grant date atas the fair value of IAC common stock and amortized ratably as non-cash compensation over the vesting term. For stock options issued since 2003, including unvested options assumed in acquisitions, the value of the optionsoption is measured at the grant date (or acquisition date, if applicable) at fair value and amortized over the remaining vesting term.
In connection with the Spin-Off, all outstanding stock-based compensation instruments of the Company were modified. Accordingly, on August 9, 2005, the Company recorded a pre-tax modification
charge of $67.0 million related to the treatment of vested stock options in connection with the Spin-Off. Beginning August 9, 2005, as a result of this modification, the Company is recognizing expense for all stock-based compensation instruments in the consolidated statement of operations, including options granted prior to January 1, 2003 that were previously accounted for under APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
The following table illustrates the effect on net earnings available to common shareholders and net earnings per share if the fair value basedvalue-based method had been applied to all outstanding and unvested awards in each period:
| | Years Ended December 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years Ended December 31, | | 2005 | 2004 | 2003 | ||||||||||||||||
| | 2004 | 2003 | 2002 | | (In thousands, except per share data) | ||||||||||||||||
Net earnings available to common shareholders, as reported | Net earnings available to common shareholders, as reported | $ | 151,808 | $ | 154,341 | $ | 1,941,344 | Net earnings available to common shareholders, as reported | $ | 868,212 | $ | 151,808 | $ | 154,341 | ||||||||
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects | Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects | 147,824 | 75,242 | 8,157 | Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects | 119,125 | 147,824 | 75,242 | ||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (166,945 | ) | (151,390 | ) | (158,069 | ) | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (102,055 | ) | (166,945 | ) | (151,390 | ) | ||||||||
Pro forma net earnings | $ | 132,687 | $ | 78,193 | $ | 1,791,432 | ||||||||||||||||
Pro forma net earnings available to common shareholders | Pro forma net earnings available to common shareholders | $ | 885,282 | $ | 132,687 | $ | 78,193 | |||||||||||||||
Earnings per share: | ||||||||||||||||||||||
Net earnings per share available to common shareholders: | Net earnings per share available to common shareholders: | |||||||||||||||||||||
Basic as reported | $ | 0.22 | $ | 0.26 | $ | 4.55 | Basic as reported | $ | 2.64 | $ | 0.44 | $ | 0.51 | |||||||||
Basic pro forma | $ | 0.19 | $ | 0.13 | $ | 4.20 | Basic pro forma | $ | 2.69 | $ | 0.38 | $ | 0.26 | |||||||||
Diluted as reported | $ | 0.20 | $ | 0.23 | $ | 4.54 | Diluted as reported | $ | 2.46 | $ | 0.41 | $ | 0.51 | |||||||||
Diluted pro forma | $ | 0.18 | $ | 0.11 | $ | 4.19 | Diluted pro forma | $ | 2.51 | $ | 0.36 | $ | 0.26 |
In conjunction with the Spin-Off and the upcoming adoption of Statement 123(R) (described below), the Company conducted an assessment of certain assumptions used in determining the expense related to stock-based compensation which was completed in the third quarter of 2005. The cumulative effect of a change in the Company's estimate related to the number of stock-based awards that are expected to vest resulted in a reduction in non-cash compensation expense of $5.5 million which is included in continuing operations and $35.3 million related to Expedia which is included in discontinued operations. The after-tax effect of this change in estimate on earnings and earnings per share from continuing operations, income from discontinued operations and net income is $3.5 million or $0.01 per share, $22.0 million or $0.06 per share and $25.5 million or $0.07 per share, respectively. In addition, the deduction line item in the table above included in the determination of pro forma expense for the year ended December 31, 2005, includes a favorable adjustment of $20.6 million due to the cumulative effect of the change in the Company's estimate related to the number of stock-based awards that are expected to vest.
Pro forma 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 grant date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 2003 and 2002:2003: risk-free interest rates of 4.10%,
3.30% in 2004 and 2.78% in 2003 and 2002;, respectively; a dividend yield of zero; azero and volatility factorfactors of 43%40%, 50%,43% and 50%, respectively, based on the expected market price of IAC Common Stockcommon 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 that 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 on a straight-line basis. See below under Recent Accounting Pronouncements for a discussion of
On December 16, 2004, the FASB issued FASB Statement No. 123 (R) "Accounting for Stock-Based Compensation,, "Share-Based Payment" ("Statement 123(R)"), which is a revision of SFAS No. 123. Statement 123(R) supersedes APB No. 25 and amends SFAS No. 95, "Statement of Cash Flows." which was issuedGenerally, the approach in December 2004. See Note 13 for further discussionStatement 123(R) is similar to the approach described in SFAS No. 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. The Company is required to apply Statement 123(R) no later than the first quarter of 2006.
Currently, the Company uses the Black-Scholes formula to estimate the value of stock basedoptions granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on January 1, 2006. Due to the modification related to the Spin-Off, the Company is recognizing expense for all stock-based compensation plans.instruments in the statement of operations after the Spin-Off. However, had the Company adopted Statement 123(R) in periods prior to the Spin-Off, the impact of that standard would have approximated the impact of SFAS No. 123 as described above in the disclosure of pro forma net earnings and pro forma net earnings per share to the Company's consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is currently assessing the impact of this pronouncement on its consolidated statement of operations and statement of cash flows.
Minority Interest in Income of Consolidated Subsidiaries
Minority interest in 2005 and 2004 primarily represents minority ownership in HSE-Germany and EUVÍA, including redeemable preferred equity interests issued by EUVÍA that are originally due in 2006, but EUVÍA has the right to extend maturity to 2016 based on meeting certain financial covenants. The EUVÍA preferred equity interest is only due to the holder under German law to the extent sufficient funds in excessinternational operations of fixed capital at EUVÍA are available.Ticketmaster. Minority interest in 2003 primarily represents minority ownership in HSE-Germanycertain international operations of Entertainment Publications, Ticketmaster and EUVÍA, as well as the public's ownership of the Company's former public subsidiaries, Ticketmaster, Hotels.com and Expedia until the date of the respective buy-ins. Minority interest in 2002 primarily represents Universal Studios, Inc.'s ("Universal") and Liberty Media Corporation's ("Liberty") ownership interest in USANi LLC through May 7, 2002, Liberty's ownership interest in Home Shopping Network, Inc. through June 27, 2002, the public's minority interests in Ticketmaster, Hotels.com and Expedia, HSE-Germany, and EUVÍA since its consolidation in July 2002.HSE-Germany.
Accounting Estimates
Management of the Company is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. 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, sales return and other revenue allowances, allowance for doubtful
accounts, recoverability of intangibles, including goodwill and other long-lived assets, carrying amount of long-term investments,deferred income taxes, including the Company's investment in VUE andrelated valuation allowances, various other operating allowances, reserves and accruals.accruals, and assumptions related to the determination of stock-based compensation.
Certain Risks and Concentrations
The Company's business is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and hotels, dependence on third-party technology
providers, exposure to risks associated with online commerce security and credit card fraud. Expedia is highly dependent on its relationships with six major airlines in the United States: United, Delta, American, Continental, Northwest and US Airways. The Company also depends on global distribution system partners and third party service providers for processing certain fulfillment services.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and marketable securities. Cash equivalents and marketable securities are of high-quality short to intermediate term agency securities, all of which are maintained with quality financial institutions of high credit. Cash and cash equivalents are maintained with financial institutions and are in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits.
Loans Held for Sale
HLC originates residential loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first and second mortgage loans that are secured by residential real estate throughout the United States. Loans held for sale are carried at the lower of cost or fair value determined on an aggregate basis. The Company's HLC business relies substantially on the secondary mortgage market as almost all of the loans that are funded are sold into this market.
The cost basis of loans held for sale includes the capitalized value of the interest rate lock commitments, deferred origination fees, deferred origination costs and the effects of hedge accounting. The fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality.
Loan origination fees (income) and costs related to loans originated for sale (including direct costs of origination as well as payroll and administration costs associated with the origination process) are capitalized and deferred until the loan is sold. Upon sale of the loan, the origination fees and costs are recognized as a component of the gain on sale of loans. Origination costs related to unsuccessful loans are recorded as operating expenses in the period in which it is determined that the loans will not close.
HLC sells the loans it originates to investors on a servicing released basis without recourse so the risk of loss or default by the borrower is generally transferred to the investor. However, HLC is required by these investors to make certain representations relating to credit information, loan documentation and collateral. To the extent HLC does not comply with such representations, or there are early payment defaults, HLC may be required to repurchase loans or indemnify the investors for losses. In connection with a majority of its loan sales agreements, HLC is also responsible for a minimum number of payments to be made on each loan. In the event the minimum number of payments are not made, HLC may be required to refund the premium paid to it by the loan investor. As such, HLC records reserves for estimated losses based on certain assumptions from current loan activity. As of December 31, 2004, HLC had recorded $1.1 million of reserves. For the period from acquisition to December 31, 2004, HLC had charged approximately $0.2 million of reserves to operating expense and no amounts had been written off against the reserve.
Derivative Instruments
In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in interest rates and foreign exchange rates using financial instruments
deemed appropriate by management. As part of its risk management strategy, the Company uses derivative instruments, including interest rate swaps and forward contracts, to hedge certain interest rate and foreign exchange exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, respectively, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Derivative positions are used only to manage underlying exposures of IAC. IAC does not use derivative financial instruments for speculative purposes. The Company formally designates and documents all of its hedging relationships as either fair value hedges or cash flow hedges, as applicable, and documents the objective and strategy for undertaking the hedge transactions. IAC applies hedge accounting based upon the criteria established by SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The Company recognizes all derivative instruments at fair value. Changes in the fair value (i.e., gains or losses) of the derivatives are recorded each period in the statement of operations or other comprehensive income (loss). For a derivative designated as a cash flow hedge, the gain or loss on the derivative is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into the statement of operations when the hedged transaction affects earnings. For derivatives recognized as a fair value hedge, the gain or loss on the derivative in the period of change and the offsetting loss or gain of the hedged item attributed to the hedged risk are recognized in the statement of operations. See Note 6 for a full description of IAC's derivative financial instruments.
Recent Accounting Pronouncements
In March 2004, the FASB's Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In September 2004,On February 16, 2006, the FASB delayedissued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS No. 155"), which amends SFAS No. 133, and SFAS No. 140. SFAS No. 155 alters the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting provisions of EITF 03-1; however,for these instruments. Among other things, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the disclosure requirements remainneed to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for annual periods endingall financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year. The Company is currently assessing the impact of SFAS No. 155 on its consolidated financial position, results of operations and cash flows.
On June 7, 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"), replacing APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 alters the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the period of the change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2003.2005; however, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. The Company does not believe adoption of the disclosure provision of EITF 03-1 did notSFAS No. 154 will have anya material effect on the Company'sits consolidated financial position, results of operations or cash flows. The Company will evaluate the additional effect, if any, the remainder of EITF 03-1 will have on the consolidated financial statements once final guidance is issued.
In April 2004, the EITF reached a consensus on No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the Company's calculation of earnings per share.
On December 16, 2004, the FASB issued FASB Statement No. 123 (R), Share-Based Payment, which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Statement 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
amends FASB Statement No. 95, "Statement of Cash Flows." Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company is required to apply Statement 123(R) in the third quarter of 2005.
The Company adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on July 1, 2005. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We do not believe the adoption of Statement 123(R) will have a material effect on the Company's consolidated statement of operations. The Company is currently assessing the impact of this pronouncement on its consolidated statement of cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on the Company's current financial condition or results of operations.
Reclassifications
Certain amounts in the prior years' consolidated financial statementsperiod amounts have been reclassified to conform to current year presentation. In addition, the 2004 presentation, including amounts related to the VUE deferred tax liability that were previously classified as minority interest, and have been reclassified for all periods presented as a reduction in the deferred tax liability.
The statements of operations, balance sheets and2003 consolidated statements of cash flows of USA Entertainment, USA Broadcasting, Styleclick, ECS and Avaltus have been classifiedrevised to separately disclose the operating, investing and financing portion of the cash flows attributable to the Company's discontinued operations. These amounts had previously been reported on a combined basis as discontinued operations for all periods presented. See Note 21 for further discussion of discontinued operations.a single amount.
NOTE 3: 3—BUSINESS ACQUISITIONS
The significant businessBusiness acquisitions completed by the Company during the three years ended December 31, 2004 for which pro forma results are presented2005 are described below. See Note 4All IAC common stock share information and related per share prices included in this note have been adjusted to reflect IAC's one-for-two reverse stock split in August 2005.
Acquisitions completed in 2005
Ask Jeeves Acquisition
On July 19, 2005, IAC completed the acquisition of Ask Jeeves, now referred to as IAC Search & Media, a leading provider of world-class information retrieval technologies, brands and services that are available to consumers across a range of platforms, including destination websites, downloadable search-based applications and portals. Under the terms of the agreement, IAC issued 37.9 million shares of IAC common stock to IAC Search & Media security holders based on an exchange ratio of 1.2668 shares (or 0.6334 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for additional informationeach share of IAC Search & Media common stock in a tax-free transaction valued as of the date of the agreement at approximately $1.7 billion, net of cash acquired. IAC also assumed options to acquire approximately 4.1 million shares of IAC common stock and assumed 0.1 million restricted share units. The price used to value the securities was $43.976, which was the average of the closing prices of IAC common stock during the five consecutive trading days beginning two trading days prior to the announcement of the IAC Search & Media acquisition. The amount recorded as unearned compensation was based upon the fair value of the unvested stock options and restricted stock as of the acquisition date and is being recognized as non-cash compensation over the vesting period. IAC Search & Media is included in IAC's Media & Advertising operating segment and sector.
IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $352.6 million of intangible assets other than goodwill. The goodwill recognized amounted to $1.5 billion. The trade names acquired were identified as indefinite-lived intangible assets and $195.9 million was allocated to these assets. Intangibles with definite lives included existing technology ($116.4 million), distribution agreements ($12.7 million), customer lists ($17.0 million), advertising relationships ($4.2 million) and other ($6.4 million) and are being amortized over a weighted-average period of 4.3 years. None of the amount allocated to goodwill is tax deductible. The purchase price paid for IAC Search & Media was based on historical as well as expected performance metrics. The Company viewed IAC Search & Media's revenue, operating income, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed
to consideration that resulted in recognition of a significant amount of goodwill for a number of reasons including: IAC Search & Media's market position and brand; IAC Search & Media's business model which complements the business models of the Company's other acquisitionsbusinesses; growth opportunities in the markets in which IAC Search & Media operates; and IAC Search & Media's distinctly unique, proprietary and exclusive service lines which we expect will enable the Company to grow. As a result, the predominant portion of the consideration was based on the expected financial performance of IAC Search & Media, and not the asset value on the books of IAC Search & Media at the time of acquisition.
Cornerstone Brands Acquisition
On April 1, 2005, the Company completed its acquisition of Cornerstone Brands, a portfolio of leading print catalogs and online retailing sites that sell home products and leisure and casual apparel, for approximately $715 million, principally in cash. Cornerstone Brands is included in IAC's U.S. Retailing operating segment. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $309.1 million of intangible assets other than goodwill. The goodwill recognized amounted to $456.4 million. The trade names acquired were identified as indefinite-lived intangible assets and $269.4 million was allocated to these assets. Intangibles with definite lives included customer lists ($31.4 million), existing technology ($4.1 million), vendor and supply agreements ($3.0 million) and intellectual property ($1.2 million) and are being amortized over a weighted-average period of 4.5 years. None of the amount allocated to goodwill is tax deductible. The purchase price paid for Cornerstone Brands was based on historical as well as expected performance metrics. The Company viewed Cornerstone Brands' revenue, operating income, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: Cornerstone Brand's market position and brands; Cornerstone Brand's business model which complements the business models of the Company's other businesses; growth opportunities in the markets in which Cornerstone Brands operates; and Cornerstone Brand's distinctly unique, proprietary and exclusive product lines which should enable the Company to grow. As a result, the predominant portion of the purchase price was based on the expected financial performance of Cornerstone Brands, and not the asset value on the books of Cornerstone Brands at the time of the acquisition.
Acquisitions completed in 2004
Home Loan Center Acquisition
On December 14, 2004, LendingTree acquired all of the outstanding stock of Home Loan Center, now referred to as LendingTree Loans, a consumer direct mortgage banker. LendingTree Loans is included in IAC's Lending operating segment. LendingTree Loans derives its income primarily from the origination of mortgage loans and the subsequent sale of the loans to investors. The Company allocated a portion of the purchase price to record an increase in the recorded value of loans held for sale to fair value of $2.3 million; record the fair value of interest rate lock commitments of $4.1 million; and record the value of the unlocked consumer loan commitments in the "pipeline" of $1.5 million. IAC obtained an independent valuation of intangible assets acquired. This valuation identified $7.5 million
of intangible assets other than goodwill. Intangibles with definite lives included trade names ($3.3 million), existing technology ($2.3 million), covenant-not-to-compete ($1.8 million) and customer lists ($0.1 million) and are being amortized over a weighted-average period of 2.8 years. Additional contingent purchase price may be earned by the Company duringLendingTree Loans stockholders based on the three years endedearnings performance of LendingTree Loans through December 31, 2007 (the "earnout period"). Since the additional contingent purchase is contingent upon future earnings, no liability is recorded for such amounts at December 31, 2005.
ServiceMagic Acquisition
On September 1, 2004, the Company completed its acquisition of ServiceMagic, Inc., a leading online marketplace connecting homeowners with pre-screened and customer rated residential contractors, real estate professionals and lenders. Immediately following the acquisition, the Company transferred ServiceMagic's financial services businesses to LendingTree for $20 million and ServiceMagic's Home Services portion of the business has been included in the Home Services segment since its acquisition. In connection with the ServiceMagic acquisition, IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $26.1 million of intangible assets other than goodwill. The trade name was identified as an indefinite-lived intangible and $10.8 million was allocated to this asset. Intangibles with definite lives included real estate agent and lending relationships ($3.5 million), contractor relationships ($7.1 million), software ($4.4 million) and customer lists ($0.3 million) and are being amortized over a weighted-average period of 5.3 years. The net purchase price paid for ServiceMagic was based on historical as well as expected performance metrics. The Company viewed ServiceMagic's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including ServiceMagic's market leading position and brand and ServiceMagic's business model, which complements the business models of the Company's other businesses.
The aggregate purchase price of the acquisitions of LendingTree Loans and ServiceMagic was approximately $211.1 million, of which approximately $143.5 million was classified as goodwill as of December 31, 2004. None of the amount allocated to goodwill is tax deductible.
TripAdvisor Acquisition (Discontinued Operations)
On April 27, 2004, the Company completed its acquisition of TripAdvisor, Inc., a leading travel search engine and directory that enables consumers to extensively research their travel and destination place via the internet. The Company's acquisition of TripAdvisor represented 94.1% of the business. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $54.9 million of intangible assets other than goodwill. The goodwill recognized amounted to approximately $163.0 million. The trade name was identified as an indefinite-lived intangible and $30.3 million was allocated to this asset. Intangibles with definite lives included existing technology ($22.1 million), and customer lists ($2.5 million) and are being amortized over a weighted-average period of 2.9 years. The net purchase price paid for TripAdvisor was based on historical as well as expected performance metrics. The Company viewed TripAdvisor's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed
to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: TripAdvisor's market leading position and brand; TripAdvisor's business model which complements the business models of Expedia's other businesses; growth opportunities in the markets in which TripAdvisor operates; and TripAdvisor's technological and operational expertise. As a result, the predominant portion of the purchase price was based on the expected financial performance of TripAdvisor, and not the asset value on the books at the time of the acquisition. These factors resulted in a significant amount of the purchase price being allocated to goodwill. None of the amount allocated to goodwill is tax deductible. TripAdvisor was included within Expedia subsequent to its acquisition by IAC and is reflected in discontinued operations for all periods presented.
Acquisitions completed in 2003
Ticketmaster Merger
On January 17, 2003, IAC completed its acquisition of all of the outstanding shares of Ticketmaster that it did not already own. Prior to the acquisition, IAC owned approximately 66% of the outstanding equity of Ticketmaster, including its subsidiaries Citysearch and Match.com. IAC issued approximately 45.522.7 million shares of IAC common stock to Ticketmaster security holders based on an exchange ratio of 0.935 of a share (or 0.4675 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of Ticketmaster common stock. IAC also assumed options to acquire approximately 8.94.5 million shares of IAC common stock and warrants to acquire approximately 4.22.1 million shares of IAC common stock, in each case based on anthe same exchange ratio of 0.935.ratio. The price used to value the securities was $17.918,$35.836, which was the average of the closing prices of IAC common stock during the five consecutive trading days beginning two trading days prior to the announcement of the Ticketmaster merger. The amount recorded as unearned compensation was based upon the estimated impactfair value of the unvested stock options and warrants as of the merger date, at their fair value as of such date, and is being recognized as non-cash compensation over the vesting period. The purchase consideration and resulting allocation are as follows (in thousands):
Value of securities issued | $ | 900,382 | ||
Less: fair value of unvested options and warrants to acquire IAC common stock recorded as unearned compensation | (32,583 | ) | ||
Net purchase price | 867,799 | |||
Less: minority interest acquired | (441,300 | ) | ||
Add: deferred income taxes associated with the intangible asset step-up | 81,300 | |||
Excess of the merger consideration over minority interest acquired, deferred taxes and deferred compensation | $ | 507,799 | ||
IAC obtained an independent valuation of the identifiable intangible assets acquired. This valuation identified $616.1 million of intangible assets other than goodwill. IAC recorded 34% of this amount, or $209.5 million, representing the incremental ownership acquired in the transaction. The unallocated excess of merger consideration over minority interest acquired, deferred taxes and deferred compensation of $298.3 million was allocated to goodwill. The trade name was identified as an indefinite lived intangible and $90.3 million was allocated to this asset. Intangibles with definite lives included venue promoter contracts ($75.1 million), distribution agreements ($25.9 million), technology ($11.4 million) and subscribers ($6.8 million) and are being amortized over a weighted average period of 5.7 years. None of the amountsamount allocated to goodwill or intangible assets areis tax deductible. The
Company recorded no adjustments to the historical carrying value of assets and liabilities, other than to goodwill and intangible assets, as a result of the step-up in fair value.
The Company acquired the remaining interest in Ticketmaster because the acquisition significantly simplified its corporate structure (which at the time was very complex with significant minority interests); the acquisition removed potential conflicts of interest between the Company's shareholders and the minority public shareholders of Ticketmaster, and allowed the companies to work together more closely to achieve operating efficiencies; the Company gained access to the acquiree's total cash flow; and the Company believed that Ticketmaster had great growth prospects.
LendingTree Acquisition
On August 8, 2003, the Company completed its acquisition of all of the outstanding capital stock of LendingTree, Inc. in a stock-for-stock transaction. In the acquisition, LendingTree shareholders received 0.6199 of a share (or 0.30995 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of LendingTree common stock that they owned and LendingTree preferred stockholders received the same merger consideration, on an as-converted basis. IAC issued an aggregate of approximately 9.4 million shares of IAC common stock, and assumed approximately 1.7 million stock options in the merger.
In connection with the LendingTree acquisition, the consideration attributable to intangible assets and goodwill was $714.6 million. IAC obtained an independent valuation of the identifiable intangible assets. This valuation identified $187.2 million of intangible assets other than goodwill. The goodwill recognized amounted to $527.4 million. The trade name was identified as an indefinite-lived intangible and $87.0 million was allocated to this asset. Intangibles with definite lives included purchased service agreements ($62.8 million), technology ($24.7 million), customer backlog ($7.2 million) and customer lists ($5.5 million) and are being amortized over a weighted-average period of 4.4 years. None of the amount allocated to goodwill is tax deductible.
The net purchase price paid for LendingTree was based on historical as well as expected performance metrics. The Company viewed LendingTree's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: LendingTree's market leading position and brand; LendingTree's technological and operational expertise; and the Company's expectation of significant growth in the online financial services and real estate market. LendingTree had a relatively short business history and was unprofitable in every year prior to 2002. As a result, the predominant portion of purchase price was
based on the expected financial performance of LendingTree, and not the net asset value on the books at the time of the acquisition.
Entertainment Publications Acquisition
In connection with the Entertainment Publications acquisition, which was completed on March 25, 2003, the consideration attributable to intangible assets and goodwill was $314.0 million. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $103.1 million of intangible assets other than goodwill. The goodwill recognized amounted to $210.9 million. The trade name was identified as an indefinite-lived intangible and $48.7 million was allocated to this asset. Intangibles with definite lives included distribution lists ($36.9 million), merchant agreements ($11.7 million), technology ($4.4 million), and covenant not-to-compete ($1.4 million) and are being amortized over a weighted average period of 8.8 years. None of the amount allocated to goodwill is tax deductible.
The net purchase price paid for Entertainment Publications was based on historical as well as expected performance metrics. The Company viewed Entertainment Publications' revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: Entertainment Publications' business model complements the business models of the Company's other Membership & Subscriptions businesses; and the early stages of Entertainment Publications' online migration. As a result, the predominant portion of purchase price was based on the expected financial performance of Entertainment Publications, and not the net asset value on the books at the time of the acquisition.
Expedia.com Merger (Discontinued Operations)
On August 8, 2003, IAC completed its acquisition of all of the outstanding shares of Expedia.com that it did not already own. Prior to the acquisition IAC owned approximately 59% of the outstanding equity of Expedia.com. IAC issued approximately 50.4 million shares of IAC common stock to Expedia.com security holders based on an exchange ratio of 1.93875 shares (or 0.969375 of a share, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of Expedia.com common stock. IAC also assumed options to acquire 18.5 million shares of IAC common stock, issued warrants to acquire 12.2 million shares of IAC common stock and assumed 0.6 million restricted share units. The price used to value the securities was $52.94, which was the average of the closing prices of IAC common stock during the five consecutive trading days beginning two trading days prior to the announcement of the Expedia.com merger. The amount recorded as unearned compensation was based upon the fair value of the unvested stock options and warrants as of
the merger date, and is being recognized as non-cash compensation over the vesting period. The purchase consideration and resulting allocation are as follows (in thousands):
Value of securities issued | $ | 3,883,614 | ||
Less: fair value of unvested options and warrants to acquire IAC common stock recorded as unearned compensation | (314,214 | ) | ||
Net purchase price | 3,569,400 | |||
Less: minority interest acquired | (326,700 | ) | ||
Add: deferred income taxes associated with the intangible asset step-up | 300,500 | |||
Excess of the merger consideration over minority interest acquired, deferred taxes and deferred compensation | $ | 3,543,200 | ||
IAC obtained an independent valuation of the identifiable intangible assets acquired, in conjunction with the acquisition of a controlling interest in Expedia.com in 2002. The Company updated this valuation, which identified $2.0 billion of intangible assets other than goodwill. IAC recorded approximately 41% of this amount, or $799.1 million, representing the incremental ownership acquired in the transaction. The unallocated excess of merger consideration over minority interest acquired, deferred taxes and deferred compensation of $2.7 billion was allocated to goodwill. The trade name was identified as an indefinite-lived intangible and $531.3 million was allocated to this asset. Intangibles with definite lives included affiliate agreements ($114.1 million), supply relationships ($67.3 million), technology ($78.8 million) and ECT customer relationships and customer lists ($7.5 million) and are being amortized over a weighted average period of 5 years. None of the amount allocated to goodwill is tax deductible. The Company recorded no adjustments to the historical carrying value of assets and liabilities, other than to goodwill and intangible assets, as a result of the step-up in fair value. Expedia.com was included within Expedia subsequent to its merger with IAC and is reflected in discontinued operations for all periods presented.
Hotels.com Merger (Discontinued Operations)
On June 23, 2003, IAC completed its acquisition of all of the outstanding shares of Hotels.com that it did not already own. Prior to the acquisition, IAC owned approximately 67% of the outstanding equity of Hotels.com. IAC issued 44.322.2 million shares of IAC common stock to Hotels.com security holders based on an exchange ratio of 2.4 shares (or 1.2 shares, adjusted to reflect IAC's one-for-two reverse stock split in August 2005) of IAC common stock for each share of Hotels.com common stock. IAC also assumed options to acquire 6.43.2 million shares of IAC common stock, warrants to acquire 1.20.6 million shares of IAC common stock and 0.30.15 million restricted share units in the merger, in each case based on anthe same exchange ratio of 2.4.ratio. The price used to value the securities was $26.174,$52.348, which was the average of the closing prices of IAC common stock during the five consecutive trading days beginning two trading days prior to the announcement of the Hotels.com merger. The amount recorded as unearned compensation was the estimated impact of unvested stock options and warrants as of the
merger date, at their fair value as of such date, and is being recognized as non-cash compensation over the vesting period. The purchase consideration and resulting allocation are as follows (in thousands):
Value of securities issued | $ | 1,276,408 | ||
Less: fair value of unvested options and warrants to acquire IAC common stock recorded as unearned compensation | (97,100 | ) | ||
Net purchase price | 1,179,308 | |||
Less: minority interest acquired | (357,000 | ) | ||
Add: deferred income taxes associated with the intangible asset step-up | 82,600 | |||
Excess of the merger consideration over minority interest acquired, deferred taxes and deferred compensation | $ | 904,908 | ||
IAC obtained an independent valuation of the identifiable intangible assets acquired. This valuation identified $672.8 million of intangible assets other than goodwill. IAC recorded approximately 33% of this amount, or $219.6 million, representing the incremental ownership acquired in the transaction. The unallocated excess of merger consideration over minority interest acquired, deferred taxes and deferred compensation of $685.3 million was allocated to goodwill. The trade name was identified as an indefinite livedindefinite-lived intangible and $115.7 million was allocated to this asset. Intangibles with definite lives included supply relationships ($63.4 million), affiliate agreements ($36.6 million), technology ($3.6 million) and customer lists ($0.3 million) and are being amortized over a weighted averageweighted-average period of 6.5 years. None of the amountsamount allocated to goodwill or intangible assets areis tax deductible. The Company recorded no adjustments to the historical carrying value of assets and liabilities, other than to goodwill and intangible assets, as a result of the step-up in fair value.
Hotels.com was included within Expedia Merger
On August 8, 2003,subsequent to its merger with IAC completed its acquisition of all of the outstanding shares of Expedia that it did not already own. Prior to the acquisition IAC owned approximately 59% of the outstanding equity of Expedia. IAC issued approximately 100.8 million shares of IAC common stock to Expedia
security holders based on an exchange ratio of 1.93875 shares of IAC common stock for each share of Expedia common stock. IAC also assumed options to acquire 36.9 million shares of IAC common stock, issued warrants to acquire 24.5 million shares of IAC common stock and assumed 1.2 million restricted share units. The price used to value the securities was $26.47, which was the average of the closing prices of IAC common stock during the five consecutive trading days beginning two trading days prior to the announcement of the Expedia merger. The amount recorded as unearned compensation was the estimated impact of unvested stock options and warrants as of the merger date, at their fair value as of such date, and is being recognized as non-cash compensation over the vesting period. The purchase consideration and resulting allocation are as follows (in thousands):
Value of securities issued | $ | 3,883,614 | ||
Less: fair value of unvested options and warrants to acquire IAC common stock recorded as unearned compensation | (314,214 | ) | ||
Net purchase price | 3,569,400 | |||
Less: minority interest acquired | (326,700 | ) | ||
Add: deferred income taxes associated with the intangible asset step-up | 300,500 | |||
Excess of the merger consideration over minority interest acquired, deferred taxes and deferred compensation | $ | 3,543,200 | ||
IAC obtained an independent valuation of the identifiable intangible assets acquired,reflected in conjunction with the acquisition of a controlling interest in Expedia in 2002. The Company updated this valuation, which identified $2.0 billion of intangible assets other than goodwill. IAC recorded approximately 41% of this amount, or $799.1 million, representing the incremental ownership acquired in the transaction. The unallocated excess of merger consideration over minority interest acquired, deferred taxes and deferred compensation of $2.7 billion was allocated to goodwill. The trade name was identified as an indefinite lived intangible and $531.3 million was allocated to this asset. Intangibles with definite lives included affiliate agreements ($114.1 million), supply relationships ($67.3 million), technology ($78.8 million) and ECT customer relationships and customer lists ($7.5 million) and are being amortized over a weighted average period of 5 years. None of the amounts allocated to goodwill or intangible assets are tax deductible. The Company recorded no adjustments to the historical carrying value of assets and liabilities, other than to goodwill and intangible assets, as a result of the step-up in fair value.discontinued operations for all periods presented.
The Company acquired the remaining interests in Ticketmaster, ExpediaExpedia.com and Hotels.com because (1) the acquisitions significantly simplified its corporate structure (which at the time was very complex with significant minority interests); (2) the acquisitions removed potential conflicts of interest between the Company's shareholders and the minority public shareholders of Ticketmaster, ExpediaExpedia.com and Hotels.com, and allowed the companies to work together more closely to achieve operating efficiencies; (3) the Company gained access to the acquirees' total cash flow; and (4) the Company believed that all of theboth companies had great growth prospects in their respective fields.
Hotwire Acquisition (Discontinued Operations)
On November 5, 2003, the Company completed its acquisition of Hotwire, a leading discount travel website. Total consideration paid was $666.7 million in cash, plus the assumption of options to acquire approximately 0.3 million shares of IAC common stock, warrants to acquire approximately 40 thousand shares of IAC common stock, and 0.2 million restricted share units. In connection with the Hotwire acquisition, the consideration attributable to intangible assets and goodwill was $659.8 million.
IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $126.8 million of intangible assets other than goodwill. The goodwill recognized amounted to $533.0 million. The trade name was identified as an indefinite-lived intangible and $90.0 million was allocated to this asset. Intangibles with definite lives included supply relationships ($28.5 million),
technology ($7.0 million) and customer lists ($1.3 million) and are being amortized over a weighted-average period of 4.1 years. None of the amount allocated to goodwill is tax deductible.
The net purchase price paid for Hotwire was based on historical as well as expected performance metrics. The Company viewed Hotwire's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: Hotwire's market leading position and brand; Hotwire's business model, which complements the business models of the Company's other travel businesses; growth opportunities in the markets in which Hotwire competes; and Hotwire's technological and operational expertise. As a result, the predominant portion of purchase price was based on the expected financial performance of Hotwire, and not the net asset value on the books at the time of the acquisition. Hotwire was included within Expedia subsequent to its acquisition by IAC and is reflected in discontinued operations for all periods presented.
Pro Forma Results
The following unaudited pro forma condensed consolidated financial information for the yearsyear ended December 31, 2003 and 2002, is presented to show the results of the Company to give effect to
IAC's acquisition of a controlling interest in Expedia completed on February 4, 2002, IAC's contribution of the USA Entertainment Group to VUE completed on May 7, 2002, including the exchange by Liberty of its USANi LLC shares for 7.1 million IAC common shares, the exchange by Liberty of its shares of Home Shopping Network, Inc. for 31.6 million shares of IAC common stock and 1.6 million shares of IAC Class B common stock completed on June 27, 2002, the merger of Ticketmaster with a wholly-owned subsidiary of IAC completed on January 17, 2003, the merger of Hotels.com with a wholly-owned subsidiary of IAC completed on June 23, 2003 and the merger of ExpediaExpedia.com with a wholly ownedwholly-owned subsidiary of IAC completed on August 8, 2003, as if the transactions had occurred at the beginning of the periods presented.on January 1, 2003. The pro forma results include certain adjustments, including increased amortization related to intangible assets and compensation expense, and are not necessarily indicative of what the results would have been had the transactions actually occurred on January 1, 2003. Note that the aforementioned dates.pro forma results include Hotels.com and Expedia.com in discontinued operations (see Note 9).
| Years Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||
| (In thousands, except per share data) | ||||||
Net revenue | $ | 6,328,118 | $ | 4,616,412 | |||
Earnings (loss) from continuing operations before cumulative effect of accounting change | 108,753 | (113,290 | ) | ||||
Net earnings available to common shareholders | 136,437 | 1,795,957 | |||||
Basic earnings (loss) from continuing operations before cumulative effect of accounting change available to common shareholders | 0.14 | (0.20 | ) | ||||
Diluted earnings (loss) from continuing operations before cumulative effect of accounting change available to common shareholders | 0.13 | (0.20 | ) | ||||
Basic earnings per share from net income | 0.20 | 2.82 | |||||
Diluted earnings per share from net income | 0.18 | 2.82 |
| Year Ended December 31, 2003 | |||
---|---|---|---|---|
| (In thousands, except per share data) | |||
Net revenue | $ | 3,823,489 | ||
Earnings from continuing operations before cumulative effect of accounting change | 10,483 | |||
Net earnings available to common shareholders | 136,437 | |||
Basic loss per share from continuing operations before cumulative effect of accounting change available to common shareholders | (0.01 | ) | ||
Diluted loss per share from continuing operations before cumulative effect of accounting change available to common shareholders | (0.01 | ) | ||
Basic earnings per share available to common shareholders | 0.40 | |||
Diluted earnings per share available to common shareholders | 0.40 |
NOTE 4: 4—GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In connection with the adoption of this standard, the Company has not amortized any goodwill or indefinite-lived intangible assets subsequent to January 1, 2002. Prior to the adoption, all intangible assets were amortized over the period during which the associated benefit was expected to be realized, generally on a straight-line basis. In connection with the implementation of SFAS 142, the Company was required to assess goodwill and indefinite-lived intangible assets for impairment. As a result, in 2002 the Company recorded a write-off before tax and minority interest of $499 million related to the Citysearch ($115 million) and PRC businesses ($384 million) as a cumulative effect of accounting change. Adoption of the new standard resulted in a one-time, non-cash after-tax, after minority interest charge of $461.4 million. The charge is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations as of January 1, 2002.
In addition, in the second quarter of 2002, IAC recorded a further write-down of $22.2 million related to PRC. The write-down resulted from contingent purchase price recorded in the second quarter.
Additionally, pursuant to SFAS 142, the Company assesses goodwill and indefinite-lived intangible assets for impairment annually as of October 1, of each year, or more frequently if circumstances indicate impairment may have occurred. The Company performed its annual assessmentassessments for impairment of goodwill and indefinite-lived intangible assets for 2004 as of October 1, 2005, 2004 and 2003 in connection with the preparation of its auditedannual financial statements. Pursuant to thisBased upon its annual assessment in 2004, the Company recorded an impairment charge related to the
write-down to the goodwill of PRC (Teleservices operating segment) of $184.8 million, before tax, which was recorded as a component of operating income (loss) in the accompanying consolidated statement of operations. The write-down was determined by comparing the fair value of the business and the implied value of the goodwill with the carrying amounts on the balance sheet. The fair value of the reporting unit was determined based on a weighting of income and market approaches. The write-down primarily resulted from continued competition and macroeconomic factors which negatively impacted industry valuations and PRC's fourth quarter 2004 financial performance. In addition, in connection with the Company's annual impairment review of intangible assets, an impairment charge of $32.7 million was recorded in the fourth quarter of 2004 related to the write-off of certain indefinite and definite-lived intangible assets of TV Travel Shop, (IAC Travel segment), which has beenis included in amortization of intangiblesdiscontinued operations in the accompanying consolidated statement of operations. This impairment was recorded in 2004 due to management's reassessment of TV Travel Shop's expected future financial performance and the fair value of the assets was determined based on the present value of estimated future cash flows. In connection with the Spin-Off and establishment of the Lending and Real Estate operating segments, the Company allocated the goodwill of its former IAC Travel reporting unit to Expedia, TV Travel Shop and Interval and the goodwill of its Financial Services and Real Estate reporting unit to the Lending and Real Estate operating segments based upon their relative fair values as of January 1, 2005 and September 30, 2005, respectively.
The balance of goodwill and intangible assets is as follows (in thousands):
| December 31, | December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2005 | 2004 | ||||||||
Goodwill | $ | 11,433,746 | $ | 11,273,635 | $ | 7,351,700 | $ | 5,361,825 | ||||
Intangible assets with indefinite lives | 1,469,919 | 1,418,990 | 1,042,558 | 574,473 | ||||||||
Intangible assets with definite lives | 863,744 | 1,094,899 | 515,630 | 479,829 | ||||||||
$ | 13,767,409 | $ | 13,787,524 | $ | 8,909,888 | $ | 6,416,127 | |||||
In total, goodwillIntangible assets with indefinite lives relate principally to trade names and othertrademarks acquired in the various acquisitions. At December 31, 2005, intangible assets decreased $20.1 million as ofwith definite lives relate principally to the following (in thousands):
| Cost | Accumulated Amortization | Net | Weighted-Average Amortization Life (Years) | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Distribution agreements | $ | 244,798 | $ | (177,146 | ) | $ | 67,652 | 5.0 | |||
Purchase agreements | 304,911 | (161,988 | ) | 142,923 | 6.8 | ||||||
Customer lists | 197,084 | (70,951 | ) | 126,133 | 7.6 | ||||||
Technology | 212,282 | (84,297 | ) | 127,985 | 4.3 | ||||||
Merchandise agreements | 44,957 | (27,359 | ) | 17,598 | 5.7 | ||||||
Other | 76,911 | (43,572 | ) | 33,339 | 3.1 | ||||||
Total | $ | 1,080,943 | $ | (565,313 | ) | $ | 515,630 | ||||
At December 31, 2004, as comparedintangible assets with definite lives related principally to the prior year.following (in thousands):
| Cost | Accumulated Amortization | Net | Weighted-Average Amortization Life (Years) | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Distribution agreements | $ | 511,031 | $ | (405,945 | ) | $ | 105,086 | 5.1 | |||
Purchase agreements | 291,941 | (133,499 | ) | 158,442 | 11.6 | ||||||
Customer lists | 147,824 | (22,320 | ) | 125,504 | 9.2 | ||||||
Technology | 89,482 | (53,490 | ) | 35,992 | 3.9 | ||||||
Merchandise agreements | 41,957 | (18,719 | ) | 23,238 | 5.8 | ||||||
Other | 56,920 | (25,353 | ) | 31,567 | 3.4 | ||||||
Total | $ | 1,139,155 | $ | (659,326 | ) | $ | 479,829 | ||||
Amortization of intangible assets with definite lives is computed on a straight-line basis and based on December 31, 2005 balances for the next five years and thereafter is estimated to be as follows (in thousands):
Years Ending December 31, | | ||
---|---|---|---|
2006 | �� | $ | 161,205 |
2007 | 111,528 | ||
2008 | 86,647 | ||
2009 | 66,386 | ||
2010 | 43,730 | ||
2011 and thereafter | 46,134 | ||
$ | 515,630 | ||
The decrease is duefollowing table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill for the year ended December 31, 2005 (in thousands):
| Balance as of January 1, 2005 | Additions | (Deductions) | Foreign Exchange Translation | Balance as of December 31, 2005 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Retailing: | ||||||||||||||||
U.S. | $ | 2,436,892 | $ | 456,403 | $ | (4,285 | ) | $ | — | $ | 2,889,010 | |||||
International | 108,779 | 1,311 | — | — | 110,090 | |||||||||||
Total Retailing | 2,545,671 | 457,714 | (4,285 | ) | — | 2,999,100 | ||||||||||
Services: | ||||||||||||||||
Ticketing | 1,036,019 | 24,321 | (1,333 | ) | (3,661 | ) | 1,055,346 | |||||||||
Lending | 525,100 | 3,772 | (12,442 | ) | — | 516,430 | ||||||||||
Real Estate | 67,365 | 455 | (1,811 | ) | — | 66,009 | ||||||||||
Teleservices | 128,655 | 691 | — | — | 129,346 | |||||||||||
Home Services | 112,973 | 8,648 | (20,291 | ) | — | 101,330 | ||||||||||
Total Services | 1,870,112 | 37,887 | (35,877 | ) | (3,661 | ) | 1,868,461 | |||||||||
Media & Advertising | — | 1,538,998 | — | — | 1,538,998 | |||||||||||
Membership & Subscriptions: | ||||||||||||||||
Vacations | 467,564 | — | (60 | ) | — | 467,504 | ||||||||||
Personals | 221,728 | 224 | — | (1,057 | ) | 220,895 | ||||||||||
Discounts | 256,750 | 885 | (893 | ) | — | 256,742 | ||||||||||
Total Membership & Subscriptions | 946,042 | 1,109 | (953 | ) | (1,057 | ) | 945,141 | |||||||||
Total | $ | 5,361,825 | $ | 2,035,708 | $ | (41,115 | ) | $ | (4,718 | ) | $ | 7,351,700 | ||||
Additions principally relate to new acquisitions, primarily IAC Search & Media and Cornerstone Brands. Deductions principally relate to the Teleservices impairment charge noted aboveestablishment of a deferred tax asset related to purchased net operating losses, adjustments to the carrying value of goodwill based upon the finalization of the valuation of intangible assets and their related deferred tax impacts and the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as wella reduction in goodwill when the income tax deductions are realized.
The following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill for the year ended December 31, 2004 (in thousands):
| Balance as of January 1, 2004 | Additions | (Deductions) | Goodwill Impairment | Foreign Exchange Translation | Balance as of December 31, 2004 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Retailing: | |||||||||||||||||||
U.S. | $ | 2,424,680 | $ | 13,082 | $ | (870 | ) | $ | — | $ | — | $ | 2,436,892 | ||||||
International | 108,779 | — | — | — | — | 108,779 | |||||||||||||
Total Retailing | 2,533,459 | 13,082 | (870 | ) | — | — | 2,545,671 | ||||||||||||
Services: | |||||||||||||||||||
Ticketing | 1,007,300 | 35,358 | (12,428 | ) | — | 5,789 | 1,036,019 | ||||||||||||
Lending and Real Estate(*) | 571,859 | 86,534 | (65,928 | ) | — | — | 592,465 | ||||||||||||
Teleservices | 314,001 | 2 | (568 | ) | (184,780 | ) | — | 128,655 | |||||||||||
Home Services | — | 112,973 | — | — | — | 112,973 | |||||||||||||
Total Services | 1,893,160 | 234,867 | (78,924 | ) | (184,780 | ) | 5,789 | 1,870,112 | |||||||||||
Membership & Subscriptions: | |||||||||||||||||||
Vacations | 465,737 | 1,827 | — | — | — | 467,564 | |||||||||||||
Personals | 223,429 | 58 | (2,580 | ) | — | 821 | 221,728 | ||||||||||||
Discounts | 208,973 | 48,431 | (654 | ) | — | — | 256,750 | ||||||||||||
Total Membership & Subscriptions | 898,139 | 50,316 | (3,234 | ) | — | 821 | 946,042 | ||||||||||||
Total | $ | 5,324,758 | $ | 298,265 | $ | (83,028 | ) | $ | (184,780 | ) | $ | 6,610 | $ | 5,361,825 | |||||
Deductions principally relatedrelate to the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in purchase pricegoodwill when the income tax deductions are realized. These decreases were partially offset by additions related to new acquisitions, primarily TripAdvisor, ServiceMagic, Home Loan Center and other acquisitions made by IAC Travel. The change in the goodwill balance also reflectsrealized, adjustments to the carrying value of goodwill based upon the finalization of the valuation of intangible assets and their related deferred tax impacts, and the elimination of valuation allowances recorded against purchased net operating losses.
Intangibles with indefinite lives relate principally to trade names and trademarks acquired in the various acquisitions. At December 31, 2004, intangibles with definite lives relate principally to the following:
| Cost | Accumulated Amortization | Net | Weight Average Amortization Life (Years) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | | |||||||||
Purchase agreements | $ | 291,941 | $ | (133,499 | ) | $ | 158,442 | 11.6 | ||||
Distribution agreements | 687,753 | (484,306 | ) | 203,447 | 5.2 | |||||||
Merchandise agreements | 41,957 | (18,719 | ) | 23,238 | 5.8 | |||||||
Supplier relationships | 208,776 | (104,985 | ) | 103,791 | 3.6 | |||||||
Technology | 277,235 | (134,545 | ) | 142,690 | 4.4 | |||||||
Customer lists | 169,486 | (34,739 | ) | 134,747 | 9.0 | |||||||
Affiliate agreements | 33,049 | (4,984 | ) | 28,065 | 10.0 | |||||||
Domain names | 13,157 | (302 | ) | 12,855 | 8.8 | |||||||
Other | 104,635 | (48,166 | ) | 56,469 | 5.3 | |||||||
Total | $ | 1,827,989 | $ | (964,245 | ) | $ | 863,744 | |||||
At December 31, 2003, intangible assets with definite lives related principally to the following:
| Cost | Accumulated Amortization | Net | Weighted Average Amortization Life (Years) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | | |||||||||
Purchase agreements | $ | 269,389 | $ | (86,116 | ) | $ | 183,273 | 11.8 | ||||
Distribution agreements | 690,936 | (373,745 | ) | 317,191 | 5.2 | |||||||
Merchandise agreements | 41,957 | (11,205 | ) | 30,752 | 5.8 | |||||||
Supplier relationships | 231,596 | (65,575 | ) | 166,021 | 5.4 | |||||||
Technology | 248,805 | (72,583 | ) | 176,222 | 4.6 | |||||||
Customer lists | 165,593 | (20,711 | ) | 144,882 | 9.1 | |||||||
Affiliate agreements | 33,049 | (1,673 | ) | 31,376 | 10.0 | |||||||
Domain names | 28,756 | (4,953 | ) | 23,803 | 9.9 | |||||||
Other | 55,444 | (34,065 | ) | 21,379 | 5.6 | |||||||
Total | $ | 1,765,525 | $ | (670,626 | ) | $ | 1,094,899 | |||||
Amortization of intangibles is computed on a straight-line basis and based on December 31, 2004 balances for the next five years and thereafter is estimated to be as follows (in thousands):
Years Ending December 31 | | ||
---|---|---|---|
2005 | $ | 274,373 | |
2006 | 211,639 | ||
2007 | 136,205 | ||
2008 | 96,724 | ||
2009 | 44,490 | ||
2010 and thereafter | 100,313 | ||
$ | 863,744 | ||
The following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill for the year ended December 31, 2004 (in thousands):
| Balance as of January 1, 2004 | Additions | (Deductions) | Goodwill Impairment | Foreign Exchange Translation | Balance as of December 31, 2004 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
IAC Travel | $ | 6,214,139 | $ | 153,218 | $ | (232,659 | ) | $ | — | $ | 16,857 | $ | 6,151,555 | ||||||
Electronic Retailing | |||||||||||||||||||
HSN U.S. | 2,424,680 | 13,082 | (870 | ) | — | — | 2,436,892 | ||||||||||||
HSN International | 313,812 | — | — | — | 17,748 | 331,560 | |||||||||||||
Total Electronic Retailing | 2,738,492 | 13,082 | (870 | ) | — | 17,748 | 2,768,452 | ||||||||||||
Ticketing | 1,005,131 | 35,358 | (10,379 | ) | — | 5,789 | 1,035,899 | ||||||||||||
Personals | 223,429 | 58 | (2,579 | ) | — | 821 | 221,729 | ||||||||||||
IAC Local and Media Services | 206,584 | 328,831 | (424 | ) | — | — | 534,991 | ||||||||||||
Teleservices | 314,001 | 2 | (568 | ) | (184,780 | ) | — | 128,655 | |||||||||||
Financial Services and Real Estate | 571,859 | 86,534 | (65,928 | ) | — | — | 592,465 | ||||||||||||
Goodwill | $ | 11,273,635 | $ | 617,083 | $ | (313,407 | ) | $ | (184,780 | ) | $ | 41,215 | $ | 11,433,746 | |||||
Deductions principally relate to (1) the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in purchase price when the deductions are realized, (2) adjustments to the carrying value of goodwill based upon the finalization of the valuation of intangible assets and their related deferred tax impacts and (3) the elimination of valuation allowances recorded against purchased net operating losses. Additions principally relate to new acquisitions, primarily TripAdvisor, ServiceMagic Home Loan Center and other acquisitions made by IAC Travel,LendingTree Loans, as well as adjustments to the carrying value of goodwill based upon the finalization of the valuation of intangible assets and their related deferred tax impacts.
The following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill for the year ended December 31, 2003 (in thousands):
| Balance as of January 1, 2003 | Additions | (Deductions) | Foreign Exchange Translation | Balance as of December 31, 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
IAC Travel | $ | 2,163,843 | $ | 4,233,254 | $ | (187,433 | ) | $ | 4,475 | $ | 6,214,139 | |||||
Electronic Retailing | ||||||||||||||||
HSN U.S. | 2,424,606 | 74 | — | — | 2,424,680 | |||||||||||
HSN International | 270,233 | 946 | — | 42,633 | 313,812 | |||||||||||
Total | 2,694,839 | 1,020 | — | 42,633 | 2,738,492 | |||||||||||
Ticketing | 743,831 | 262,635 | (9,184 | ) | 7,849 | 1,005,131 | ||||||||||
Personals | 65,195 | 152,858 | (749 | ) | 6,125 | 223,429 | ||||||||||
IAC Local and Media Services | — | 208,973 | (2,389 | ) | — | 206,584 | ||||||||||
Teleservices | 312,001 | 2,000 | — | — | 314,001 | |||||||||||
Financial Services and Real Estate | — | 583,406 | (11,547 | ) | — | 571,859 | ||||||||||
Goodwill | $ | 5,979,709 | $ | 5,444,146 | $ | (211,302 | ) | $ | 61,082 | $ | 11,273,635 | |||||
Deductions principally relate the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in purchase price when the deductions are realized. Additions principally relate to the 2003 mergers of Ticketmaster, Hotels.com and Expedia, as described above in Note 3, as well as the 2003 acquisitions of LendingTree, Hotwire and Entertainment Publications which are described below.
TripAdvisor Goodwill and Intangibles
On April 27, 2004, the Company completed its acquisition of TripAdvisor, Inc., a leading travel search engine and directory that enables consumers to extensively research their travel and destination place via the internet. The Company's acquisition of TripAdvisor represented only 94.1% of the business and as such, minority interest representing the fair value of the 5.9% of TripAdvisor's common stock that the Company does not own was recorded on the accompanying consolidated balance sheet. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation
identified $54.9 million of intangible assets other than goodwill. The trade name was identified as an indefinite-lived intangible and $30.3 million was allocated to this asset. Intangibles with definite lives included existing technology ($22.1 million), and customer lists ($2.5 million) and are being amortized over a weighted average period of 2.9 years. The net purchase price consideration paid for TripAdvisor was based on historical as well as expected performance metrics. The Company viewed TripAdvisor's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in a significant amount of goodwill for a number of reasons including: (1) TripAdvisor's market leading position and brand; (2) TripAdvisor's business model which complements the business models of our other businesses; (3) growth opportunities in the markets in which TripAdvisor operates; and (4) TripAdvisor's technological and operational expertise. As a result, the predominant portion of the purchase price was based on the expected financial performance of TripAdvisor, and not the asset value on the books at the time of the acquisition. These factors resulted in a significant amount of the purchase price being allocated to goodwill.
ServiceMagic Goodwill and Intangibles
On September 1, 2004, the Company completed its acquisition of ServiceMagic, Inc., a leading online marketplace connecting homeowners with pre-screened and customer rated residential contractors, real estate professionals and lenders. Immediately following the acquisition, the Company transferred ServiceMagic's financial services businesses to LendingTree for $20 million and ServiceMagic's Home Services portion of the business has been included in the IAC Local and Media Services segment since its acquisition. In connection with the ServiceMagic acquisition, IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $26.1 million of intangible assets other than goodwill. The trade name was identified as an indefinite lived intangible and $10.8 million was allocated to this asset. Intangibles with definite lives included real estate agent and lending relationships ($3.5 million), contractor relationships ($7.1 million), software ($4.4 million) and customer lists ($0.3 million) and are being amortized over a weighted-average period of 5.3 years. The net purchase price consideration paid for Service Magic was based on historical as well as expected performance metrics. The Company viewed Service Magic's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including (1) ServiceMagic's market leading position and brand (2) ServiceMagic's business model, which complements the models of our other businesses.
Home Loan Center Goodwill and Intangibles
On December 14, 2004, LendingTree acquired all of the outstanding stock of Home Loan Center ("HLC"), a consumer direct mortgage banker. HLC is licensed in all 50 states and derives its income primarily from fees charged for services related to the origination of mortgage loans and the subsequent sale of the loans to investors. The Company allocated a portion of that amount to (a) record a step-up in the recorded value of loans held for sale to fair value of $2.3 million, (b) record the fair value of interest rate lock commitments of $4.1 million and (c) record the value of the unlocked consumers in the "pipeline" of $1.2 million. Given that the acquisition was completed in December, a preliminary independent valuation of identifiable intangible assets acquired other than those referred to in the preceding sentence has not yet been completed. An independent valuation of
identifiable intangible assets will be performed in 2005 and the goodwill recorded will be adjusted accordingly. Additional contingent purchase price may be earned by the HLC stockholders based on the earnings performance of HLC through December 31, 2007 (the "earnout period"). Since the additional contingent purchase is contingent upon future earnings, no liability is recorded for such amounts at December 31, 2004.
The aggregate purchase price of the acquisitions of TripAdvisor, ServiceMagic and HLC was approximately $430 million, of which approximately $330 million was classified as goodwill as of December 31, 2004. None of the amounts allocated to goodwill are tax deductible.
LendingTree Goodwill and Intangibles
On August 8, 2003, the Company completed its acquisition of all of the outstanding capital stock of LendingTree, Inc. in a stock-for-stock transaction. In the acquisition, LendingTree shareholders received 0.6199 of a share of IAC common stock for each share of LendingTree common stock that they owned and LendingTree preferred stockholders received the same merger consideration, on an as-converted basis. IAC issued an aggregate of approximately 18.8 million shares of IAC common stock, and assumed approximately 3.4 million stock options in the merger.
In connection with the LendingTree acquisition, the consideration attributable to intangible assets and goodwill was $714.6 million. IAC obtained an independent valuation of the identifiable intangible assets. This valuation identified $187.2 million of intangible assets other than goodwill. The goodwill recognized amounted to $527.4 million. The trade name was identified as an indefinite lived intangible and $87.0 million was allocated to this asset. Intangibles with definite lives included purchased service agreements ($62.8 million), technology ($24.7 million), customer backlog ($7.2 million) and customer lists ($5.5 million) and are being amortized over a weighted average period of 4.4 years. None of the amounts allocated to goodwill or intangible assets are tax deductible.
The net purchase price consideration paid for LendingTree was based on historical as well as expected performance metrics. The Company viewed LendingTree's revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: (1) LendingTree's market leading position and brand; (2) LendingTree's technological and operational expertise; and (3) the Company's expectation of significant growth in the online financial services and real estate market. LendingTree had a relatively short business history and was unprofitable in every year prior to 2002. As a result, the predominant portion of purchase price was based on the expected financial performance of LendingTree, and not the net asset value on the books at the time of the acquisition. This resulted in a significant amount of the purchase price being allocated to goodwill.
Hotwire Goodwill and Intangibles
On November 5, 2003, the Company completed its acquisition of Hotwire, a leading discount travel website. Total consideration paid was $666.7 million in cash, plus the assumption of options to acquire approximately 0.5 million shares of IAC common stock, warrants to acquire approximately 0.1 million shares of IAC common stock, and 0.3 million restricted share units. In connection with the Hotwire acquisition, the consideration attributable to intangible assets and goodwill was $659.8 million. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation
identified $126.8 million of intangible assets other than goodwill. The goodwill recognized amounted to $533.0 million. The trade name was identified as an indefinite lived intangible and $90.0 million was allocated to this asset. Intangibles with definite lives included supply relationships ($28.5 million), technology ($7.0 million) and customer lists ($1.3 million) and are being amortized over a weighted average period of 4.1 years. None of the amounts allocated to goodwill or intangible assets are tax deductible.
The net purchase price paid for Hotwire was based on historical as well as expected performance metrics. The Company viewed Hotwire revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: (1) Hotwire's market leading position and brand; (2) Hotwire's business model, which complements the models of our other travel businesses; (3) growth opportunities in the markets in which Hotwire competes; and (4) Hotwire's technological and operational expertise. As a result, the predominant portion of purchase price was based on the expected financial performance of Hotwire, and not the net asset value on the books at the time of the acquisition. This resulted in a significant amount of the purchase price being allocated to goodwill.
Entertainment Publications Goodwill and Intangibles
In connection with the Entertainment Publications acquisition, which was completed on March 25, 2003, the consideration attributable to intangible assets and goodwill was $314.0 million. IAC obtained an independent valuation of identifiable intangible assets acquired. This valuation identified $103.1 million of intangible assets other than goodwill. The goodwill recognized amounted to $210.9 million. The trade name was identified as an indefinite lived intangible and $48.7 million was allocated to this asset. Intangibles with definite lives included distribution lists ($36.9 million), merchant agreements ($11.7 million), technology ($4.4 million), and covenant not-to-compete ($1.4 million) and are being amortized over a weighted average period of 8.8 years. None of the amounts allocated to goodwill or intangible assets are tax deductible.
The net purchase price paid for Entertainment Publications was based on historical as well as expected performance metrics. The Company viewed Entertainment Publications revenue, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. The Company agreed to a purchase price that resulted in recognition of a significant amount of goodwill for a number of reasons including: (1) Entertainment Publications' business model complements the models of our other Local Services businesses; and (2) the early stages of Entertainment Publications' online migration. As a result, the predominant portion of purchase price was based on the expected financial performance of Entertainment Publications, and not the net asset value on the books at the time of the acquisition. This resulted in a significant amount of the purchase price being allocated to goodwill.
NOTE 5: LONG-TERM OBLIGATIONS
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||
| (In thousands) | ||||||
$750,000,000 7.00% Senior Notes (the "2002 Senior Notes") due January 15, 2013; interest payable each January 15 and July 15 commencing on July 15, 2003. | $ | 750,000 | $ | 750,000 | |||
$360,845,000 63/4% Senior Notes (the "1998 Senior Notes") due November 15, 2005; interest payable each May 15 and November 15 commencing May 15, 1999. | 360,845 | 360,845 | |||||
$275,000,000 Warehouse Credit Lines due on demand. | 199,454 | — | |||||
$39,554,000 Installment Note Payable due January 31, 2006, 2007 and 2008. | 39,554 | — | |||||
Other long-term obligations maturing through 2022 | 16,140 | 13,776 | |||||
Total gross long-term obligations | 1,365,993 | 1,124,621 | |||||
Fair value basis adjustment attributable to hedged debt obligations | 407 | (1,103 | ) | ||||
Total unamortized discount | (4,412 | ) | (571 | ) | |||
Total long-term obligations | 1,361,988 | 1,122,947 | |||||
Less current maturities | (565,273 | ) | (2,850 | ) | |||
Long-term obligations, net of current maturities | $ | 796,715 | $ | 1,120,097 | |||
At December 31, 2004 current maturities of long-term obligations consist primarily of the $360.8 million of 1998 Senior Notes and the various warehouse lines of credit due on demand.
One of the Company's subsidiaries, HLC, has various warehouse lines of credit that it uses to fund mortgage and home equity loans. HLC has available warehouse lines of credit of $275 million of which $199.5 million was outstanding at December 31, 2004. The interest rate under these lines of credit falls within a range of 30-day LIBOR plus 100 basis points to 30-day LIBOR plus 245 basis points, depending on the underlying quality of the loans in the borrowing base. Under the terms of the credit agreement, HLC is required to maintain various financial and other covenants.
At December 31, 2004 the Company has outstanding two interest rate swap agreements with notional amounts of $250 million and $150 million, respectively, in each case related to a portion of the 2002 Senior Notes. During 2004, the Company sold other interest rate swap agreements for nominal gains, which are being amortized over the remaining life of the 2002 Senior Notes. The changes in fair value of the interest rate swaps outstanding at December 31, 2004 and 2003 resulted in a gain of $0.4 million and a loss of $1.1 million, respectively, which have been recognized as an increase or reduction of the corresponding debt as applicable. See Note 6 for further discussion.
In connection with the acquisition of HLC, the Company is committed to pay a portion of the purchase price payments to former shareholders under an installment note payable in three future installments. These payments are due annually with $9.6 million due January 31, 2006, $10.0 million due January 31, 2007 and $20.0 million due January 31, 2008 and are recorded net of imputed interest of $4.1 million.
During 2003, the Company repurchased $92.2 million principal amount of the 1998 Senior Notes resulting in losses of $8.6 million.
5—PROPERTY, PLANT AND EQUIPMENT
On December 16, 2002, IAC issued the 2002 Senior Notes, which are guaranteed by USANi LLC. The USANi LLC guaranty will terminate whenever the 1998 Senior Notes, co-issued by IACbalance of property, plant and USANi LLC, cease to be outstanding or its obligations under the 1998 Senior Notes and the related indenture are discharged or defeased pursuant to the terms thereof.
Aggregate contractual maturities of long-term obligations areequipment, net is as follows (in thousands):
Years Ending December 31, | | ||
---|---|---|---|
2005 | $ | 565,273 | |
2006 | 11,999 | ||
2007 | 9,698 | ||
2008 | 17,547 | ||
2009 | 258 | ||
Thereafter | 757,213 | ||
$ | 1,361,988 | ||
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||
Computer and broadcast equipment | $ | 786,979 | $ | 649,845 | ||||
Buildings and leasehold improvements | 187,439 | 145,645 | ||||||
Furniture and other equipment | 152,765 | 135,268 | ||||||
Land | 20,620 | 21,160 | ||||||
Projects in progress | 104,096 | 64,321 | ||||||
1,251,899 | 1,016,239 | |||||||
Less: accumulated depreciation and amortization | (684,491 | ) | (588,982 | ) | ||||
Total property, plant and equipment, net | $ | 567,408 | $ | 427,257 | ||||
At December 31, 2004 and 2003, the Company leased certain IT equipment under capital leases with interest rates ranging from approximately 4.00% to 12.00%. Included in other long-term obligations above as of December 31, 2004 are capital lease obligations totaling approximately $8.3 million, net of interest of $0.2 million. Included in other long-term obligations above as of December 31, 2003 are capital lease obligations totaling approximately $3.9 million, net of interest of $0.3 million. Total fixed assets under capital leases at December 31, 2004 and 2003 approximate $13.9 million and $10.6 million, respectively, with accumulated depreciation of approximately $5.9 million and $5.8 million, respectively.
NOTE 6: DERIVATIVE INSTRUMENTS
IAC's objective in managing its exposure to interest rate risk on its long-term debt is to maintain its mix of floating rate and fixed rate debt within a certain range. This policy enables IAC to manage its exposure to the impact of interest rate changes. As such, from time to time, IAC may enter into interest rate swap transactions designated as fair value hedges with financial institutions to modify the interest characteristics on a portion of its long-term debt. In 2004 and 2003, the Company entered into various interest rate swap agreements related to a portion of the 2002 Senior Notes. The interest rate swaps allow IAC to receive fixed rate amounts in exchange for making floating rate payments based on LIBOR, which effectively changes the Company's interest rate exposure on a portion of the debt. As of December 31, 2004 and 2003, of the $750 million total notional amount of the 2002 Senior Notes, the interest rate is fixed on $350 million with the balance of $400 million remaining at a floating rate of interest based on the spread over 6-month LIBOR. To further manage risk, the Company sold swap agreements for nominal gains during 2004, which are being amortized over the remaining life of the 2002 Senior Notes. The changes in fair value of the interest rate swaps at December 31, 2004 and 2003 resulted in a gain of $0.4 million and a loss of $1.1 million, respectively. The fair value of the contracts has been recorded on the accompanying balance sheet as of December 31, 2004 in other non-current assets with a corresponding offset to the carrying value of the related debt. The gain or loss on the derivative in the period of change and the loss or gain of the hedged item attributed to the hedged risk are recognized in the statement of operations and are offsetting.
In December 2004, the Company acquired HLC and in connection with its mortgage banking operations is exposed to additional interest rate risk. The fair value of loans held for sale is subject to change primarily due to changes in market interest rates. HLC hedges the changes in fair value of the loans held for sale primarily by using mortgage forward delivery contracts. These hedging relationships are documented as fair value hedges.
The fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality. The Company formally designates and documents these hedging relationships as fair value hedges. For loans held for sale that are hedged with forward delivery contracts, the carrying value is adjusted for the change in market value during the time the hedge was deemed to be highly effective. The effective portion of the derivative and loss or gain of the hedged item attributable to the hedged risk are recognized in the statement of operations as a component of revenue and are offsetting. If it is determined that the hedging relationship is not highly effective as a hedge, hedge accounting is discontinued. When hedge accounting is discontinued, the changes in fair value of derivative instruments are no longer offset with changes in value of the previously hedged loans held for sale and the difference is reflected in current earnings as a component of revenue. The fair value of the hedge instrument is recorded within other current assets in the accompanying balance sheet. During 2004, the amount of hedge ineffectiveness on loans held for sale resulted in the Company recognizing $0.5 million in gains.
HLC enters into commitments with consumers to originate loans at a locked in interest rate (interest rate lock commitments—"IRLCs"). IAC reports IRLCs as derivative instruments in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and determines the fair value of IRLCs using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or fallout factor. Similar to loans held for sale, the fair value of IRLCs is subject to change primarily due to changes in interest rates and fallout factors. Under HLC's risk management policy, HLC hedges the changes in fair value of IRLCs primarily by entering into forward delivery contracts which can reduce the volatility of earnings. Both the IRLCs and the related hedging instrument do not qualify for hedge accounting and are recorded at fair value with changes in fair value being recorded in current earnings as a component of revenue in the accompanying statement of operations. The change in the fair value of these derivative instruments resulted in a loss of $0.1 million during 2004, which has been reflected in the accompanying statement of operations. The IRLCs are recorded as a component of other current assets in the accompanying balance sheet.
IAC's objective in managing its foreign exchange risk is to reduce its potential exposure to the changes that exchange rates might have on its earnings, cash flows and financial position. IAC's primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the U.S. dollar, primarily the Euro, British Pound Sterling and Canadian Dollar. The Company is also exposed to foreign currency risk related to its non-U.S. dollar denominated assets and liabilities. As such, from time to time, IAC may enter into forward contracts or swap transactions designated as cash flow hedges with financial institutions to protect against the volatility of future cash flows caused by changes in currency exchange rates in order to reduce, but not always entirely eliminate, the impact of currency exchange rate movements of these local currencies.
On April 29, 2003, one of the Company's foreign subsidiaries entered into a five-year foreign exchange forward contract with a notional amount of $38.6 million, which was used to hedge against
the change in value of a liability denominated in a currency other than the subsidiary's functional currency. This derivative contract has been designated as a cash flow hedge for accounting purposes and foreign exchange re-measurement gains and losses related to the contract and liability are recognized each period in our statement of operations and are offsetting. In addition, the remaining effective portion of the derivative's gain/loss is recorded in other comprehensive income until the liability is extinguished. The change in fair value of this foreign exchange forward contract at December 31, 2004 and 2003 resulted in an unrealized loss of $10.8 million and $5.7 million, respectively.
On November 26, 2003, one of the Company's subsidiaries entered into a ten-year cross currency swap with a notional amount of Euro 39 million which is to mature on October 30, 2013 and is used to hedge against the change in value of an asset denominated in a currency other than the subsidiary's functional currency. This swap enables the Company to pay Euro at a rate of the three-month EURIBOR plus 0.50% on Euro 39 million. In exchange the Company receives 4.9% interest on $46.4 million in U.S. dollars. In addition, on April 14, 2004, one of the Company's subsidiaries entered into a cross currency swap with a notional amount of Euro 38.2 million which is to mature on April 7, 2014 and is used to hedge against the change in value of an asset in a similar manner to the swap described above. This swap enables the Company to pay Euro at a rate of the six-month EURIBOR plus 0.90% on Euro 38.2 million. In exchange the Company receives 5.47% interest on $45.9 million U.S. dollars. At the respective dates of maturity, these agreements call for the exchange of notional amounts. These derivative contracts have been designated as cash flow hedges for accounting purposes and foreign exchange re-measurement gains and losses related to these contracts and assets are recognized each period in our statement of operations and are offsetting. In addition, the remaining effective portion of these derivative's gain/loss is recorded in other comprehensive income until the hedged items are extinguished. The change in fair value of these cross currency swaps at December 31, 2004 and 2003 resulted in an unrealized loss of $12.8 million and $3.3 million, respectively. There was no ineffectiveness related to these cash flow hedges reported in the statement of operations for any periods presented.
Periodically, IAC Travel has purchased 30 day foreign currency forwards in order to mitigate the effects of the changes in exchange rates between the time in which payables to hotel vendors in foreign countries are recorded and when they are settled. The changes in fair value of these foreign currency forwards are included as a component of cost of sales in the accompanying statement of operations. During the years ended December 31, 2004, 2003 and 2002, the Company recognized nominal gains from forward contracts. As of December 31, 2004 there were no foreign currency forwards outstanding.
NOTE 7: 6—INCOME TAXES
U.S. and foreign earnings (loss) from continuing operations before income tax and minority interest are as follows:follows (in thousands):
| Years Ended December 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | 2002 | Years Ended December 31, | ||||||||||||||||
| | (In thousands) | 2005 | 2004 | 2003 | ||||||||||||||||
U.S. | U.S. | $ | 384,860 | $ | 240,021 | $ | 263,910 | $ | 955,413 | $ | 110,518 | $ | (23,233 | ) | |||||||
Foreign | Foreign | (6,184 | ) | 22,370 | (150,713 | ) | 36,272 | 21,774 | 15,661 | ||||||||||||
Total | $ | 991,685 | $ | 132,292 | $ | (7,572 | ) | ||||||||||||||
Total | $ | 378,676 | $ | 262,391 | $ | 113,197 | |||||||||||||||
The components of income tax expense attributable to continuing operations are as follows:follows (in thousands):
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||||
| (In thousands) | |||||||||||||||||||
Current income tax expense (benefit): | ||||||||||||||||||||
Current income tax expense: | ||||||||||||||||||||
Federal | $ | 114,426 | $ | 200,105 | $ | 83,067 | $ | 1,198,301 | $ | 22,909 | $ | 63,115 | ||||||||
State | 44,963 | 26,277 | 20,333 | 233,432 | 32,696 | 10,017 | ||||||||||||||
Foreign | 49,074 | 13,964 | 5,980 | 28,165 | 29,246 | 15,828 | ||||||||||||||
Current income tax expense (benefit) | 208,463 | 240,346 | 109,380 | |||||||||||||||||
Current income tax expense | 1,459,898 | 84,851 | 88,960 | |||||||||||||||||
Deferred income tax (benefit) expense: | ||||||||||||||||||||
Federal | 4,584 | (135,360 | ) | (34,567 | ) | (907,012 | ) | 11,151 | (94,520 | ) | ||||||||||
State | (19,002 | ) | (31,728 | ) | (9,686 | ) | (164,017 | ) | (18,746 | ) | (16,088 | ) | ||||||||
Foreign | (14,859 | ) | (2,567 | ) | — | 2,200 | (2,990 | ) | (2,566 | ) | ||||||||||
Deferred income tax (benefit) expense | (29,277 | ) | (169,655 | ) | (44,253 | ) | ||||||||||||||
Deferred income tax (benefit) | (1,068,829 | ) | (10,585 | ) | (113,174 | ) | ||||||||||||||
Income tax expense | $ | 179,186 | $ | 70,691 | $ | 65,127 | ||||||||||||||
Income tax expense (benefit) | $ | 391,069 | $ | 74,266 | $ | (24,214 | ) | |||||||||||||
The current income tax payable has been reduced by $95.7$163.9 million, $317.1$101.8 million and $7.6$175.6 million for the years ended December 31, 2005, 2004 2003 and 2002,2003, respectively, for tax deductions attributable to stock basedstock-based compensation. The related income tax benefits of this stock basedstock-based compensation were recorded as amounts charged or credited to additional paid-in capital or a reduction in goodwill.
TheIn 2004, the Company redomiciled the place of management of one of its foreign subsidiaries in 2004 to the U.S. The tax impact of the transaction was a foreign tax provision of $24$16 million (net of NOLsnet operating loss carryforwards ("NOLs") benefited of $28$23 million), fully offset by U.S. foreign income tax credits. Previously unbenefited foreign NOLs of $80$59 million expired unutilized as a result of the transaction.
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, 20042005 and 20032004 are presented below.below (in thousands). The
valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
| Years Ended December 31, | December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2005 | 2004 | ||||||||||
Deferred tax assets: | ||||||||||||||
Inventory | $ | 4,862 | $ | 8,840 | $ | 10,522 | $ | 4,821 | ||||||
Provision for accrued expenses | 49,508 | 32,656 | 54,496 | 38,721 | ||||||||||
Capital loss carryforwards | 1,440 | 19,604 | 442 | 1,440 | ||||||||||
Deferred revenue | 11,960 | 32,771 | 19,239 | 9,377 | ||||||||||
Net operating loss carryforwards | 265,245 | 520,811 | 68,047 | 125,513 | ||||||||||
Tax credit carryforwards | 12,458 | 21,114 | 7,187 | 4,563 | ||||||||||
Capitalized R&D expenditures | 29,234 | 33,844 | ||||||||||||
Stock based compensation | 87,013 | 40,197 | ||||||||||||
Stock-based compensation | 50,435 | 35,088 | ||||||||||||
Other | 54,851 | 8,038 | 43,159 | 73,551 | ||||||||||
Total deferred tax assets | 516,571 | 717,875 | 253,527 | 293,074 | ||||||||||
Less valuation allowance | (138,379 | ) | (390,531 | ) | (41,664 | ) | (104,711 | ) | ||||||
Net deferred tax assets | $ | 378,192 | $ | 327,344 | 211,863 | 188,363 | ||||||||
Deferred tax liabilities: | ||||||||||||||
Property, plant and equipment | $ | (2,854 | ) | $ | (3,716 | ) | (1,745 | ) | (6,413 | ) | ||||
Prepaid expenses | (31,071 | ) | (18,782 | ) | (15,777 | ) | (6,361 | ) | ||||||
Intangible and other assets | (1,551,540 | ) | (1,556,991 | ) | (1,294,282 | ) | (1,078,608 | ) | ||||||
Investment in subsidiaries | (95,871 | ) | (66,031 | ) | (72,025 | ) | (63,884 | ) | ||||||
VUE Limited Partnership | (1,036,376 | ) | (1,063,147 | ) | — | (1,036,376 | ) | |||||||
Other | (8,804 | ) | (8,098 | ) | ||||||||||
Total deferred tax liabilities | $ | (2,717,712 | ) | $ | (2,708,667 | ) | (1,392,633 | ) | (2,199,740 | ) | ||||
Net deferred tax liability | $ | (2,339,520 | ) | $ | (2,381,323 | ) | $ | (1,180,770 | ) | $ | (2,011,377 | ) | ||
Included within Deferred charges and other assets onin "Other non-current assets" in the accompanying consolidated balance sheetsheets at December 31, 2005 and December 31, 2004 is a non-current deferred tax asset of $29.5$19.8 million and $11.8 million, respectively. In addition, included in "Other accrued liabilities" in the accompanying consolidated balance sheet at December 31, 2005 is a current deferred tax liability of $1.7 million.
At December 31, 2004,2005, the Company had federal and state net operating loss carryforwards ("NOLs")NOLs of approximately $308$59 million and $793$372 million, respectively. If not utilized, the federal NOLs will expire at various times between 20122009 and 2023,2025, and the state NOLs will expire at various times between 20072006 and 2024.2025. Utilization of approximately $56 million and $246 million of federal NOLs will be subject to limitations under SectionsSection 382 and 1502 of the Internal Revenue Code of 1986, as amended, respectively.
amended. In addition, utilization of certain state NOLs may be subject to limitations under state laws similar to SectionsSection 382 and 1502 of the Internal Revenue Code of 1986. At December 31, 2004,2005, the Company had foreign NOL carryforwardsNOLs of approximately $548$123 million available to offset future income. Of these foreign losses, approximately $545$114 million can be carried forward indefinitely, and approximately $3$2 million and $7 million will expire within five years.years and ten years, respectively. Utilization of approximately $407$70 million of foreign NOL carryforwardsNOLs will be subject to annual limitations based on taxable income. During 2004,2005, the Company recognized tax benefits for the utilization ofrelated to NOLs of approximately $177$43 million. Included in this amount was approximately $39.5 million of tax benefits of acquired attributes which $43 million related to foreign operations. Of this amount $134 million was recorded as an increase of additional paid in capital or a reduction of goodwill.
At December 31, 2005, the Company had tax credit carryforwards of approximately $7.2 million. Of this amount, approximately $5.8 million related to federal tax credits for foreign taxes and increasing research activities, with the remaining $1.3 million related to various state and local tax credits. If not utilized, the credit carryforwards will expire at various times between 2006 and 2024.
During 2004,2005, the Company's valuation allowance decreased by approximately $252$63 million. Approximately $132Included in this amount is approximately $62.5 million of this reductiondecrease primarily related to the write-off of previously unbenefited deferred tax assets for foreign net operating losses. The remaining $0.6 million valuation allowance decrease was recorded as a reduction of goodwill as a result of NOLs benefited on acquired entity NOLs or an increase to additional paid-in capital as a result of NOLs benefited on amounts generated from excess stock based compensation deductions. The remaining $120 million valuation allowance decrease is primarily due to foreign NOLs that expired unutilized or foreign NOLs for which the benefit was recognized in 2004 dueand relates to the net benefit of acquired tax impact of the change in domicile of a foreign subsidiary (discussed above).attributes. At December 31, 2004,2005, the Company had a valuation allowance of approximately $138$41.7 million related to the portion of tax operating loss carryforwards and other items for which it is more likely than not that the tax benefit will not be realized. The tax benefit forOf this amount, approximately $28$1.6 million of valuation allowance recorded at December 31, 2004 will be applied as a reduction of goodwill or an increase toof additional paid-in capital,paid-in-capital, if recognized in future years.years, and approximately $23.1 million of valuation allowance related to foreign operations will not result in any net tax benefit if recognized in future years as these benefits were recognized in previous periods due to certain U.S. tax elections.
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:follows (in thousands):
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||||
| (In thousands) | |||||||||||||||||||
Income tax expense at the federal statutory rate of 35% | $ | 132,537 | $ | 91,837 | $ | 39,619 | ||||||||||||||
Income tax expense (benefit) at the federal statutory rate of 35% | $ | 347,089 | $ | 46,619 | $ | (2,650 | ) | |||||||||||||
State income taxes, net of effect of federal tax benefit | 16,457 | 3,866 | 9,700 | 37,612 | 8,632 | (3,378 | ) | |||||||||||||
Foreign income taxed at a different statutory tax rate | 2,566 | 7,473 | 6,885 | (1,766 | ) | 2,931 | 3,514 | |||||||||||||
Incremental tax on unremitted earnings of certain non-U.S. subsidiaries | 7,799 | 7,409 | 552 | 2,308 | 3,240 | 6,917 | ||||||||||||||
Non-deductible amortization of non-cash compensation expense | 22,203 | — | — | |||||||||||||||||
Equity in income of foreign unconsolidated affiliates | — | (1,232 | ) | — | ||||||||||||||||
Tax exempt income | (3,354 | ) | (4,845 | ) | (5,755 | ) | ||||||||||||||
Foreign income tax credits utilized | (594 | ) | (53,460 | ) | (4,615 | ) | ||||||||||||||
Foreign income taxes related to the change in domicile of a foreign subsidiary | 52,441 | — | — | — | 38,615 | — | ||||||||||||||
NOLs utilized due to the change in domicile of a foreign subsidiary | (27,994 | ) | — | — | — | (23,159 | ) | — | ||||||||||||
Amortization of intangibles | 11,822 | 24,844 | 25,952 | — | 11,464 | 24,104 | ||||||||||||||
Impairment of non-deductible goodwill | 56,207 | — | — | — | 56,207 | — | ||||||||||||||
Change in valuation allowance | 7,175 | (34,243 | ) | (29,008 | ) | 1,262 | (111 | ) | (34,243 | ) | ||||||||||
Effect of change in estimated combined state tax rate | — | (13,261 | ) | — | (10,373 | ) | — | (3,537 | ) | |||||||||||
Tax exempt income | (4,845 | ) | (7,616 | ) | (4,767 | ) | ||||||||||||||
Foreign income tax credits utilized | (56,578 | ) | (4,615 | ) | 11 | |||||||||||||||
Change in tax reserves | 10,854 | (8,625 | ) | (4,987 | ) | |||||||||||||||
Other, net | (18,401 | ) | (5,003 | ) | 16,183 | (14,172 | ) | (2,010 | ) | 416 | ||||||||||
Income tax expense | $ | 179,186 | $ | 70,691 | $ | 65,127 | ||||||||||||||
Income tax expense (benefit) | $ | 391,069 | $ | 74,266 | $ | (24,214 | ) | |||||||||||||
The Company settledIn 2005, the Joint Committee of Taxation completed its IRS examinationreview and approved the audit settlement previously agreed to with the Internal Revenue Service ("IRS") for the years ended December 31, 1997 through 2000. This settlement is currently under review by the IRS Joint Committee of Taxation ("JCT"). It is reasonably possible that there will be aThe resolution of this IRS examination did not have a material effect on the Company's consolidated results of operations or its consolidated financial position. The IRS is currently examining the Company's tax returns for the years ended December 31, 2001 through 2003. The examination is expected to be completed in 2005.2007. The Company is routinely under audit by federal, state, local and foreign authorities in the areasarea of income taxes and the remittance of sales and use taxes.tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. The Company has recently been notified that the IRS will conduct a new routine tax return audit which will cover the periods
2001 through 2003. Annual tax provisions include amounts considered sufficient to pay assessments that may result from the examination of prior year returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by the Company are recorded in the period they become known. The ultimate outcome of these tax contingencies could have a material effect on the Company's consolidated financial statements.
In 2004, the Company madecompleted a cash refund claimstudy of tax basis of certain assets which resulted in a net $14.6 million reduction to the IRScarrying value of approximately $14.1 million related to amended prior year incomedeferred tax returns,liabilities, of which $10$4.5 million was established throughrecorded as a benefit to the 2004 tax provision in the current year.provision.
In accordance with APB No. 23, no federal and state income taxes have been provided on permanently reinvested earnings of certain foreign subsidiaries aggregating approximately $19.2$27.8 million at December 31, 2004.2005. Determination of the amount of unrecognized deferred U.S. income tax liability with respect to such earnings is not practicable.
NOTE 8: COMMITMENTS7—OPERATING SEGMENTS
The Company leases satellite transponders, computers, warehouseoverall concept that IAC employs in determining its operating segments is to present the financial information in a manner consistent with how the chief operating decision maker and office space, equipmentexecutive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services usedoffered or the target market. Expedia, EUVÍA, TV Travel Shop, ECS, Styleclick, Inc., and Avaltus, Inc., a subsidiary of PRC, are presented as discontinued operations and, accordingly, are excluded from the schedules below except for the schedule of assets, in connection with its operations under various operating leases, many of which contain escalation clauses.they are included in corporate and other.
Future minimum payments underDuring the second quarter of 2005, and in contemplation of the Spin-Off, the chief operating lease agreementsdecision maker and executive management of IAC realigned how they view the businesses and how the businesses are organized. Accordingly, beginning in the second quarter of 2005, IAC introduced sector reporting that corresponds to the areas of interactivity in which the Company operates and redefined its operating segments to present the results consistent with how the chief operating decision maker and executive management currently view the businesses. Further, during the third quarter of 2005, the chief operating decision maker and executive management realigned how they view the Financial Services and Real Estate operating segment, which is included in IAC's Services sector. Accordingly, beginning in the third quarter of 2005, IAC redefined its Financial Services and Real Estate operating segment to present the results of Lending and Real Estate each as follows (in thousands):a separate operating segment in its Services sector. The new segment presentation is as follows: the Retailing sector includes the U.S. and International Retailing operating segments; the Services sector includes the Ticketing, Lending, Real Estate, Teleservices and Home Services operating segments; Media & Advertising is its own sector and reportable segment; and the Membership & Subscriptions sector includes the Vacations, Personals and Discounts operating segments. In addition, IAC reports the performance of its Emerging Businesses and corporate expenses. Media & Advertising includes two operating segments, IAC Search & Media and Citysearch, which have been aggregated as one reportable segment in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."
During 2003, the Company switched from reporting adjusted EBITDA as its primary metric to Operating Income Before Amortization, concluding that EBITDA was not the best way to look at segment performance as it did not include certain operating costs such as depreciation. Operating Income Before Amortization is defined as operating income excluding: (1) amortization of non-cash compensation, distribution and marketing expense, (2) amortization of intangibles and goodwill impairment, if applicable, (3) pro forma adjustments for significant acquisitions, if applicable, and (4) one-time items, if applicable. The Company believes this measure is useful to investors because it represents the consolidated operating results from IAC's segments, taking into account depreciation, which it believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses, including non-cash compensation, non-cash marketing expense, and acquisition-related accounting. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence, financial statements prepared in accordance with generally accepted accounting principles, and descriptions of the reconciling items and adjustments, including quantifying such items, to derive the non-GAAP measure.
Years Ending December 31, | | |||
---|---|---|---|---|
2005 | $ | 103,734 | ||
2006 | 77,167 | |||
2007 | 66,125 | |||
2008 | 54,970 | |||
2009 | 49,099 | |||
Thereafter | 114,221 | |||
Total | $ | 465,316 | ||
The following table reconciles Operating Income Before Amortization to operating income (loss) and net earnings available to common shareholders in 2005, 2004 and 2003.
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
| (In thousands) | |||||||||
Operating Income Before Amortization | $ | 668,277 | $ | 421,552 | $ | 366,896 | ||||
Amortization of non-cash compensation expense | (137,537 | ) | (70,326 | ) | (32,404 | ) | ||||
Amortization of non-cash distribution and marketing expense | — | (1,302 | ) | (9,458 | ) | |||||
Amortization of intangibles | (186,511 | ) | (185,388 | ) | (186,677 | ) | ||||
Goodwill impairment | — | (184,780 | ) | — | ||||||
Merger costs(a) | — | — | (96 | ) | ||||||
Operating income (loss) | 344,229 | (20,244 | ) | 138,261 | ||||||
Interest income | 141,104 | 170,181 | 147,528 | |||||||
Interest expense | (77,674 | ) | (68,367 | ) | (80,108 | ) | ||||
Gain on sale of VUE interests | 523,487 | — | — | |||||||
Equity in income (losses) of VUE | 21,960 | 16,188 | (224,468 | ) | ||||||
Equity in income of unconsolidated affiliates and other(b) | 38,579 | 34,534 | 11,215 | |||||||
Income tax (expense) benefit | (391,069 | ) | (74,266 | ) | 24,214 | |||||
Minority interest in income of consolidated subsidiaries | (2,229 | ) | (3,159 | ) | (5,933 | ) | ||||
Gain on sale of EUVÍA, net of tax | 70,152 | — | — | |||||||
Income from discontinued operations, net of tax | 207,611 | 109,994 | 156,687 | |||||||
Preferred dividends | (7,938 | ) | (13,053 | ) | (13,055 | ) | ||||
Net earnings available to common shareholders | $ | 868,212 | $ | 151,808 | $ | 154,341 | ||||
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Revenue: | |||||||||||
Retailing: | |||||||||||
U.S. | $ | 2,670,951 | $ | 1,905,903 | $ | 1,763,689 | |||||
International | 379,947 | 342,037 | 348,442 | ||||||||
Total Retailing | 3,050,898 | 2,247,940 | 2,112,131 | ||||||||
Services: | |||||||||||
Ticketing | 950,177 | 768,199 | 743,232 | ||||||||
Lending | 367,769 | 159,348 | 48,631 | ||||||||
Real Estate | 57,555 | 30,435 | 7,164 | ||||||||
Teleservices | 337,424 | 293,895 | 294,273 | ||||||||
Home Services | 41,006 | 6,903 | — | ||||||||
Total Services | 1,753,931 | 1,258,780 | 1,093,300 | ||||||||
Media & Advertising | 213,451 | 30,463 | 28,715 | ||||||||
Membership & Subscriptions: | |||||||||||
Vacations | 272,767 | 256,846 | 222,757 | ||||||||
Personals | 249,505 | 197,993 | 185,294 | ||||||||
Discounts | 218,964 | 217,937 | 201,550 | ||||||||
Intra-sector elimination | (1,456 | ) | (1,310 | ) | (1,438 | ) | |||||
Total Membership & Subscriptions | 739,780 | 671,466 | 608,163 | ||||||||
Emerging Businesses | 29,852 | 6,592 | — | ||||||||
Intersegment eliminations (c) | (34,241 | ) | (26,962 | ) | (18,820 | ) | |||||
Total | $ | 5,753,671 | $ | 4,188,279 | $ | 3,823,489 | |||||
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Operating Income (Loss): | |||||||||||
Retailing: | |||||||||||
U.S. | $ | 216,693 | $ | 141,737 | $ | 117,468 | |||||
International | 4,453 | 2,979 | 3,403 | ||||||||
Total Retailing | 221,146 | 144,716 | 120,871 | ||||||||
Services: | |||||||||||
Ticketing | 189,904 | 137,928 | 116,471 | ||||||||
Lending | 55,290 | 4,385 | (11,644 | ) | |||||||
Real Estate | (29,541 | ) | (11,962 | ) | (4,828 | ) | |||||
Teleservices | 22,614 | (167,729 | ) | 12,460 | |||||||
Home Services | 8,929 | (2,242 | ) | — | |||||||
Total Services | 247,196 | (39,620 | ) | 112,459 | |||||||
Media & Advertising | 7,702 | (47,093 | ) | (69,829 | ) | ||||||
Membership & Subscriptions: | |||||||||||
Vacations | 85,527 | 65,011 | 40,977 | ||||||||
Personals | 44,115 | 18,850 | 14,130 | ||||||||
Discounts | 11,157 | 14,038 | 40,408 | ||||||||
Total Membership & Subscriptions | 140,799 | 97,899 | 95,515 | ||||||||
Emerging Businesses | (13,340 | ) | (4,990 | ) | (5,922 | ) | |||||
Corporate and other | (259,274 | ) | (171,156 | ) | (114,833 | ) | |||||
Total | $ | 344,229 | $ | (20,244 | ) | $ | 138,261 | ||||
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Operating Income Before Amortization: | |||||||||||
Retailing: | |||||||||||
U.S. | $ | 276,550 | $ | 194,669 | $ | 168,260 | |||||
International | 5,759 | 4,289 | 4,699 | ||||||||
Total Retailing | 282,309 | 198,958 | 172,959 | ||||||||
Services: | |||||||||||
Ticketing | 218,652 | 164,326 | 144,502 | ||||||||
Lending | 80,649 | 26,066 | 3,148 | ||||||||
Real Estate | (16,692 | ) | (4,641 | ) | (1,951 | ) | |||||
Teleservices | 22,614 | 17,051 | 12,460 | ||||||||
Home Services | 11,247 | 289 | — | ||||||||
Total Services | 316,470 | 203,091 | 158,159 | ||||||||
Media & Advertising | 30,512 | (13,324 | ) | (19,865 | ) | ||||||
Membership & Subscriptions: | |||||||||||
Vacations | 110,746 | 90,231 | 66,197 | ||||||||
Personals | 47,872 | 27,569 | 31,019 | ||||||||
Discounts | 17,541 | 22,023 | 46,092 | ||||||||
Total Membership & Subscriptions | 176,159 | 139,823 | 143,308 | ||||||||
Emerging Businesses | (12,746 | ) | (1,059 | ) | (3,779 | ) | |||||
Corporate and other | (124,427 | ) | (105,937 | ) | (83,886 | ) | |||||
Total | $ | 668,277 | $ | 421,552 | $ | 366,896 | |||||
| December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Assets: | |||||||||||
Retailing: | |||||||||||
U.S. | $ | 4,194,357 | $ | 3,321,343 | $ | 3,324,896 | |||||
International | 321,254 | 299,648 | 306,943 | ||||||||
Total Retailing | 4,515,611 | 3,620,991 | 3,631,839 | ||||||||
Services: | |||||||||||
Ticketing | 1,777,953 | 1,626,275 | 1,529,393 | ||||||||
Lending(d) | 1,197,519 | 1,077,461 | 799,377 | ||||||||
Real Estate(d) | 138,786 | — | — | ||||||||
Teleservices | 252,277 | 234,095 | 419,369 | ||||||||
Home Services | 161,608 | 156,772 | — | ||||||||
Total Services | 3,528,143 | 3,094,603 | 2,748,139 | ||||||||
Media & Advertising | 3,309,186 | 20,233 | 61,499 | ||||||||
Membership & Subscriptions: | |||||||||||
Vacations | 750,034 | 767,553 | 791,535 | ||||||||
Personals | 301,546 | 286,280 | 298,830 | ||||||||
Discounts | 392,646 | 399,117 | 380,773 | ||||||||
Total Membership & Subscriptions | 1,444,226 | 1,452,950 | 1,471,138 | ||||||||
Emerging Businesses | 25,576 | 19,288 | 12,885 | ||||||||
Corporate and other | 1,095,023 | 14,190,800 | 13,642,955 | ||||||||
Total | $ | 13,917,765 | $ | 22,398,865 | $ | 21,568,455 | |||||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
| (In thousands) | |||||||||
Depreciation, amortization of intangibles and goodwill, including goodwill impairment and cable distribution fees: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 170,792 | $ | 164,396 | $ | 162,570 | ||||
International | 7,995 | 11,604 | 11,029 | |||||||
Total Retailing | 178,787 | 176,000 | 173,599 | |||||||
Services: | ||||||||||
Ticketing | 65,441 | 59,539 | 57,254 | |||||||
Lending | 28,989 | 21,662 | 14,905 | |||||||
Real Estate | 13,045 | 7,321 | 2,508 | |||||||
Teleservices(e) | 15,234 | 202,497 | 23,530 | |||||||
Home Services | 4,018 | 1,163 | — | |||||||
Total Services | 126,727 | 292,182 | 98,197 | |||||||
Media & Advertising | 36,002 | 37,512 | 50,945 | |||||||
Membership & Subscriptions: | ||||||||||
Vacations | 32,588 | 33,764 | 34,489 | |||||||
Personals | 11,922 | 22,864 | 23,642 | |||||||
Discounts | 11,150 | 11,682 | 8,075 | |||||||
Total Membership & Subscriptions | 55,660 | 68,310 | 66,206 | |||||||
Emerging Businesses | 912 | 4,084 | 5 | |||||||
Corporate and other | 7,989 | 5,888 | 5,760 | |||||||
Total | $ | 406,077 | $ | 583,976 | $ | 394,712 | ||||
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
| (In thousands) | |||||||||
Capital expenditures: | ||||||||||
Retailing: | ||||||||||
U.S. | $ | 36,037 | $ | 49,040 | $ | 27,499 | ||||
International | 6,199 | 6,042 | 3,684 | |||||||
Total Retailing | 42,236 | 55,082 | 31,183 | |||||||
Services: | ||||||||||
Ticketing | 39,367 | 38,443 | 38,242 | |||||||
Lending and Real Estate(f) | 17,827 | 2,912 | 2,214 | |||||||
Teleservices | 17,865 | 11,836 | 11,578 | |||||||
Home Services | 2,108 | 616 | — | |||||||
Total Services | 77,167 | 53,807 | 52,034 | |||||||
Media & Advertising | 19,509 | 2,950 | 2,362 | |||||||
Membership & Subscriptions: | ||||||||||
Vacations | 8,966 | 6,927 | 8,095 | |||||||
Personals | 9,832 | 4,137 | 12,054 | |||||||
Discounts | 5,074 | 7,566 | 4,977 | |||||||
Total Membership & Subscriptions | 23,872 | 18,630 | 25,126 | |||||||
Emerging Businesses | 6,074 | 640 | 27 | |||||||
Corporate and other | 72,611 | 36,681 | 27,779 | |||||||
Total | $ | 241,469 | $ | 167,790 | $ | 138,511 | ||||
The Company maintains operations in the United States, Germany, the United Kingdom, Canada and other international territories. Geographic information about the United States and international territories as of and for the years ended December 31, 2005, 2004, and 2003 and 2002, respectively.are presented below (in thousands).
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
Revenue | ||||||||||
United States | $ | 4,949,243 | $ | 3,538,690 | $ | 3,239,094 | ||||
All other countries | 804,428 | 649,589 | 584,395 | |||||||
$ | 5,753,671 | $ | 4,188,279 | $ | 3,823,489 | |||||
| December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
Long-lived assets | ||||||||||
United States | $ | 560,201 | $ | 465,734 | $ | 477,398 | ||||
All other countries | 36,475 | 39,007 | 41,608 | |||||||
$ | 596,676 | $ | 504,741 | $ | 519,006 | |||||
NOTE 8—RECONCILIATION OF NON-GAAP MEASURE
The Company also has funding commitments that could potentially require its performancefollowing table reconciles Operating Income Before Amortization to operating income (loss) for the Company's operating segments and to net earnings available to common shareholders in total (in millions, rounding differences may occur):
| For the year ended December 31, 2005: | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Operating income (loss) | ||||||||
Retailing: | |||||||||||
U.S. | $ | 276.6 | $ | (59.9 | ) | $ | 216.7 | ||||
International | 5.8 | (1.3 | ) | 4.5 | |||||||
Total Retailing | 282.3 | (61.2 | ) | 221.1 | |||||||
Services: | |||||||||||
Ticketing | 218.7 | (28.7 | ) | 189.9 | |||||||
Lending | 80.6 | (25.4 | ) | 55.3 | |||||||
Real Estate | (16.7 | ) | (12.8 | ) | (29.5 | ) | |||||
Teleservices | 22.6 | — | 22.6 | ||||||||
Home Services | 11.2 | (2.3 | ) | 8.9 | |||||||
Total Services | 316.5 | (69.3 | ) | 247.2 | |||||||
Media & Advertising | 30.5 | (22.8 | ) | 7.7 | |||||||
Membership & Subscriptions: | |||||||||||
Vacations | 110.7 | (25.2 | ) | 85.5 | |||||||
Personals | 47.9 | (3.8 | ) | 44.1 | |||||||
Discounts | 17.5 | (6.4 | ) | 11.2 | |||||||
Total Membership & Subscriptions | 176.2 | (35.4 | ) | 140.8 | |||||||
Emerging Businesses | (12.7 | ) | (0.6 | ) | (13.3 | ) | |||||
Corporate and other | (124.4 | ) | (134.8 | ) | (259.3 | ) | |||||
Total | $ | 668.3 | $ | (324.0 | ) | 344.2 | |||||
Other income, net | 647.5 | ||||||||||
Earnings from continuing operations before income taxes and minority interest | 991.7 | ||||||||||
Income tax expense | (391.1 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (2.2 | ) | |||||||||
Earnings from continuing operations | 598.4 | ||||||||||
Gain on sale of EUVÍA, net of tax | 70.2 | ||||||||||
Income from discontinued operations, net of tax | 207.6 | ||||||||||
Earnings before preferred dividends | 876.2 | ||||||||||
Preferred dividends | (7.9 | ) | |||||||||
Net earnings available to common shareholders | $ | 868.2 | |||||||||
| For the year ended December 31, 2004: | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Operating income (loss) | ||||||||
Retailing: | |||||||||||
U.S. | $ | 194.7 | $ | (52.9 | ) | $ | 141.7 | ||||
International | 4.3 | (1.3 | ) | 3.0 | |||||||
Total Retailing | 199.0 | (54.2 | ) | 144.7 | |||||||
Services: | |||||||||||
Ticketing | 164.3 | (26.4 | ) | 137.9 | |||||||
Lending | 26.1 | (21.7 | ) | 4.4 | |||||||
Real Estate | (4.6 | ) | (7.3 | ) | (12.0 | ) | |||||
Teleservices | 17.1 | (184.8 | ) | (167.7 | ) | ||||||
Home Services | 0.3 | (2.5 | ) | (2.2 | ) | ||||||
Total Services | 203.1 | (242.7 | ) | (39.6 | ) | ||||||
Media & Advertising | (13.3 | ) | (33.8 | ) | (47.1 | ) | |||||
Membership & Subscriptions: | |||||||||||
Vacations | 90.2 | (25.2 | ) | 65.0 | |||||||
Personals | 27.6 | (8.7 | ) | 18.8 | |||||||
Discounts | 22.0 | (8.0 | ) | 14.0 | |||||||
Total Membership & Subscriptions | 139.8 | (41.9 | ) | 97.9 | |||||||
Emerging Businesses | (1.1 | ) | (3.9 | ) | (5.0 | ) | |||||
Corporate and other | (105.9 | ) | (65.2 | ) | (171.2 | ) | |||||
Total | $ | 421.6 | $ | (441.8 | ) | (20.2 | ) | ||||
Other income, net | 152.5 | ||||||||||
Earnings from continuing operations before income taxes and minority interest | 132.3 | ||||||||||
Income tax expense | (74.3 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (3.2 | ) | |||||||||
Earnings from continuing operations | 54.9 | ||||||||||
Income from discontinued operations, net of tax | 110.0 | ||||||||||
Earnings before preferred dividends | 164.9 | ||||||||||
Preferred dividends | (13.1 | ) | |||||||||
Net earnings available to common shareholders | $ | 151.8 | |||||||||
| For the year ended December 31, 2003: | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income Before Amortization | Amortization of non-cash items | Merger costs | Operating income (loss) | ||||||||||
Retailing: | ||||||||||||||
U.S. | $ | 168.3 | $ | (50.8 | ) | $ | — | $ | 117.5 | |||||
International | 4.7 | (1.3 | ) | — | 3.4 | |||||||||
Total Retailing | 173.0 | (52.1 | ) | — | 120.9 | |||||||||
Services: | ||||||||||||||
Ticketing | 144.5 | (28.0 | ) | (0.1 | ) | 116.5 | ||||||||
Lending | 3.1 | (14.8 | ) | — | (11.6 | ) | ||||||||
Real Estate | (2.0 | ) | (2.9 | ) | — | (4.8 | ) | |||||||
Teleservices | 12.5 | — | — | 12.5 | ||||||||||
Total Services | 158.2 | (45.7 | ) | (0.1 | ) | 112.5 | ||||||||
Media & Advertising | (19.9 | ) | (50.0 | ) | — | (69.8 | ) | |||||||
Membership & Subscriptions: | ||||||||||||||
Vacations | 66.2 | (25.2 | ) | — | 41.0 | |||||||||
Personals | 31.0 | (16.9 | ) | — | 14.1 | |||||||||
Discounts | 46.1 | (5.7 | ) | — | 40.4 | |||||||||
Total Membership & Subscriptions | 143.3 | (47.8 | ) | — | 95.5 | |||||||||
Emerging Businesses | (3.8 | ) | (2.1 | ) | — | (5.9 | ) | |||||||
Corporate and other | (83.9 | ) | (30.9 | ) | — | (114.8 | ) | |||||||
Total | $ | 366.9 | $ | (228.5 | ) | $ | (0.1 | ) | 138.3 | |||||
Other expense, net | (145.8 | ) | ||||||||||||
Loss from continuing operations before income taxes and minority interest | (7.6 | ) | ||||||||||||
Income tax benefit | 24.2 | |||||||||||||
Minority interest in income of consolidated subsidiaries | (5.9 | ) | ||||||||||||
Earnings from continuing operations | 10.7 | |||||||||||||
Income from discontinued operations, net of tax | 156.7 | |||||||||||||
Earnings before preferred dividends | 167.4 | |||||||||||||
Preferred dividends | (13.1 | ) | ||||||||||||
Net earnings available to common shareholders | $ | 154.3 | ||||||||||||
NOTE 9—DISCONTINUED OPERATIONS
During the second quarter of 2003, ECS, Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations due to the lack of consumer acceptance in the eventmarketplace as well as management concerns about the viability of demands by third parties or contingent events, suchthe businesses. In June 2005, IAC sold its 48.6% ownership in EUVÍA (which was previously reported in the International segment of IAC's Retailing sector) for approximately $204.0 million which resulted in a pre-tax gain of $127.1 million and an after-tax gain of $70.2 million. During the second quarter of 2005, TV Travel Shop ceased the sale of third-party travel products through its broadcast programming. On August 9, 2005, IAC completed the spin-off of its travel businesses, including Expedia.com, Hotels.com, Hotwire and TripAdvisor, into an independent public company, Expedia, Inc. Accordingly, the results of operations, statements of position and cash flows of these businesses are presented as under linesdiscontinued operations for all periods presented. The net
revenue and net earnings, net of credit extended or under guaranteesthe effect of debt,any minority interest for the aforementioned discontinued operations for the applicable periods, were as follows (in thousands):
| Amount of Commitment Expiration Per Period | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Amounts Committed | Less Than 1 year | 1–3 years | 3–5 years | |||||||||
Letters of Credit | $ | 78,298 | $ | 76,384 | $ | 1,791 | $ | 123 | |||||
Purchase Obligations | 69,584 | 44,941 | 24,643 | — | |||||||||
Guarantees | 87,498 | 85,531 | 1,656 | 311 | |||||||||
Total Commercial Commitments | $ | 235,380 | $ | 206,856 | $ | 28,090 | $ | 434 | |||||
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
Net revenue | $ | 1,365,146 | $ | 2,005,426 | $ | 2,505,023 | ||||
Income before income taxes and minority interest | $ | 271,115 | $ | 243,532 | $ | 264,914 | ||||
Income tax expense | (58,131 | ) | (122,967 | ) | (42,881 | ) | ||||
Minority interest in income of consolidated subsidiaries | (5,373 | ) | (10,571 | ) | (65,346 | ) | ||||
Net earnings | $ | 207,611 | $ | 109,994 | $ | 156,687 | ||||
The letters Income from discontinued operations, net of credit ("LOC's") consisttax, in 2005 was principally due to the income of standby LOC'sExpedia and EUVÍA as well as trade LOC's. The standby LOC's are primarily extended to certain hotel properties to secure payment for the potential purchasea tax benefit of hotel rooms. There have been no claims made against any letters of credit. The trade LOC's primarily relate to HSN and are used for inventory purchases. Trade LOC's are guarantees of payment based upon the delivery of goods. Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. The purchase obligations primarily relate to two national telecommunications contracts with certain vendors related to data transmission lines and telephones. The guarantees primarily relate to guarantees to the U.K. Civil Aviation Authority for the potential non-delivery of travel sold in the U.K. market as agents are required to be bonded in the U.K. in the event that tour operators cannot fulfill their obligations.
NOTE 9: RESTRUCTURING CHARGES
Restructuring related expenses were approximately $1.5 million, $0.1 million and $54.1 million in 2004, 2003 and 2002, respectively. The 2004 amounts are principally comprised of (1) asset impairments and severance costs related to the shut down of certain HSN facilities as HSN migrates certain operations to its new fulfillment center in Tennessee and (2) severance and other costs associated with the elimination of certain non-core business lines at the Personals segment. These charges were partially offset by the reversal of reserves related primarily to the favorable resolution of a contractual arrangement with a supplier, as well as the settlement of an uncollectible receivable that had been previously written off related to the restructuring of HSN's U.K. offices.
The 2003 amounts are principally comprised of $3.1 million related to the write-down of a receivable from the 2002 restructuring of HSN's U.K. offices, $1.2 million related to facility closure costs at uDate's Derby, U.K. facility as the back-office operations of uDate were combined with Match International, and $1.4 million for PRC related to employee terminations due principally to the decline in the teleservicing market. Such restructuring charges were offset by the reversals of contingent costs for terminated employees, which are no longer probable of occurrence.
The 2002 amounts are principally comprised of $14.8 million for HSN International related to the shut-down of HSN-Espanol, the Company's Spanish language electronic retailing operation, due to high costs of carriage and disappointing sales per home due to the fragmented market, $7.9 million for PRC related principally to the shut down of three call centers and employee terminations due principally to the decline of the teleservices market, and $31.4$62.8 million related to the write-off of the Company's investment in HSE-Italy.
Costs that relateTV Travel Shop. Income from discontinued operations, net of tax, in 2004 was principally due to ongoing operations are not partthe income of Expedia and EUVÍA. The income was partially offset by the restructuring charges and are not included in "Restructuring" on the statement of operations. Furthermore, all inventory adjustments that resulted from the actions are classifiedlosses at TV Travel Shop, as operating expenseswell as an adjustment in the statementsecond quarter of operations.
In 2004 to the deferred tax liability of IAC's investment in Styleclick, Inc. to reflect minority interest, which resulted in a reduction of a tax benefit recorded in 2002 when the deferred tax liabilities of IAC's investment in Styleclick, Inc. were originally reversed. Income from discontinued operations, net of tax, in 2003 was principally due to the income of Expedia and 2002EUVÍA as well as a tax benefit recognized due to the charges associated with the restructuringsshut-down of Styleclick, Inc. The net assets transferred to Expedia as of August 9, 2005 and as reported as discontinued operations as of December 31, 2004 were as follows (in thousands):
| Years Ended December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||
Continuing lease obligations | $ | 83 | $ | 618 | $ | 1,234 | |||
Asset impairments | 3,390 | 3,061 | 4,642 | ||||||
Employee termination costs | 1,989 | (2,635 | ) | 3,920 | |||||
Write-down of prepaid cable distribution fees | — | — | 10,852 | ||||||
HSE-Italy | — | — | 31,411 | ||||||
Other | (3,920 | ) | (1,023 | ) | 2,071 | ||||
$ | 1,542 | $ | 21 | $ | 54,130 | ||||
| August 9, 2005 | December 31, 2004 | |||||
---|---|---|---|---|---|---|---|
Current assets | $ | 544,511 | $ | 308,391 | |||
Goodwill | $ | 5,889,127 | $ | 5,849,139 | |||
Intangible assets, net | 1,227,380 | 1,279,361 | |||||
Other non-current assets | 126,453 | 232,219 | |||||
Total non-current assets | $ | 7,242,960 | $ | 7,360,719 | |||
Current liabilities | $ | 1,496,530 | $ | 982,178 | |||
Deferred income taxes | $ | 368,656 | $ | 349,293 | |||
Other long-term liabilities | 109,933 | 68,683 | |||||
Total non-current liabilities | $ | 478,589 | $ | 417,976 | |||
The assets and liabilities of EUVÍA at December 31, 2004 have been classified in the accompanying consolidated balance sheets as "Assets held for sale" (which is included in "Other current assets") and "Liabilities held for sale." Such net assets held for sale consist of the following (in thousands):
| December 31, 2004 | |||
---|---|---|---|---|
Current assets | $ | 108,865 | ||
Goodwill | 218,309 | |||
Other assets | 12,706 | |||
Total assets held for sale | 339,880 | |||
Total liabilities held for sale | (295,773 | ) | ||
Total net assets held for sale | $ | 44,107 | ||
NOTE 10—SALE OF VUE INTERESTS
On June 7, 2005, IAC completed a transaction with NBC Universal in which IAC sold its common and preferred interests in VUE for approximately $3.4 billion in aggregate consideration consisting of approximately $1.9 billion in cash, 28.3 million IAC common shares formerly held by NBC Universal and $115 million of television advertising time that NBC Universal will provide through its media outlets over a three-year period. Based upon the closing price of IAC common stock on June 7, 2005 of $49.28, the 28.3 million IAC common shares had a market value of approximately $1.4 billion. The transaction resulted in an after-tax gain of $322.1 million. The after-tax gain was determined as follows (in thousands):
Proceeds received: | |||||
Cash | $ | 1,882,291 | |||
Value of 28.3 million IAC common shares | 1,394,903 | ||||
Television advertising time | 115,000 | ||||
Total proceeds received | 3,392,194 | ||||
Book value of VUE interests: | |||||
Common interest | 804,733 | ||||
Preferred A interest | 632,444 | ||||
Preferred B interest | 1,428,530 | ||||
Total book value of VUE interests | 2,865,707 | ||||
Subtotal | 526,487 | ||||
Less: Transaction costs | (3,000 | ) | |||
Pre-tax gain | 523,487 | ||||
Income tax expense | (201,384 | ) | |||
After-tax gain on sale of VUE interests | $ | 322,103 | |||
NOTE 11—MARKETABLE SECURITIES AND INVESTMENTS HELD FOR SALE
At December 31, 2005, marketable securities available-for-sale were as follows (in thousands):
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Auction rate preferred securities | $ | 19,150 | $ | 33 | $ | — | $ | 19,183 | |||||
U.S. government and agencies | 607,230 | 14 | (11,359 | ) | 595,885 | ||||||||
Non-U.S. government securities and other fixed term obligations | 721,709 | 137 | (3,774 | ) | 718,072 | ||||||||
Corporate debt securities | 158,151 | 7 | (3,240 | ) | 154,918 | ||||||||
Total debt securities | 1,487,090 | 158 | (18,373 | ) | 1,468,875 | ||||||||
Total marketable securities | $ | 1,506,240 | $ | 191 | $ | (18,373 | ) | $ | 1,488,058 | ||||
Continuing lease obligations primarily relateThe net unrealized loss is included within other comprehensive income and is recorded net of a deferred tax benefit of $6.1 million as of December 31, 2005. The proceeds from sales and maturities of available-for-sale marketable securities were approximately $3.1 billion, which resulted in gross realized gains of $0.3 million and gross realized losses of $16.1 million for the year ended December 31, 2005. Additionally, the Company recognized $7.1 million and $1.6 million of foreign exchange gains and losses related to vacated office spacemarketable securities, respectively, through earnings during the year ended December 31, 2005.
The contractual maturities of uDate's Derby, UK facilitydebt securities classified as wellavailable-for-sale as excess call center, warehouseof December 31, 2005 are as follows (in thousands):
| Amortized Cost | Estimated Fair Value | |||||
---|---|---|---|---|---|---|---|
Due in one year or less | $ | 493,033 | $ | 489,816 | |||
Due after one year through two years | 252,618 | 246,699 | |||||
Due after two through five years | 255,236 | 248,317 | |||||
Due over five years | 486,203 | 484,043 | |||||
Total | $ | 1,487,090 | $ | 1,468,875 | |||
The following table summarizes those investments with unrealized losses at December 31, 2005 that have been in a continuous unrealized loss position for less than twelve months and office space of PRC and HSN. Asset impairments relatethose in a continuous unrealized loss position for twelve months or longer (in thousands):
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||
U.S. government and agencies | $ | 119,801 | $ | (1,098 | ) | $ | 465,542 | $ | (10,261 | ) | $ | 585,343 | $ | (11,359 | ) | |||||
Non-U.S. government securities and other fixed term obligations | 89,746 | (1,141 | ) | 109,106 | (2,633 | ) | 198,852 | (3,774 | ) | |||||||||||
Corporate debt securities | 65,816 | (1,332 | ) | 67,081 | (1,908 | ) | 132,897 | (3,240 | ) | |||||||||||
Total | $ | 275,363 | $ | (3,571 | ) | $ | 641,729 | $ | (14,802 | ) | $ | 917,092 | $ | (18,373 | ) | |||||
The gross unrealized losses related to fixed income securities were due primarily to changes in interest rates. The Company's management has determined that the shut downgross unrealized losses on its marketable securities at December 31, 2005 are temporary in nature. The Company reviews its investments to identify and evaluate investments that have indications of HSN's Salem, VA facilitypossible impairment. Factors considered in determining whether a loss is temporary include the length of time and leasehold improvementsextent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the obligor, and the Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company's fixed income securities are rated investment grade or better. In the first quarter of 2005, the Company recognized $15.0 million of losses that were deemed to be other-than-temporary related to marketable securities that were expected to be sold by the Company to fund its cash needs related to: the repurchase of 26.4 million shares of IAC common stock associated with the acquisition of IAC Search & Media; the acquisition of Cornerstone Brands; and the redemption of substantially all of IAC's preferred stock for $656 million in connection with the Spin-Off.
During the year ended December 31, 2005, $14.5 million of net unrealized losses included within other comprehensive income as of December 31, 2004 were recognized into earnings.
From time to time the Company makes equity investments in non-publicly traded companies which are being abandoned. Employee termination costs relateaccounted for under the cost method as the Company does not have the ability to exercise significant influence over the respective company's operating and financial policies. These investments are included in "Long-term investments" in the accompanying consolidated balance sheets and have a carrying value of approximately $45.2 million and $16.7 million as of December 31, 2005 and 2004, respectively. The Company monitors its investments for impairment on a quarterly basis and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. Factors used in determining an impairment include, but are not limited to, the current business environment including competition and uncertainty of financial condition; going concern considerations such as the rate at which the investee company utilizes cash, and the investee company's ability to obtain additional private financing to fulfill its stated business plan; the need for changes to the investee company's existing business model due to changing business environments and its ability to successfully implement necessary changes; and comparable valuations. If an investment is determined to be impaired, a determination is made as to whether such impairment is
other-than-temporary. If the Company has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of a cost investment, then the fair value of such cost method investment is not estimated, as it is impracticable to do so. The Company recognized an other-than-temporary loss of $23.4 million related to an investment accounted for under the cost method during the third quarter of 2005 which is included in discontinued operations as the investment was an Expedia asset. The determination to recognize an other-than-temporary loss related to this investment was primarily based on information received during the third quarter of 2005 indicating deteriorating financial conditions of the investment.
The Company has other investments in equity securities, which are marked to severancemarket, and are included in "Long-term investments" in the accompanying consolidated balance sheets. Included within other costscomprehensive income at December 31, 2005 and 2004 were unrealized gains of $4.7 million and $3.2 million, respectively, related to these investments, which are recorded net of deferred tax expense of $3.0 million and $2.0 million, respectively.
At December 31, 2004, marketable securities available-for-sale were as follows (in thousands):
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Auction rate preferred securities | $ | 166,054 | $ | 33 | $ | — | $ | 166,087 | |||||
U.S. government and agencies | 1,116,007 | 6 | (17,686 | ) | 1,098,327 | ||||||||
Non-U.S. government securities and other fixed term obligations | 889,115 | 7,777 | (4,089 | ) | 892,803 | ||||||||
Corporate debt securities | 253,865 | 74 | (1,411 | ) | 252,528 | ||||||||
Total debt securities | 2,258,987 | 7,857 | (23,186 | ) | 2,243,658 | ||||||||
Total marketable securities | $ | 2,425,041 | $ | 7,890 | $ | (23,186 | ) | $ | 2,409,745 | ||||
The net unrealized losses on available for sale securities noted above includes $5.5 million of unrealized foreign exchange gains that have been recognized through earnings during the year ended December 31, 2004. The remaining net unrealized loss is included within other comprehensive income and is recorded net of a deferred tax benefit of $8.0 million as of December 31, 2004. The proceeds from sales and maturities of available-for-sale marketable securities were approximately $2.6 billion, which resulted in gross realized gains of $5.3 million and gross realized losses of $2.0 million for the year ended December 31, 2004.
The following table summarizes those investments with unrealized losses at December 31, 2004 that have been in a continuous unrealized loss position for less than twelve months and those in a continuous unrealized loss position for twelve months or longer (in thousands):
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||
U.S. government and agencies | $ | 452,964 | $ | (4,995 | ) | $ | 645,363 | $ | (12,691 | ) | $ | 1,098,327 | $ | (17,686 | ) | |||||
Non-U.S. government securities and other fixed term obligations | 736,039 | (3,196 | ) | 59,245 | (893 | ) | 795,284 | (4,089 | ) | |||||||||||
Corporate debt securities | 218,545 | (868 | ) | 33,962 | (543 | ) | 252,507 | (1,411 | ) | |||||||||||
Total | $ | 1,407,548 | $ | (9,059 | ) | $ | 738,570 | $ | (14,127 | ) | $ | 2,146,118 | $ | (23,186 | ) | |||||
During the year ended December 31, 2004, $1.7 million of net unrealized losses included within other comprehensive income as of December 31, 2003 were recognized into earnings.
NOTE 12—EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of Basic and Diluted earnings per share. All share information has been adjusted to reflect IAC's one-for-two reverse stock split in August 2005.
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
| (In thousands, except per share data) | |||||||||
Earnings from continuing operations: | ||||||||||
Numerator: | ||||||||||
Earnings from continuing operations | $ | 598,387 | $ | 54,867 | $ | 10,709 | ||||
Preferred stock dividends(a)(b) | (7,938 | ) | (13,053 | ) | (13,055 | ) | ||||
Net earnings (loss) from continuing operations available to common shareholders | 590,449 | 41,814 | (2,346 | ) | ||||||
Interest expense on convertible notes(c) | 1,180 | — | — | |||||||
Net earnings (loss) from continuing operations available to common shareholders after assumed conversion of convertible notes | $ | 591,629 | $ | 41,814 | $ | (2,346 | ) | |||
Denominator: | ||||||||||
Basic shares outstanding | 329,459 | 347,990 | 300,032 | |||||||
Dilutive securities including stock options, warrants and restricted stock and share units | 27,159 | 23,222 | — | |||||||
Denominator for basic and diluted earnings per share—weighted average shares(d)(e) | 356,618 | 371,212 | 300,032 | |||||||
Net earnings available to common shareholders: | ||||||||||
Numerator: | ||||||||||
Earnings before preferred dividends | $ | 876,150 | $ | 164,861 | $ | 167,396 | ||||
Preferred stock dividends(a)(b) | (7,938 | ) | (13,053 | ) | (13,055 | ) | ||||
Net earnings available to common shareholders | 868,212 | $ | 151,808 | $ | 154,341 | |||||
Interest expense on convertible notes(c) | 1,180 | — | — | |||||||
Net earnings available to common shareholders after assumed conversion of convertible notes | $ | 869,392 | $ | 151,808 | $ | 154,341 | ||||
Denominator: | ||||||||||
Basic shares outstanding | 329,459 | 347,990 | 300,032 | |||||||
Dilutive securities including stock options, warrants and restricted stock and share units | 27,159 | 23,222 | — | |||||||
Denominator for basic and diluted earnings per share—weighted average shares(d)(e) | 356,618 | 371,212 | 300,032 | |||||||
Earnings (loss) per share: | ||||||||||
Basic earnings (loss) per share from continuing operations | $ | 1.79 | $ | 0.12 | $ | (0.01 | ) | |||
Discontinued operations, net of tax | 0.85 | 0.32 | 0.52 | |||||||
Basic earnings per share from net earnings | $ | 2.64 | $ | 0.44 | $ | 0.51 | ||||
Diluted earnings (loss) per share from continuing operations | $ | 1.68 | $ | 0.11 | $ | (0.01 | ) | |||
Discontinued operations, net of tax | 0.78 | 0.30 | 0.52 | |||||||
Diluted earnings per share from net earnings | $ | 2.46 | $ | 0.41 | $ | 0.51 | ||||
stock were redeemed for approximately $656 million.
Asthe Convertible Notes were included in the calculation of diluted earnings per share because their inclusion was dilutive. Accordingly, under the "if-converted" method, the after-tax interest expense on the convertible subordinated notes was excluded from the numerator in calculating diluted earnings per share.
NOTE 10: 13—SHAREHOLDERS' EQUITY
All IAC common stock share information and related per share prices included in this note have been adjusted to reflect IAC's one-for-two reverse stock split in August 2005.
Description of Common Stock and Class B Convertible Common Stock
The following is a description of IAC's common stock before and after the Spin-Off. The only change effected by the Spin-Off to the terms of IAC's common stock was the change in par value from $0.01 to $0.001.
With respect to matters that may be submitted to a vote or for the consent of IAC's shareholders generally, including the election of directors, each holder of shares of IAC common stock, IAC Class B common stock and IAC preferred stock vote together as a single class. In connection with any such vote, each holder of IAC common stock is entitled to one vote for each share of IAC common stock held, each holder of IAC Class B common stock is entitled to ten votes for each share of IAC Class B common stock held and each holder of IAC preferred stock is entitled to two votes for each share of IAC preferred stock held. Notwithstanding the foregoing, the holders of shares of IAC common stock, acting as a single class, are entitled to elect 25% of the total number of IAC's directors, and, in the event that 25% of the total number of directors shall result in a fraction of a director, then the holders of shares of IAC common stock, acting as a single class, are entitled to elect the next higher whole number of IAC's directors. In addition, Delaware law requires that certain matters be approved by the holders of shares of IAC common stock, holders of IAC Class B common stock or holders of IAC preferred stock voting as a separate class.
Shares of IAC Class B common stock are convertible into shares of IAC common stock at the option of the holder thereof, at any time, on a share-for-share basis. Such conversion ratio will in all events be equitably preserved in the event of any recapitalization of IAC by means of a stock dividend on, or a stock split or combination of, outstanding shares of IAC common stock or IAC Class B common stock, or in the event of any merger, consolidation or other reorganization of IAC with another corporation. Upon the conversion of shares of IAC Class B common stock into shares of IAC common stock, those shares of IAC Class B common stock will be retired and will not be subject to reissue. Shares of IAC common stock are not convertible into shares of IAC Class B common stock.
Except as described herein, shares of IAC common stock and IAC Class B common stock are identical. The holders of shares of IAC common stock and the holders of shares of IAC Class B common stock are entitled to receive, share for share, such dividends as may be declared by IAC's Board of Directors out of funds legally available therefor.therefore. In the event of a liquidation, dissolution, distribution of assets or winding-up of IAC, the holders of shares of IAC common stock and the holders of shares of IAC Class B common stock are entitled to receive, share for share, all the assets of IAC available for distribution to its stockholders, after the rights of the holders of the IAC preferred stock have been satisfied.
In the event that IAC issues or proposes to issue any shares of IAC common stock or Class B common stock (including(with certain limited exceptions), including shares issued upon exercise, conversion or exchange of options, warrants and convertible securities),securities, Liberty Media Corporation ("Liberty") will have preemptive rights that entitle it to purchase, subject to a cap, a number of IAC common shares so that Liberty will maintain the identical ownership interest in IAC that Liberty had immediately prior to such issuance or proposed issuance. Any purchase by Liberty will be allocated between IAC common stock and Class B common stock in the same proportion as the issuance or issuances giving rise to the preemptive right, except to the extent that Liberty opts to acquire shares of IAC common stock in lieu of shares of IAC Class B common stock. During 2005 and 2004, Liberty did not exercise any of its preemptive rights. During 2003 the Company received proceeds of approximately $1.2 billion related to the sale of 48.7 million shares of common stock to Liberty, pursuant to Liberty's preemptive rights in relation to the Ticketmaster merger, the uDate acquisition, the Expedia and Hotels.com mergers and in connection with IAC option exercises between May 2, 2003 and June 3, 2003.
Description of Preferred Stock
IAC's Board of Directors has the authority to designate, by resolution, the powers, preferences, rights and qualifications, limitations and restrictions of preferred stock issued by IAC without any further vote or action by the shareholders. Any shares of preferred stock so issued would have priority over shares of IAC common stock and shares of IAC Class B common stock with respect to dividend or liquidation rights or both.
In connection with the 2002 acquisition of a controlling interest in Expedia, Inc.,Expedia.com, IAC issued an aggregate of approximately 13.1 million preferred shares, par value $0.01 per share, which securities were designated as "Series A Cumulative Convertible Preferred Stock," each having a $50.00 face value and a term of 20 years, which is referred to in this document as IAC Series A preferred stock. In connection with the Spin-Off, on August 9, 2005, approximately 13.1 million shares of IAC Series A preferred stock were put to IAC for $50.00 in cash per share, plus accrued and unpaid dividends. The remaining shares of IAC Series A preferred stock outstanding immediately prior to the Spin-Off were either put to IAC for (i) the shares of IAC common stock and Expedia common stock that would have otherwise been received by the holders thereof had they converted their IAC Series A preferred stock into IAC common stock immediately prior to the Spin-Off or (ii) one share of IAC Series B preferred stock and one share of Expedia Series A preferred stock, each of which mirror in all material respects the terms of the IAC Series A preferred stock. At December 31, 2005, 846 shares of IAC Series B preferred stock were outstanding.
Each share of IAC Series B preferred stock is convertible, at the option of the holder at any time, into that number of shares of IAC common stock equal to the quotient obtained by dividing $50the face value of $27.77 by the conversion price per share of IAC common stock. The conversion price is initially equal to $33.75$37.48 per share of IAC common stock and is subject to downward adjustment if the price of IAC common stock exceeds $35.10$38.98 at the time of
conversion pursuant to a formula set forth in the certificate of designation for the IAC Series B preferred stock. At the end of the 20-year term,On February 4, 2022, all then outstanding shares of IAC Series B preferred stock shall automatically be converted into shares of IAC common stock. Shares of IAC Series B preferred stock may be put to IAC at the option of the holder thereof on the fifth, seventh, tenth and fifteenth anniversary of February 4, 2002 for cash or stock at IAC's option. IAC also has the right to redeem the shares of IAC Series B preferred stock for cash or stock commencing on the tenth anniversary of February 4, 2002. In the event of a voluntary or involuntary liquidation, dissolution or winding-up of IAC, holders of IAC Series B preferred stock will be entitled to receive, in preference to any holder of IAC common stock or IAC Class B common stock, an amount per share equal to all accrued and unpaid dividends plus the greater of (a) face value, or (b) the liquidating distribution that would be received had such holder converted the IAC Series B preferred stock into IAC common stock immediately prior to the liquidation, dissolution or winding-up of IAC. TheShares of IAC Series B preferred shares bear intereststock accrue dividends at 1.99%, payable quarterly in cash or stock at IAC's option. If IAC elects to pay cash, the amount is approximately $13.1 million on an annual basis. The Company paid cash dividends of $13.1approximately $9.6 million, $13.1 million and $11.8$13.1 million in the years ended December 31, 2005, 2004 and 2003, and 2002, respectively.respectively, in respect of IAC Series A preferred stock.
In accordance with SFAS No. 128, "Earnings per Share," for purposes of calculating diluted EPS,earnings per share, the Company uses the if-converted method of calculating the dilutive effect of the IAC Series B preferred stock and prior to the completion of the Spin-Off, used this method for purposes of calculating the dilutive effect of the IAC Series A preferred stock. Under the if-converted method, securities are assumed to be converted at the beginning of the period if the conversion of those shares would be dilutive.
Note Receivable from Key Executive for Common Stock Issuance
In connection with the employment of Barry Diller as Chief Executive Officer in August 1995, the Company agreed to sell Mr. Diller 1,767,952883,976 shares of IAC common stock ("Diller Shares") at $5.6563$11.3126 per share for cash and a non-recourse promissory note in the approximate amount of $5.0 million,
secured by approximately 1,060,000530,000 shares of IAC Common Stock.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.Inc., BDTV II, INC.Inc., BDTV III, INC.Inc., BDTV IV, INC.Inc., his own holdings and pursuant to a proxy over shares held by Liberty under the Stockholders Agreement amongamended and restated stockholders agreement, dated as of August 9, 2005, between Liberty and Mr. Diller, Universal, Liberty, and Vivendi (the "Stockholders Agreement"), hashad the right to vote approximately 20.9% (132,543,02216.8% (49,226,079 shares) of IAC's outstanding common stock, and 100% (64,629,996(25,599,998 shares) of IAC's outstanding Class B common stock at December 31, 2004.2005. As a result, Mr. Diller controls 59.7%controlled 55.7% of the outstanding total voting power of the Company as of December 31, 20042005 and is effectively able to control the outcome of nearly all matters submitted to a vote of the Company's shareholders. Liberty holds substantially all of the economic interest in, and Mr. Diller holds all of the voting power in, the shares of IAC stock held by the BDTV entities listed above.
Reserved Common Shares
In connection with equity compensation plans, warrants, and other matters, 197,443,49597,596,679 shares of IAC common stock were reserved as of December 31, 2004.2005.
Stock-Based Warrants
At December 31, 2004,2005, warrants (in thousands) to acquire shares of IAC common were outstanding as follows:
| | Average Strike per Share | Expiration Date | Number of IAC common shares underlying Warrants outstanding at December 31, 2004 | | Average Strike per IAC Share | Expiration Date | Number of IAC common shares underlying Warrants outstanding at December 31, 2005 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Issued in 2002 Expedia deal | $ | 35.10 | 2/4/09 | 14,591 | ||||||||||||
Issued in 2002 Expedia.com deal | Issued in 2002 Expedia.com deal | $ | 38.98 | 2/4/09 | 7,295 | |||||||||||
Issued in Vivendi deal: | Issued in Vivendi deal: | Issued in Vivendi deal: | ||||||||||||||
Tranche 1 | $ | 27.50 | 2/7/12 | 24,187 | Tranche 1 | $ | 30.54 | 2/7/12 | 12,094 | |||||||
Tranche 2 | $ | 32.50 | 2/7/12 | 8,000 | Tranche 2 | $ | 36.10 | 2/7/12 | 4,000 | |||||||
Converted Expedia: | ||||||||||||||||
Converted Expedia.com: | Converted Expedia.com: | |||||||||||||||
Tranche 1 | $ | 13.41 | 2/4/09 | 23,709 | Tranche 1 | $ | 14.89 | 2/4/09 | 11,096 | |||||||
Other | Other | $ | 13.12 | 11/7/05–5/19/10 | 666 | Other | $ | 16.55 | 11/7/09–5/19/10 | 164 | ||||||
$ | 24.79 | 71,153 | $ | 27.88 | 34,649 | |||||||||||
The information in the table above reflects IAC's continuing obligation to its warrant holders subsequent to the Spin-Off. In addition, with respect to certain of the warrants included in the caption "Other" noted in the table above, Expedia is obligated to issue to the same warrant holders Expedia common stock for their portion of the obligation that arises from the Spin-Off.
In addition to the warrants outstanding as noted above, Hotels.com entered into several exclusive affiliate distribution and marketing agreements and agreed to issue warrants to purchase shares of its common stock to affiliates if they achieved certain performance targets. As a result of the Company's assumption of Hotels.com warrants in the merger, and its continuing obligation post Spin-Off, at December 31, 2004,2005, the Company had contingently issuable warrants to purchase approximately 2.1
0.5 million shares of IAC common stock under such agreements. Such warrants will be issued at fair market value on the date of issuance if and when earned.
During 2005, various warrants to acquire 0.2 million shares of IAC common stock were exercised for aggregate proceeds of $1.8 million. The strike prices ranged from $7.36 to $14.56.
On September 17, 2004, warrants to acquire 4.22.1 million shares of IAC common stock issued in conjunction with the Ticketmaster merger expired unexercised. The strike prices ranged from $32.09$64.18 to $64.17.$128.34. During 2004 there were no material warrant exercises.
On June 30, 2003 pursuant to the exercise, as Barry Diller's designee, of a right of first refusal, the Company repurchased from Vivendi warrants to acquire 28.2 million shares of IAC common stock for an aggregate purchase price of $407.4 million.
On June 23, 2003, in conjunction with the Hotels.com merger, IAC issued to former warrant holders of Hotels.com, warrants to acquire 1.2 million shares of IAC common stock. Due to the termination of the Travelocity affiliate relationship in September 2003, 0.8 million remaining outstanding Travelocity warrants were cancelled.
On August 8, 2003, in conjunction with the Expedia merger, IAC purchased for $32.2 million approximately 0.8 million warrants which were issued by Expedia in February 2002. In addition, IAC issued to former warrant holders of Expedia, warrants to acquire 24.5 million shares of IAC common stock. During 2003, 0.3 million warrants were exercised into IAC common stock for proceeds of $3.9 million.
Common Stock Exchangeable for Preferred Interest
On June 7, 2005, IAC completed a transaction with NBC Universal Inc.'s current beneficial ownership in which IAC issold its common and preferred interests in VUE for approximately $3.4 billion in aggregate consideration, which consideration included 28.3 million shares of IAC capital stock, valued at $1.4 billion, as described below. See Note 10 for further discussion of the formsale by IAC of 43.2its common and preferred interests in VUE.
Immediately prior to the completion of this transaction, NBC Universal beneficially owned 21.6 million shares of IAC common stock and 13.46.7 million shares of IAC Class B common stock (for a total of 56.628.3 million IAC shares). Such number of shares is required to be held by Universal Studios, Inc. or its affiliates in connection with Universal's obligations related to our ownership of the Class B preferred interest in
VUE. The preferred is to be settled by Universal at its then face value with a maximum of approximately 56.6 million IAC common shares, provided that Universal may substitute cash in lieu of shares of IAC common stock (but not IAC Class B common stock), at its election. If IAC's share price exceeds $40.82 per share at the time of settlement, fewer than 56.6 million shares would be received. The value of 56.6 million shares of $1.4 billion has been reclassified from Additional Paid in Capital to Common Stock Exchangeable for Preferred Interest, which account is presented on a separate line item outside of Shareholders' Equity. The value of the shares will not be adjusted, unless the value of IAC common stock suffers a decline in value that is other than temporary over the twenty-year holding period.
Common Stock Repurchases
In NovemberDuring 2004 and 2003, IAC announced that its Board of Directors authorized the repurchase of up toan aggregate of 80 million shares of IAC common stock. This authorization is in additionPursuant to the 22.9 million shares IAC has remaining under the repurchase authorizations announced in March 2003 and November 2003, which initially covered a total of 80 million shares.that authority IAC may purchase shares over an indefinite period of time, on the open market or through private transactions, depending on those factors IAC deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook. DuringPursuant to the Board's authorizations, during 2005 and 2004, and 2003, IAC purchased 15.850.6 million and 41.37.9 million shares of IAC common stock for aggregate consideration of $1.8 billion and $426.9 million, and $1.4 billion, respectively. At December 31, 2004,2005, IAC had 102.9 millionapproximately 826 thousand shares remaining in these authorizations. During January 2006, IAC repurchased the remaining 826 thousand shares pursuant to these authorizations for an aggregate consideration of $23.8 million.
NOTE 14—STOCK COMPENSATION PLANS
IAC currently has a total of sixteen equity based compensation plans under which stock options and other equity awards are outstanding, including plans assumed in acquisitions. During 2005, IAC assumed certain plans in connection with the IAC Search & Media and Cornerstone Brands acquisitions and terminated certain plans pursuant to which it did not intend to grant further equity awards.
The provisions of these sixteen plans are similar, in that each plan generally has a term of ten years with awards under those plans vesting generally over a four-year period for stock options and over a five-year period for Restricted Stock Units ("RSUs"). Thirteen of the sixteen plans, including those assumed, have no additional stock options or other equity awards available for future grant. The Company intends to grant future awards from the three active plans described below, all of which currently cover outstanding stock options to acquire shares of IAC common stock and RSUs, as well as provide for the future grant of these and other equity awards.
The three active plans under which future awards may be granted are: the IAC 2005 Stock and Annual Incentive Plan, the Amended and Restated IAC 2000 Stock and Annual Incentive Plan and the IAC 1997 Stock and Annual Incentive Plan. Under the IAC 2005 Stock and Annual Incentive Plan, the Company is authorized to grant stock options, restricted stock and other equity based awards for up to 25,000,000 shares of IAC common stock. IAC's Board of Directors approved and adopted the IAC 2005 Stock and Annual Incentive Plan, effective as of June 7, 2005, subject to approval by IAC's stockholders, which approval was obtained on July 19, 2005. Under IAC's 2000 Stock and Annual Incentive Plan and 1997 Stock and Annual Incentive Plan, the Company is authorized to grant stock options, restricted stock and other equity based awards and the number of shares that remained available for future awards pursuant to the authorizations under each of these plans immediately prior to the reverse stock split and Spin-Off was adjusted to give effect to these transactions, which adjustments are reflected in the information set forth below. All three of the active plans described above authorize the Company to grant awards to its authorization.employees, officers, directors and consultants.
In addition, each of the three plans described above has a stated term of ten years and provides that the exercise price of stock options granted will not be less than the market price of the Company's common stock on the date of grant. The plans do not specify grant dates or vesting schedules as those determinations have been delegated to the Compensation/Benefits Committee of IAC's Board of Directors (the "Committee"). Each grant agreement reflects the vesting schedule for that particular grant as determined by the Committee. Stock option awards to date have generally vested in equal annual installments over a four-year period, and RSU awards to date have generally vested in equal annual installments over a five-year period, in each case, from the date of grant.
Stock Options
A summary of changes in outstanding stock options under the plans under which stock options are outstanding is as follows:
| December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||||||
| Shares | Weighted Average Exercise Price($) | Shares | Weighted Average Exercise Price($) | Shares | Weighted Average Exercise Price($) | |||||||||
| (Shares in thousands) | ||||||||||||||
Outstanding at beginning of period | 38,674 | $ | 23.54 | 48,835 | $ | 22.84 | 34,007 | $ | 22.58 | ||||||
Granted or issued, principally, in connection with acquisitions and mergers | 12,772 | 24.20 | 418 | 18.12 | 28,211 | 24.04 | |||||||||
Exercised | (16,170 | ) | 8.88 | (8,705 | ) | 16.92 | (11,205 | ) | 23.58 | ||||||
Forfeited or expired | (3,461 | ) | 33.87 | (1,874 | ) | 31.02 | (2,178 | ) | 28.34 | ||||||
Outstanding at end of period | 31,815 | 19.73 | 38,674 | 23.54 | 48,835 | 22.84 | |||||||||
Options exercisable | 22,709 | $ | 16.27 | 33,086 | $ | 22.52 | 34,672 | $ | 20.24 | ||||||
Available for grant | 19,260 | 5,817 | 8,670 | ||||||||||||
The weighted average fair value of stock options granted during the years ended December 31, 2005, 2004 and 2003 at market prices equal to IAC's common stock on grant date was $24.48, $44.82, and $36.76, respectively. The 2005 weighted average fair value has been adjusted for both the one-for-
two reverse stock split in August 2005 and the value of the Spin-Off. The 2004 and 2003 weighted average fair values are stated after giving effect only to the one-for-two reverse stock split.
During 2005, the Company granted stock options to its Chairman at exercise prices greater than market value on the date of grant with a 10-year term and cliff vesting at the end of five years, with accelerated vesting upon certain terminations of employment or upon a change of control. The weighted average exercise price and the weighted average fair value related to these grants were $40.12 and $27.90, respectively.
The following table summarizes the information about stock options outstanding and exercisable as of December 31, 2005.
| Options Outstanding | Options Exercisable | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Outstanding at December 31, 2005 | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | Exercisable at December 31, 2005 | Weighted Average Exercise Price | |||||||
| (Shares in thousands) | |||||||||||
$0.00 to $10.00 | 4,244 | 4.9 | $ | 5.00 | 2,781 | $ | 4.20 | |||||
$10.01 to $20.00 | 13,498 | 2.9 | 11.98 | 12,813 | 11.77 | |||||||
$20.01 to $30.00 | 7,161 | 6.4 | 24.91 | 4,898 | 25.07 | |||||||
$30.01 to $40.00 | 4,825 | 7.8 | 34.04 | 1,530 | 32.22 | |||||||
$40.01 to $50.00 | 1,935 | 7.9 | 47.36 | 535 | 45.95 | |||||||
$50.01 to $60.00 | 89 | 4.0 | 52.15 | 89 | 52.15 | |||||||
$60.01 to $70.00 | 10 | 4.1 | 68.17 | 10 | 68.17 | |||||||
$70.01 to $80.00 | 5 | 4.0 | 72.81 | 5 | 72.81 | |||||||
$80.01 to $90.00 | 8 | 4.0 | 84.18 | 8 | 84.18 | |||||||
$90.01 to $105.00 | 40 | 3.9 | 102.09 | 40 | 102.09 | |||||||
31,815 | 5.0 | 19.73 | 22,709 | 16.27 | ||||||||
Restricted Stock Units
Restricted Stock Units ("RSUs")RSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each RSU equal to the market price of IAC common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Committee at the time of grant. However, under the terms of outstanding IAC RSU awards, at time of vest, all awards to international employees are to be settled in cash. The Company follows the guidance of SFAS No. 148 and accounts for these awards to international awardsemployees as liabilities which are marked to market each reporting period through earnings. At December 31, 2005 and 2004, approximately 0.60.3 million international awards were outstanding.outstanding, respectively. Each RSU grant is subject to a vesting requirement that includes one or both of service-based vesting where a specific period of continued employment must pass before an award vests, and performance-based vesting where certain performance targets set at the time of grant must be achieved before an award vests. Pursuant to the plans under which IAC awards RSUs, IAC may make adjustments to the number and kind of shares covered by the RSUs granted to reflect any changes in corporate capitalization (including a change in the number of shares of outstanding common stock) resulting from a stock split or a corporate transaction, such as a merger, consolidation, separation, including a spin-off or other distribution of stock or property, reorganization or liquidation or other similar type of transaction. The Company recognizes expense for all stock-based instruments granted or modified after January 1, 2003. For domestic RSU grants to U.S. employees, the accounting charge is measured at fair value at the grant date as the fair value of IAC common stock and amortized ratably as non-cash compensation over the vesting term. The expense associated with international RSU awards to non-U.S. employees is initially measured at
fair value at the grant date and amortized ratably, subject to mark-to-market adjustments for changes in the price of IAC common stock, as compensation expense within general and administrative expenses.
IAC had approximately 6.5 million shares of restricted stock and RSUs outstanding under IAC's equity plans at December 31, 2005, which vest principally over a period of five years, including approximately 3.3 million units and 3.0 million units issued in 2005 and 2004, respectively. The weighted average fair value of restricted stock and RSUs granted during the years ended December 31, 2005, 2004 and 2003 was $25.96, $59.68 and $54.28, respectively. The 2005 weighted average fair value has been adjusted for both the one-for-two reverse stock split in August 2005 and the value of the Spin-Off. The 2004 and 2003 weighted average fair values are stated after giving effect only to the one-for-two reverse stock split.
In connection with the acquisitions of certain of its operating subsidiaries, and the funding of certain start-up businesses, IAC has granted restricted equity in the relevant business to certain members of the business' management. These equity awards vest over a period of years or upon the occurrence of certain prescribed events. When acquiring or funding these entities, IAC has taken a preferred interest in the entity with a face value equal to the acquisition price or its investment cost, which accretes paid-in-kind dividends at a prescribed rate of return. The value of the management equity awards is tied to the value of the common stock, with management as a whole generally receiving a small minority of the total common stock outstanding. Accordingly, these minority interests only have value to the extent the relevant business appreciates at a greater rate than the relevant preferred dividend, but can have significant value in the event of significant appreciation. The interests are ultimately settled through varying put/call arrangements in cash or common stock at the option of IAC, with fair market value determined by negotiation or arbitration. The expense associated with these equity awards is initially measured at fair value at the grant date and is amortized ratably as non-cash compensation over the vesting term.
NOTE 15—EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At December 31, 2005 and 2004 the Company's equity investments in unconsolidated affiliates, other than its common interest in VUE, totaled $51.7 million and $40.7 million, respectively, and are included in "Long-term investments" in the accompanying consolidated balance sheets. The Company's equity in the income (losses) of its unconsolidated affiliates for each of the years in the three year period ended December 31, 2005 is presented below (in thousands):
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
Equity in income (losses) of VUE | $ | 21,960 | $ | 16,188 | $ | (224,468 | ) | |||
Equity in income of unconsolidated affiliates other than VUE | 25,884 | 15,679 | 3,636 | |||||||
Total | $ | 47,844 | $ | 31,867 | $ | (220,832 | ) | |||
Through June 7, 2005, IAC beneficially owned 5.44% of the partnership common equity of VUE, plus certain preferred interests of VUE. This common interest was accounted for using the equity method. On June 7, 2005, the Company sold its common and preferred interests in VUE to NBC Universal (see Note 10 for further discussion of the sale of the Company's VUE interests). Prior to the sale, the statement of operations data relating to VUE was historically recorded on a one-quarter lag
due to the timing of receiving information from the partnership. During the fourth quarter of 2004, VUE recorded a charge related to asset impairments. Due to the one-quarter lag noted above, IAC recorded its share of the charge in the first quarter of 2005. Equity in the income of VUE recognized in the year ended December 31, 2005 represents IAC's share in VUE's 2004 fourth quarter results as well as IAC's share of VUE's results from January 1, 2005 through June 7, 2005. For the years ended December 31, 2005, 2004 and 2003, IAC recorded equity income (losses) of $22.0 million, $16.2 million and ($224.5) million, respectively.
During the first quarter of 2003, IAC received the audited financial statements of VUE for the year ended December 31, 2002, which disclosed that VUE recorded an impairment charge for goodwill and intangible assets and other long-lived assets of $4.5 billion in the period May 7, 2002 to December 31, 2002 based upon VUE management's review of the estimated fair value of VUE as of December 31, 2002. Due to the one-quarter lag noted above, IAC recorded its share of the charge in the first quarter of 2003, which was approximately $245 million, before a tax benefit of $96 million.
The Company's investments in VUE as of December 31, 2004, included Preferred A interests and Preferred B interests with carrying values of approximately $614 million and $1.4 billion, respectively, and common interests with a carrying value of approximately $782 million.
Summarized balances of the partnership are as follows (in thousands):
| As of March 31, 2005 and for the period October 1, 2004 to June 7, 2005 | As of September 26, 2004 and for the period October 1, 2003 to September 26, 2004 | ||||
---|---|---|---|---|---|---|
Current assets | $ | 3,755,581 | $ | 1,988,454 | ||
Non-current assets | 13,904,821 | 14,908,280 | ||||
Current liabilities | 2,541,519 | 2,162,944 | ||||
Non-current liabilities | 3,714,663 | 3,382,755 | ||||
Net sales | 5,633,353 | 6,970,268 | ||||
Gross profit | 1,707,191 | 1,980,193 | ||||
Net income | 441,855 | 491,646 |
Summarized aggregated financial information of the Company's remaining equity investments including Jupiter Shop Channel, TVSN (China) and TM Mexico as of and for the years ended December 31, is summarized below (in thousands):
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
Current assets | $ | 250,801 | $ | 150,045 | $ | 123,758 | |||
Non-current assets | 67,674 | 81,195 | 59,904 | ||||||
Current liabilities | 178,035 | 112,122 | 81,505 | ||||||
Non-current liabilities | 28,061 | 27,528 | 35,656 | ||||||
Net sales | 713,638 | 499,806 | 345,212 | ||||||
Gross profit | 292,335 | 202,478 | 136,675 | ||||||
Net income | 65,494 | 18,621 | 7,966 |
The following is a list of investments accounted for under the equity method, the principal market that the venture operates, and the relevant ownership percentage:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||
Jupiter Shop Channel (Japan) | 30 | % | 30.0 | % | 30.0 | % | |
TVSN (China) | 21 | % | 21.0 | % | 21.0 | % | |
VUE (U.S.) | — | 5.44 | % | 5.44 | % | ||
TM Mexico (JV) | 33.3 | % | 50.0 | % | 50.0 | % | |
TM Australia (JV) | — | 50.0 | % | 50.0 | % |
In April 2005, Ticketmaster acquired the remaining interest in its Australian joint venture. Accordingly, the Company began to consolidate the results of the Australian joint venture effective April 2005.
NOTE 16—LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||
| (In thousands) | ||||||
7.00% Senior Notes due January 15, 2013 (the "2002 Senior Notes"); interest payable each January 15 and July 15 which commenced July 15, 2003 | $ | 750,000 | $ | 750,000 | |||
63/4% Senior Notes due November 15, 2005 (the "1998 Senior Notes"); interest payable each May 15 and November 15 which commenced May 15, 1999 | — | 360,845 | |||||
Warehouse Lines of Credit | 362,293 | 199,454 | |||||
Ask Zero Coupon Convertible Subordinated Notes due June 1, 2008 | 114,000 | — | |||||
5% New York City Industrial Development Agency Liberty Bonds due September 1, 2035; interest payable each March 1 and September 1 commencing March 1, 2006 | 80,000 | — | |||||
Installment Note Payable due January 31, 2006, 2007 and 2008 | 39,554 | 39,554 | |||||
Other long-term obligations maturing through 2022 | 13,115 | 13,820 | |||||
Total gross obligations | 1,358,962 | 1,363,673 | |||||
Fair value basis adjustment attributable to hedged debt obligations | (8,757 | ) | 407 | ||||
Total unamortized discount | (15,519 | ) | (4,412 | ) | |||
Total long-term obligations and short-term borrowings | 1,334,686 | 1,359,668 | |||||
Less current maturities of long-term obligations and short-term borrowings | (375,276 | ) | (562,953 | ) | |||
Long-term obligations, net of current maturities | $ | 959,410 | $ | 796,715 | |||
At December 31, 2005, current maturities of long-term obligations and short-term borrowings consist primarily of the warehouse lines of credit and the first installment payment of $9.6 million of the Installment Note Payable. On November 15, 2005, the Company's obligation under the 1998 Senior Notes matured, and the principal amount due at maturity of $360.8 million was paid.
One of the Company's subsidiaries, LendingTree Loans, has various warehouse lines of credit that it uses to fund consumer residential loans. As of December 31, 2005 LendingTree Loans had committed lines of credit in the aggregate amount of $1.0 billion, which expire from September 30, 2006 to August 31, 2007, and uncommitted lines aggregating $250 million. The committed lines of
credit can be canceled at the option of the holder without default upon 60-90 days notice. Total borrowings under these lines of credit are secured by outstanding mortgage loans held for sale. Interest rates under these lines of credit fall primarily within a range of 30-day LIBOR plus 75-100 basis points, depending on the underlying quality of the loans in the borrowing base and the length of time the loans remain outstanding. Under the terms of the committed lines of credit, LendingTree Loans is required to maintain various financial and other covenants. The loans are non-recourse to IAC and LendingTree. LendingTree Loans pays a facility fee based on the total amount of the committed lines. There were $362.3 million and $199.5 million outstanding under the warehouse lines of credit as of December 31, 2005 and 2004, respectively. The weighted-average interest rates on outstanding borrowings under the warehouse lines of credit at December 31, 2005 and 2004 were 5.38% and 3.62%, respectively.
On July 19, 2005, as part of the IAC Search & Media acquisition, IAC guaranteed $115.0 million par value of Ask's Zero Coupon Convertible Subordinated Notes due June 1, 2008 (the "Convertible Notes"). The Convertible Notes are convertible at the option of the holders into shares of both IAC and Expedia common stock at an initial conversion price of $13.34 per share, subject to certain adjustments. Upon conversion, IAC and Expedia have the right, subject to certain conditions, to deliver cash (or a combination of cash and shares) in lieu of shares of its respective common stock. Under the separation agreement relating to the Spin-Off, Expedia contractually assumed the obligation to deliver shares of Expedia common stock or the cash equivalent of such shares to IAC upon conversion by the holders of the Convertible Notes. See Note 17 "Derivative Instruments" for further discussion. In December 2005, $1.0 million par value of the Convertible Notes was converted by the holders, resulting in an outstanding obligation of $114.0 million at December 31, 2005.
In addition, in connection with the financing of the construction of IAC's corporate headquarters, on August 31, 2005, the New York City Industrial Development Agency (the "Agency") issued $80 million in aggregate principal amount of New York City Industrial Development Agency Liberty Bonds (IAC/InterActiveCorp Project), Series 2005 (the "Liberty Bonds"). IAC is obligated to make all principal, interest and other payments in respect of the Liberty Bonds pursuant to certain security and payment arrangements between IAC and the Agency, which arrangements were entered into in connection with the closing of the Liberty Bond issuance. Liberty Bond proceeds may only be used for certain expenditures relating to the construction of IAC's corporate headquarters and may not be used for general corporate purposes.
In connection with the acquisition of LendingTree Loans, the Company is committed to pay a portion of the purchase price payments to former shareholders under an installment note payable in three future installments. These payments are due annually with $9.6 million due January 31, 2006, $10.0 million due January 31, 2007 and $20.0 million due January 31, 2008 and are recorded net of imputed interest of $2.3 million.
IAC Search & Media has a revolving line of credit in the amount of $15.0 million. The line of credit expires on July 1, 2007. Borrowings under the line of credit bear fixed rate interest from the date of borrowing at LIBOR plus 0.4%. All borrowings and letters of credit under the credit facility are collateralized by an equal amount of marketable securities. Borrowings under the line are subject to various covenants. As of December 31, 2005, no borrowings were outstanding under the line of credit. Standby letters of credit of approximately $0.1 million, which are being maintained as security for performance under various obligations, were issued and outstanding under the credit facility.
At December 31, 2005, the Company has outstanding two interest rate swap agreements with notional amounts of $200 million and $150 million, respectively, in each case related to a portion of the 2002 Senior Notes. In July 2005 and during 2004, the Company unwound swap agreements with notional amounts of $50 million and $350 million, respectively, for nominal gains, which are being amortized over the remaining life of the 2002 Senior Notes. The changes in fair value of the interest rate swaps outstanding at December 31, 2005 and 2004 resulted in a loss of $8.8 million and a gain of $0.4 million, respectively, which have been recognized as an adjustment of the carrying value of the corresponding debt as applicable. See Note 17 for further discussion.
Aggregate contractual maturities of long-term obligations are as follows (in thousands):
Years Ending December 31, | | ||
---|---|---|---|
2006 | $ | 375,276 | |
2007 | 11,456 | ||
2008 | 119,567 | ||
2009 | 231 | ||
2010 | 216 | ||
Thereafter | 827,940 | ||
$ | 1,334,686 | ||
At December 31, 2005 and 2004, the Company leased certain equipment under capital leases with interest rates ranging from approximately 1.63% to 12.67%. Included in other long-term obligations above as of December 31, 2005 are capital lease obligations totaling approximately $5.3 million, net of interest of $0.3 million. Included in other long-term obligations above as of December 31, 2004 are capital lease obligations totaling approximately $5.8 million, net of interest of $0.2 million. Total fixed assets under capital leases at December 31, 2005 and 2004 approximate $12.2 million and $9.8 million, respectively, with accumulated depreciation of approximately $7.5 million and $4.4 million, respectively.
NOTE 17—DERIVATIVE INSTRUMENTS
Derivatives Related to Long-term Debt
IAC's objective in managing its exposure to interest rate risk on its long-term debt is to maintain its mix of floating rate and fixed rate debt within a certain range. IAC's risk management policy enables IAC to manage its exposure to the impact of interest rate changes. As such, from time to time, IAC may enter into interest rate swap transactions designated as fair value hedges with financial institutions to modify the interest characteristics on a portion of its long-term debt. In 2004 and 2003, the Company entered into various interest rate swap agreements related to a portion of the 2002 Senior Notes. The interest rate swaps allow IAC to receive fixed rate amounts in exchange for making floating rate payments based on LIBOR, which effectively changes the Company's interest rate exposure on a portion of the debt from fixed to floating. As of December 31, 2005, of the $750 million total principal amount of the 2002 Senior Notes, the interest rate is fixed on $400 million and the balance of $350 million has been swapped to floating based on the spread over 6-month LIBOR. To further manage risk, the Company unwound swap agreements for nominal gains during 2005 and 2004, which are being amortized over the remaining life of the 2002 Senior Notes. The changes in fair value of the interest rate swaps at December 31, 2005 and 2004 resulted in a loss of $8.8 million and a gain of $0.4 million, respectively. The fair value of the contracts has been recorded in the accompanying consolidated balance sheets in "Other non-current assets" with a corresponding offset to the carrying
value of the related debt. The derivative gain or loss in the period of change and the offsetting hedged item loss or gain attributable to the hedged risk are recognized in the consolidated statement of operations.
Derivatives Created in the Spin-Off
As a result of the IAC Search & Media acquisition, upon conversion of the Convertible Notes, which are due June 1, 2008, holders would receive shares of IAC common stock or the cash equivalent of such shares, at the Company's option. Following the Spin-Off, IAC became obligated to deliver shares of both IAC and Expedia common stock or the cash equivalent of such shares to the holders upon conversion of the Convertible Notes. This obligation represents a derivative liability in IAC's accompanying balance sheet because it is not denominated solely in shares of IAC common stock. This derivative liability was valued at $111.4 million at December 31, 2005. Under the separation agreement related to the Spin-Off, Expedia contractually assumed the obligation to deliver shares of Expedia common stock or the cash equivalent of such shares to IAC upon conversion by the holders of the Convertible Notes. This represents a derivative asset in IAC's accompanying consolidated balance sheet valued at $104.8 million at December 31, 2005. Both of these derivatives are maintained at fair value each reporting period with any changes in fair value reflected in the consolidated statement of operations. The net change in the fair value of these derivatives for the year ended December 31, 2005 resulted in a net gain of $4.4 million, which has been recognized in other income (expense) in the accompanying consolidated statement of operations. The derivative asset related to the Convertible Notes is recorded in "Other non-current assets" and the derivative liability related to the Convertible Notes is recorded in "Other long-term liabilities" in the accompanying consolidated balance sheet.
In connection with prior transactions, including among others, the acquisition of Ticketmaster, Hotels.com, and Hotwire.com, IAC assumed a number of warrants that were adjusted to become exercisable for shares of IAC common stock. Following the Spin-Off, IAC remained the contractually obligated party with respect to these warrants and each warrant represents the right to receive upon exercise by the holders thereof that number of shares of IAC common stock and Expedia common stock that the warrant holder would have received had the holder exercised the warrant immediately prior to the Spin-Off. Under the separation agreement, Expedia contractually assumed the obligation to deliver shares of Expedia common stock to IAC upon exercise of these warrants. The last of these warrants expires on May 19, 2010. This obligation of IAC to deliver shares of both IAC and Expedia common stock upon exercise of these warrants created a liability in the form of a derivative in IAC's accompanying consolidated balance sheet that is maintained at fair value each reporting period with any changes in fair value reflected in the consolidated statement of operations. The derivative liability was valued at $0.7 million at December 31, 2005. The contractual obligation of Expedia to deliver shares of Expedia common stock to IAC upon exercise by the warrant holders also created a derivative asset in IAC's accompanying consolidated balance sheet valued at $0.1 million at December 31, 2005. The net change in the fair value of these derivatives for the year ended December 31, 2005 resulted in a net gain of $0.2 million, which has been recognized in other income (expense) in the accompanying consolidated statement of operations. The derivative asset related to the warrants is recorded in "Other non-current assets" and the derivative liability related to the warrants is recorded in "Other long-term liabilities" in the accompanying consolidated balance sheet.
Derivatives Related to Loans Held for Sale
The Company is exposed to additional risks in connection with the LendingTree Loans mortgage banking operations. LendingTree Loans is exposed to interest rate risk for loans it originates until those loans are sold in the secondary market ("loans held for sale"). The fair value of loans held for sale is subject to change primarily due to changes in market interest rates. LendingTree Loans hedges the changes in fair value of certain loans held for sale primarily by using mortgage forward delivery contracts. These hedging relationships are designated as fair value hedges. The fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality. For loans held for sale that are hedged with forward delivery contracts, the carrying value of the loans held for sale and the derivative instruments are adjusted for the change in fair value during the time the hedge was deemed to be highly effective. The effective portion of the derivative gain or loss as well as the offsetting hedged item loss or gain attributable to the hedged risk are recognized in the statement of operations as a component of revenue. The net of these adjustments represent the ineffective portion of highly effective hedges which is also recorded as a component of revenue. If it is determined that the hedging relationship is not highly effective, hedge accounting is discontinued. When hedge accounting is discontinued, the affected loans held for sale are no longer adjusted for changes in fair value. However, the changes in fair value of the derivative instruments are recognized in current earnings as a component of revenue. The fair value of the derivative instruments are recorded in "Other current assets" and/or "Other accrued liabilities" in the accompanying consolidated balance sheets. In 2005, the Company recognized a $1.4 million loss related to hedge ineffectiveness and a $0.1 million gain related to changes in the fair value of derivative instruments when hedge accounting is discontinued. In 2004, the Company recognized a $0.5 million gain related to hedge ineffectiveness.
LendingTree Loans enters into commitments with consumers to originate loans at a locked in interest rate (interest rate lock commitments—"IRLCs"). IAC reports IRLCs as derivative instruments in accordance with SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," and SFAS No. 133 and determines the fair value of IRLCs using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or fallout factor. Similar to loans held for sale, the fair value of IRLCs is subject to change primarily due to changes in interest rates and fallout factors. Under LendingTree Loans' risk management policy, LendingTree Loans hedges the changes in fair value of IRLCs primarily by entering into forward delivery contracts which can reduce the volatility of earnings. Both the IRLCs and the related hedging instrument do not qualify for hedge accounting and are recorded at fair value with changes in fair value being recorded in current earnings as a component of revenue in the accompanying consolidated statement of operations. The change in the fair value of these derivative instruments resulted in a loss of $0.4 million and $0.1 million during 2005 and 2004, respectively, which has been reflected in the accompanying consolidated statement of operations. The IRLCs are recorded as a component of "Other current assets" and/or "Other accrued liabilities" in the accompanying consolidated balance sheets. At December 31, 2005, there was $726.3 million of IRLC's notional value outstanding.
Derivatives Related to Foreign Exchange
IAC's objective in managing its foreign exchange risk is to reduce its potential exposure to the changes that exchange rates might have on its earnings, cash flows and financial position. IAC's primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in
a functional currency other than the U.S. dollar, primarily the Euro, British Pound Sterling and Canadian Dollar. The Company is also exposed to foreign currency risk related to its non-U.S. dollar denominated assets and liabilities. As such, from time to time, IAC may enter into forward contracts or swap transactions designated as cash flow hedges with financial institutions to protect against the volatility of future cash flows caused by changes in currency exchange rates in order to reduce, but not always entirely eliminate, the impact of currency exchange rate movements of these local currencies.
During the second quarter of 2003, one of the Company's foreign subsidiaries entered into a five-year foreign exchange forward contract with a notional amount of $38.6 million, which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiary's functional currency. This derivative contract has been designated as a cash flow hedge for accounting purposes and foreign exchange re-measurement gains and losses related to the contract and liability are recognized each period in the statement of operations and are offsetting. In addition, the remaining effective portion of the derivative gain or loss is recorded in other comprehensive income until the liability is extinguished. The change in fair value of this foreign exchange forward contract at December 31, 2005 and 2004 resulted in an unrealized loss of $5.1 million and $10.8 million, respectively. There was no ineffectiveness recognized in any period related to this derivative contract as the critical terms of the derivative and hedged liability are identical.
NOTE 11: 18—COMMITMENTS
The Company leases satellite transponders, computers, warehouse and office space, equipment and services used in connection with its operations under various operating leases, many of which contain escalation clauses.
Future minimum payments under operating lease agreements are as follows (in thousands):
Years Ending December 31, | | |||
---|---|---|---|---|
2006 | $ | 98,423 | ||
2007 | 84,993 | |||
2008 | 72,440 | |||
2009 | 64,205 | |||
2010 | 53,830 | |||
Thereafter | 287,809 | |||
Total | $ | 661,700 | ||
Expenses charged to operations under these agreements were $116.0 million, $91.8 million and $91.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, such as under letters of credit extended or under guarantees of debt, as follows (in thousands):
| Amount of Commitment Expiration Per Period | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Amounts Committed | Less Than 1 year | 1–3 years | 3–5 years | |||||||||
Letters of Credit | $ | 52,328 | $ | 52,190 | $ | 53 | $ | 85 | |||||
Purchase Obligations | 45,028 | 34,189 | 10,798 | 41 | |||||||||
Guarantees | 13,541 | 12,372 | 829 | 340 | |||||||||
Total Commercial Commitments | $ | 110,897 | $ | 98,751 | $ | 11,680 | $ | 466 | |||||
The letters of credit ("LOC's") primarily consist of trade LOC's, which primarily relate to the Company's Retailing segment and are used for inventory purchases. Trade LOC's are guarantees of payment based upon the delivery of goods. Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. The purchase obligations primarily relate to telecommunications contracts with certain vendors related to data transmission lines and telephones, as well as fixed monthly fees for advertising.
NOTE 19—CONTINGENCIES
In the ordinary course of business, the Company is a party to various lawsuits. In the opinion of management, the ultimate outcome of these lawsuits should not have a material impact on the liquidity, results of operations, or financial condition of the Company. The Company also evaluates other potential contingent matters, including value-added tax, transient occupancy or accommodation tax and similar matters.Further, IAC does not believe that the amount of any additional liability that could be reasonably possible with respect to thesesuch matters wouldwill have a material adverse effect on its financial results. The Company also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 6 for discussion related to income tax contingencies.
NOTE 12: BENEFIT PLANS20—FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies when available. The Company's financial instruments include letters of credit and guarantees. These commitments are in place to facilitate the commercial operations of certain IAC has a retirement savings plansubsidiaries.
| December 31, 2005 | December 31, 2004 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| (In thousands) | ||||||||||||
Cash and cash equivalents | $ | 987,080 | $ | 987,080 | $ | 999,698 | $ | 999,698 | |||||
Restricted cash | 93,561 | 93,561 | 41,377 | 41,377 | |||||||||
Accounts and notes receivable | 487,968 | 487,968 | 353,579 | 353,579 | |||||||||
Loans available for sale | 372,512 | 381,810 | 206,256 | 206,256 | |||||||||
VUE preferred equity interests | — | — | 2,042,706 | 2,042,706 | |||||||||
Long-term obligations and short-term borrowings | (1,334,686 | ) | (1,356,714 | ) | (1,359,668 | ) | (1,447,839 | ) | |||||
Derivative contracts | (13,808 | ) | (13,808 | ) | (10,387 | ) | (10,387 | ) | |||||
Derivative assets created in the Spin-Off | 104,900 | 104,900 | — | — | |||||||||
Derivative liabilities created in the Spin-Off | (112,100 | ) | (112,100 | ) | — | — | |||||||
Letters of credit | N/A | 52,328 | N/A | 33,341 | |||||||||
Guarantees | N/A | 13,541 | N/A | 6,290 |
The carrying amounts of cash and cash equivalents and restricted cash reflected in the United States, that qualifies under Section 401(k)accompanying consolidated balance sheets approximate fair value as they are maintained with various high-quality financial institutions or in short-term duration high-quality debt securities. The accounts and notes receivable are short-term in nature and are generally settled shortly after the sale. The fair value of loans held for sale was estimated using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or fallout factor. The carrying value of the Internal Revenue Code. Participating employees may contribute upVUE preferred equity interests approximated its fair value based upon appropriate valuation methodologies, including reference to 16%the underlying collateral. In 2005, the Company sold its VUE preferred equity interests. The fair values of the 1998 Senior Notes, the 2002 Senior Notes and the Liberty Bonds, as well as the derivative contracts were estimated using quoted market prices. On November 15, 2005, the Company's obligation under the 1998 Senior Notes matured and was paid. The carrying amounts for the remaining long-term obligations and short-term borrowings and all other financial instruments approximate their pretax salary, but not more than statutory limits. IAC contributes fifty cents for each dollar a participant contributes in this plan, with a maximum contributionfair value. The carrying amounts of 3% of a participant's earnings. Matching contributions for all plans were $12.5 million, $7.5 million,the derivative assets and $4.5 million in fiscal 2004, 2003, and 2002. Matching contributions are invested proportionate to each participant's voluntary contributionsderivative liabilities created in the investment options provided underSpin-Off are maintained at fair value, which is based upon appropriate valuation methodologies. See Note 11 for the plan. Investment options indiscussion of the plan include IAC common stock, but neither participant nor our matching contributions are required to be invested in IAC common stock.fair value of marketable securities.
NOTE 13: STOCK COMPENSATION PLANS21—GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
On July 19, 2005, IAC currently has a total of sixteen equity based compensation plans under which options and other equity awards are outstanding, including plans assumed in acquisitions. During the current year, one of these plans was assumed in connection withcompleted the acquisition of ServiceMagic. The provisions of these plans are similar in that each plan generally has a term of ten years with awards under those plans vesting generally over a four-year period for stock options and over a five-year period for RSUs. ElevenIAC Search & Media. As part of the sixteen plans, including those assumed, have no additional options or other equity awards availabletransaction, IAC irrevocably and unconditionally guaranteed the Convertible Notes. IAC Search & Media is wholly owned by IAC.
The following tables present condensed consolidating financial information as of December 31, 2005 and 2004 and for future grant. Although fivethe years ended December 31, 2005, 2004, and 2003 for: the guarantor, IAC, on a stand-alone basis; IAC Search & Media (since its acquisition on July 19, 2005), on a stand-alone basis; the combined non-guarantor subsidiaries of IAC; and, IAC on a consolidated basis.
As of and for the remaining plans still have additional options or other equity awards availableyear ended December 31, 2005:
| IAC | IAC Search & Media | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Balance sheet as of December 31, 2005: | ||||||||||||||||
Current assets | $ | 1,107,587 | $ | 127,936 | $ | 2,751,967 | $ | — | $ | 3,987,490 | ||||||
Current assets of discontinued operations | — | — | 6,038 | — | 6,038 | |||||||||||
Property and equipment, net | — | 48,010 | 519,398 | — | 567,408 | |||||||||||
Goodwill and other intangible assets, net | — | 1,873,690 | 7,036,198 | — | 8,909,888 | |||||||||||
Investment in subsidiaries | 11,887,813 | 1,204,757 | 9,844,764 | (22,937,334 | ) | — | ||||||||||
Other assets | 283,528 | 30,593 | 132,350 | — | 446,471 | |||||||||||
Non-current assets of discontinued operations | — | — | 470 | — | 470 | |||||||||||
Total assets | $ | 13,278,928 | $ | 3,284,986 | $ | 20,291,185 | $ | (22,937,334 | ) | $ | 13,917,765 | |||||
Current liabilities | $ | 24,208 | $ | 39,379 | $ | 2,149,465 | $ | 7 | $ | 2,213,059 | ||||||
Current liabilities of discontinued operations | — | — | 19,938 | — | 19,938 | |||||||||||
Long-term debt, less current portion | 741,243 | 100,802 | 117,365 | — | 959,410 | |||||||||||
Other liabilities and minority interest | 719,584 | 248,378 | 525,640 | — | 1,493,602 | |||||||||||
Intercompany liabilities | 2,563,065 | (60,410 | ) | (2,502,655 | ) | — | — | |||||||||
Non-current liabilities of discontinued operations | — | — | 928 | — | 928 | |||||||||||
Interdivisional equity | — | 2,959,415 | 17,091,171 | (20,050,586 | ) | — | ||||||||||
Shareholders' equity | 9,230,828 | (2,578 | ) | 2,889,333 | (2,886,755 | ) | 9,230,828 | |||||||||
Total liabilities and shareholders' equity | $ | 13,278,928 | $ | 3,284,986 | $ | 20,291,185 | $ | (22,937,334 | ) | $ | 13,917,765 | |||||
| IAC | IAC Search & Media | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Statement of operations for the year ended December 31, 2005: | ||||||||||||||||
Net revenue | $ | — | $ | 165,088 | $ | 5,588,583 | $ | — | $ | 5,753,671 | ||||||
Operating expenses | — | (163,206 | ) | (5,246,236 | ) | — | (5,409,442 | ) | ||||||||
Interest (expense) income, net | (325,685 | ) | (888 | ) | 390,003 | — | 63,430 | |||||||||
Other income (expense), net | 841,373 | (1,706 | ) | 740,475 | (996,116 | ) | 584,026 | |||||||||
Income tax benefit (expense) | 83,083 | (864 | ) | (473,288 | ) | — | (391,069 | ) | ||||||||
Minority interest in income of consolidated subsidiaries | (384 | ) | — | (1,845 | ) | — | (2,229 | ) | ||||||||
Earnings (loss) from continuing operations | 598,387 | (1,576 | ) | 997,692 | (996,116 | ) | 598,387 | |||||||||
Discontinued operations, net of tax | 277,763 | — | 277,592 | (277,592 | ) | 277,763 | ||||||||||
Earnings (loss) before preferred dividends | 876,150 | (1,576 | ) | 1,275,284 | (1,273,708 | ) | 876,150 | |||||||||
Preferred dividends | (7,938 | ) | — | — | — | (7,938 | ) | |||||||||
Net earnings (loss) available to common shareholders | $ | 868,212 | $ | (1,576 | ) | $ | 1,275,284 | $ | (1,273,708 | ) | $ | 868,212 | ||||
Cash flows for the year ended December 31, 2005: | ||||||||||||||||
Cash flows (used in) provided by operating activities attributable to continuing operations | $ | (1,117,322 | ) | $ | 38,864 | $ | 1,006,162 | $ | — | $ | (72,296 | ) | ||||
Cash flows (used in) provided by investing activities attributable to continuing operations | (52,012 | ) | 60,544 | 2,076,940 | — | 2,085,472 | ||||||||||
Cash flows provided by (used in) financing activities attributable to continuing operations | 1,169,334 | (25,502 | ) | (3,849,162 | ) | — | (2,705,330 | ) | ||||||||
Net cash provided by discontinued operations | — | — | 706,684 | — | 706,684 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | (929 | ) | (26,219 | ) | — | (27,148 | ) | ||||||||
Cash and cash equivalents at the beginning of the period | — | — | 999,698 | — | 999,698 | |||||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | 72,977 | $ | 914,103 | $ | — | $ | 987,080 | ||||||
As of and for future grant,the year ended December 31, 2004:
| IAC | IAC Search & Media | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Balance sheet as of December 31, 2004: | ||||||||||||||||
Current assets | $ | 99,991 | $ | — | $ | 4,698,829 | $ | — | $ | 4,798,820 | ||||||
Current assets of discontinued operations | — | — | 316,947 | — | 316,947 | |||||||||||
Property and equipment, net | — | — | 427,257 | — | 427,257 | |||||||||||
Goodwill and other intangible assets, net | — | — | 6,416,127 | — | 6,416,127 | |||||||||||
Investment in subsidiaries | 18,450,945 | — | 2,471,406 | (20,922,351 | ) | — | ||||||||||
Other assets | 160,111 | — | 2,910,135 | — | 3,070,246 | |||||||||||
Non-current assets of discontinued operations | — | — | 7,369,468 | — | 7,369,468 | |||||||||||
Total assets | $ | 18,711,047 | $ | — | $ | 24,610,169 | $ | (20,922,351 | ) | $ | 22,398,865 | |||||
Current liabilities | $ | 1,833 | $ | — | $ | 1,875,524 | $ | (2 | ) | $ | 1,877,355 | |||||
Current liabilities of discontinued operations | — | — | 1,015,083 | — | 1,015,083 | |||||||||||
Long-term debt, less current portion | 750,407 | — | 46,308 | — | 796,715 | |||||||||||
Other liabilities and minority interest | 693,553 | — | 1,558,804 | — | 2,252,357 | |||||||||||
Intercompany liabilities | 1,231,420 | — | (1,231,420 | ) | — | — | ||||||||||
Common stock exchangeable for preferred interest | 1,428,530 | — | — | — | 1,428,530 | |||||||||||
Non-current liabilities of discontinued operations | — | — | 423,521 | — | 423,521 | |||||||||||
Interdivisional equity | — | — | 15,814,140 | (15,814,140 | ) | — | ||||||||||
Shareholders' equity | 14,605,304 | — | 5,108,209 | (5,108,209 | ) | 14,605,304 | ||||||||||
Total liabilities and shareholders' equity | �� | $ | 18,711,047 | $ | — | $ | 24,610,169 | $ | (20,922,351 | ) | $ | 22,398,865 | ||||
Statement of operations for the year ended December 31, 2004: | ||||||||||||||||
Net revenue | $ | — | $ | — | $ | 4,188,279 | $ | — | $ | 4,188,279 | ||||||
Operating expenses | — | — | (4,208,523 | ) | — | (4,208,523 | ) | |||||||||
Interest (expense) income, net | (168,772 | ) | — | 270,586 | — | 101,814 | ||||||||||
Other income, net | 39,018 | — | 127,936 | (116,232 | ) | 50,722 | ||||||||||
Income tax benefit (expense) | 185,334 | — | (259,600 | ) | — | (74,266 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (713 | ) | — | (2,446 | ) | — | (3,159 | ) | ||||||||
Earnings from continuing operations | 54,867 | — | 116,232 | (116,232 | ) | 54,867 | ||||||||||
Discontinued operations, net of tax | 109,994 | — | 109,994 | (109,994 | ) | 109,994 | ||||||||||
Earnings before preferred dividends | 164,861 | — | 226,226 | (226,226 | ) | 164,861 | ||||||||||
Preferred dividends | (13,053 | ) | — | — | — | (13,053 | ) | |||||||||
Net earnings available to common shareholders | $ | 151,808 | $ | — | $ | 226,226 | $ | (226,226 | ) | $ | 151,808 | |||||
Cash flows for the year ended December 31, 2004: | ||||||||||||||||
Cash flows (used in) provided by operating activities attributable to continuing operations | $ | (200,354 | ) | $ | — | $ | 704,010 | $ | — | $ | 503,656 | |||||
Cash flows (used in) provided by investing activities attributable to continuing operations | (200,565 | ) | — | (901,472 | ) | — | (1,102,037 | ) | ||||||||
Cash flows provided by (used in) financing activities attributable to continuing operations | 397,039 | — | (660,693 | ) | — | (263,654 | ) | |||||||||
Net cash provided by discontinued operations | — | — | 1,092,726 | — | 1,092,726 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | 3,880 | — | 5,510 | — | 9,390 | |||||||||||
Cash and cash equivalents at the beginning of the period | — | — | 759,617 | — | 759,617 | |||||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | — | $ | 999,698 | $ | — | $ | 999,698 | ||||||
For the year ended December 31, 2003:
| IAC | IAC Search & Media | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Statement of operations for the year ended December 31, 2003: | ||||||||||||||||
Net revenue | $ | — | $ | — | $ | 3,823,489 | $ | — | $ | 3,823,489 | ||||||
Operating expenses | (2,917 | ) | — | (3,682,311 | ) | — | (3,685,228 | ) | ||||||||
Interest (expense) income, net | (15,167 | ) | — | 82,587 | — | 67,420 | ||||||||||
Other income (expense), net | 28,793 | — | (66,992 | ) | (175,054 | ) | (213,253 | ) | ||||||||
Income tax benefit (expense) | — | — | 24,214 | — | 24,214 | |||||||||||
Minority interest in income of consolidated subsidiaries | — | — | (5,933 | ) | — | (5,933 | ) | |||||||||
Earnings from continuing operations | 10,709 | — | 175,054 | (175,054 | ) | 10,709 | ||||||||||
Discontinued operations, net of tax | 156,687 | — | 156,687 | (156,687 | ) | 156,687 | ||||||||||
Earnings before preferred dividends | 167,396 | — | 331,741 | (331,741 | ) | 167,396 | ||||||||||
Preferred dividends | (13,055 | ) | — | — | — | (13,055 | ) | |||||||||
Net earnings available to common shareholders | $ | 154,341 | $ | — | $ | 331,741 | $ | (331,741 | ) | $ | 154,341 | |||||
Cash flows for the year ended December 31, 2003: | ||||||||||||||||
Cash flows (used in) provided by operating activities attributable to continuing operations | $ | (31,196 | ) | $ | — | $ | 652,111 | $ | — | $ | 620,915 | |||||
Cash flows (used in) provided by investing activities attributable to continuing operations | (724,799 | ) | — | (340,533 | ) | — | (1,065,332 | ) | ||||||||
Cash flows provided by (used in) financing activities attributable to continuing operations | 828,456 | — | (1,353,746 | ) | — | (525,290 | ) | |||||||||
Net cash used in discontinued operations | (72,461 | ) | — | (106,656 | ) | — | (179,117 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 14,588 | — | 14,588 | |||||||||||
Cash and cash equivalents at the beginning of the period | — | — | 1,893,853 | — | 1,893,853 | |||||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | — | $ | 759,617 | $ | — | $ | 759,617 | ||||||
NOTE 22—SUPPLEMENTAL CASH FLOW INFORMATION
Continuing Operations
Supplemental Disclosure of Non-Cash Transactions for 2005
In 2005, the Company intends on only granting future awards from threeincurred non-cash compensation expense of its currently active plans. These remaining three compensation plans cover outstanding options to acquire$137.5 million.
On July 19, 2005, IAC completed the acquisition of IAC Search & Media and issued an aggregate of 37.9 million shares of IAC common stock and RSUs and provide for the future grant of options and other equity awards.valued at approximately $1.7 billion.
Prior to the commencement of trading on August 9, 2005, IAC completed the Spin-Off. The following information isnet assets comprising the Expedia businesses, which were spun-off by IAC, amounted to $5.8 billion and are included in the consolidated statement of shareholders' equity as a reduction to retained earnings and additional paid-in capital.
In connection with respect to three plans under which future awards may be granted. UnderIAC's sale of its common and preferred interests in VUE, IAC received 28.3 million IAC shares into treasury, valued at $1.4 billion, as part of the IAC 2000 Stock and Annual Incentive Plan,consideration.
In 2005, the Company initially was authorized to grant options, restricted stock and other equity based awards for up to 20,000,000 sharesrecognized $18.3 million of IAC common stock to its employees, officers, directors and consultants. Underpaid-in-kind interest income on the 1997 Stock and Annual Incentive Plan,VUE Series A Preferred interest received in connection with the formation of VUE.
In 2005, the Company initially was authorized to grant options, restricted stock and otherrecognized pre-tax income of $47.8 million from equity based awards for up to 40,000,000 shares (adjusted to reflect IAC's 2-for-1 stock splitincome of unconsolidated affiliates, including income of $22.0 million from its common interest in 2000) of IAC common stock to its employees, officers, directors and consultants. Finally, under the Silver King Communications, Inc. 1995 Stock Incentive Plan,VUE.
In, 2005, the Company initially was authorized to grant options, restricted stock and other equity awards for up to 6,000,000 sharesrecognized non-cash revenues of common stock to its employees, officers and consultants.
Each$19.0 million as a result of the three plans mentioned above has a stated term of ten years and provides that the exercise price of options granted generally will not be less than the market price of the Company's common stock on the date of grant. The plans do not specify grant dates or vesting schedules as those determinations are delegated to the Compensation/Benefits Committee of the Board of Directors (the "Committee") and each grant agreement reflects the vesting schedule for that particular grant as determined by the Committee. Option awards to date have generally vesteddeferred revenue recorded in equal annual
installments over a four-year period from the date of grant. A summary of changes in outstanding options under the stock option plans is as follows:
| December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||||||
| Shares | Weighted Average Exercise Price($) | Shares | Weighted Average Exercise Price($) | Shares | Weighted Average Exercise Price($) | |||||||||
| (Shares in thousands) | ||||||||||||||
Outstanding at beginning of period | 97,670 | $ | 11.42 | 68,013 | $ | 11.29 | 84,426 | $ | 12.51 | ||||||
Granted or issued, principally, in connection with mergers | 835 | 9.06 | 56,421 | 12.02 | 2,599 | 28.05 | |||||||||
Exercised | (17,409 | ) | 8.46 | (22,409 | ) | 11.79 | (9,208 | ) | 15.70 | ||||||
Cancelled | (3,748 | ) | 15.51 | (4,355 | ) | 14.17 | (9,804 | ) | 21.99 | ||||||
Outstanding at end of period | 77,348 | 11.77 | 97,670 | 11.42 | 68,013 | 11.29 | |||||||||
Options exercisable | 66,172 | $ | 11.26 | 69,344 | $ | 10.12 | 58,850 | $ | 9.37 | ||||||
Available for grant | 11,634 | 17,340 | 16,609 | ||||||||||||
The weighted average fair value of options granted during the years ended December 31, 2004, 2003 and 2002 was $22.41, $18.38, and $13.35 respectively.
The following table summarizes the information about options outstanding and exercisable as of December 31, 2004.
| Options Outstanding | Options Exercisable | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Outstanding at December 31, 2004 | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | Exercisable at December 31, 2004 | Weighted Average Exercise Price | |||||||
| (Share amounts in thousands) | |||||||||||
$2.50 to $5.00 | 18,602 | 1.5 | $ | 4.27 | 16,954 | $ | 4.40 | |||||
$5.01 to $10.00 | 31,523 | 2.1 | 8.35 | 30,949 | 8.36 | |||||||
$10.01 to $15.00 | 8,406 | 5.3 | 12.39 | 4,086 | 12.50 | |||||||
$15.01 to $20.00 | 4,955 | 7.1 | 17.09 | 2,873 | 17.30 | |||||||
$20.01 to $25.00 | 7,424 | 6.0 | 22.97 | 6,052 | 23.02 | |||||||
$25.01 to $30.00 | 4,231 | 5.9 | 28.19 | 3,324 | 27.93 | |||||||
$30.01 to $35.00 | 309 | 7.4 | 32.71 | 150 | 32.88 | |||||||
$35.01 to $40.00 | 135 | 8.1 | 37.69 | 57 | 37.47 | |||||||
$40.01 to $45.00 | 1,649 | 5.1 | 41.40 | 1,613 | 41.39 | |||||||
$45.01 to $50.00 | 114 | 5.0 | 45.79 | 114 | 45.79 | |||||||
77,348 | 3.3 | $ | 11.77 | 66,172 | $ | 11.26 | ||||||
Under the IAC 2000 Stock and Annual Incentive Plan and the 1997 Stock and Annual Incentive Plan, IAC has approximately 9.3 million shares of restricted stock and RSUs outstanding at December 31, 2004, which vest principally over a period of five years, including 5.9 million units issued in 2004. The weighted average fair value of restricted stock and RSUs granted during the years ended December 31, 2004 and 2003 was $29.84 and $27.14 respectively.
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATIONconnection with various acquisitions.
Supplemental Disclosure of Non-Cash Transactions for 2004
In 2004, the Company incurred non-cash distribution and marketing expense of $18.0$1.3 million and non-cash compensation expense of $241.7$70.3 million. Amortization of non-cash distribution and marketing expense consists mainlyprincipally of the non-cash advertising secured from Universal Television as part of the transaction pursuant to which VUE Transaction. The non-cash advertising from Universal has been used primarily for the benefit of Expedia, which runs television advertising primarily on the USAwas created and Sci Fi cable channels without any cash cost. Ticketmaster and Match.com also recognized non-cash distribution and marketing expense recognized by Ticketmaster, Citysearch and Match.com related to barter arrangements, which expired in March 2004, for distribution secured from third parties. The advertising provided has been secured by IAC, which in turn has retained the non-cash advertising pursuant to an agreement with Universal as part of the VUE Transaction. Sufficient advertising has been secured to satisfy existing obligations.
In 2004, IAC recognized $39.9 million of paid-in-kind interest income on the VUE Series A Preferred interest received in connection with the VUE Transaction.formation of VUE.
In 2004, the Company recognized pre-tax income of $32.0$31.9 million on equity earnings in unconsolidated subsidiaries,affiliates, including income of $16.2 million from its 5.44% proportionate sharecommon interest in VUE.
In 2004, the Company recognized non-cash revenues of $15.3$15.2 million as a result of deferred revenue recorded in connection with its various acquisitions.
In 2004, the Company recognized $184.8 million of goodwill impairment, resulting from the write-down of the goodwill at the Teleservices segment.
Supplemental Disclosure of Non-Cash Transactions for 2003
On January 17, 2003, IAC completed its merger with Ticketmaster. IACTicketmaster and issued an aggregate of 45.522.7 million shares of IAC common stock.
On April 4, 2003, IAC completed the acquisition of uDate. IACuDate and issued an aggregate of 5.5 million shares of IAC common stock.
On June 23, 2003, IAC completed its merger with Hotels.com. IAC issued an aggregate of 44.32.7 million shares of IAC common stock.
On August 8, 2003, IAC completed its mergersmerger with ExpediaLendingTree and LendingTree. IAC issued an aggregate of 100.8 and 18.89.4 million shares respectively, of IAC common stock.
In 2003, the Company incurred non-cash distribution and marketing expense of $51.4$9.5 million and non-cash compensation expense of $128.2$32.4 million. Amortization of non-cash distribution and marketing expense consists mainlyprincipally of Hotels.com performance warrants issued to obtain distribution andthe non-cash advertising secured from Universal Television as part of the transaction pursuant to which VUE Transaction. With the termination of the Travelocity affiliate agreement in September 2003, all outstanding unvested Travelocity warrants were cancelled.Ticketmasterwas created and Match.com also recognize non-cash distribution and marketing expense recognized by Ticketmaster, Citysearch and Match.com related to barter arrangements, which expired in March 2004, for distribution secured from third parties, whereby advertising is provided by Ticketmaster and Match.com to a third party in return for distribution over the third party's network.parties.
In 2003, IAC recognized $37.3 million of paid-in-kind interest income on the VUE Series A Preferred interest received in connection with the VUE Transaction.formation of VUE.
In 2003, the Company recognized pre-tax losses of $220.8 million on equity losses in unconsolidated subsidiaries,affiliates, resulting almost entirely from its 5.44% proportionate share of a $4.5 billion impairment charge for goodwill and intangible assets and other long-lived assets recognized by VUE.
In 2003, the Company recognized non-cash revenues of $27.7$27.6 million as a result of deferred revenue recorded in connection with its various acquisitions.
Supplemental Disclosure of Cash Flow Information:
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||||
| (In thousands) | ||||||||||
Cash paid during the period for: | |||||||||||
Interest | $ | 72,441 | $ | 64,714 | $ | 57,065 | |||||
Income tax payments | 957,765 | 112,231 | 14,857 | ||||||||
Income tax refunds | (73,841 | ) | (7,404 | ) | (3,413 | ) |
Discontinued Operations
Supplemental Disclosure of Non-Cash Transactions for 2005
For the period ended August 8, 2005, Expedia incurred non-cash distribution and marketing expense of $5.8 million and non-cash compensation expense of $58.0 million. Amortization of non-cash distribution and marketing expense consists mainly of non-cash advertising secured from Universal Television as part of a transaction with VUE in 2002 and was primarily used for the benefit of Expedia, which ran television advertising primarily on the USA and Sci Fi cable channels without any cash cost.
For the period ended August 8, 2005, Expedia recognized pre-tax loss of $0.6 million from equity losses of unconsolidated affiliates.
Supplemental Disclosure of Non-Cash Transactions for 2004
In 2004, Expedia incurred non-cash distribution and marketing expense of $16.7 million and non-cash compensation expense of $171.4 million. Amortization of non-cash distribution and marketing expense consists mainly of non-cash advertising secured from Universal Television as part of the VUE transaction in 2002, as noted above.
In 2004, Expedia recognized pre-tax income of $0.2 million from equity income of unconsolidated affiliates.
In 2004, Expedia recognized non-cash revenues of $0.1 million as a result of deferred revenue recorded in connection with its various acquisitions.
Supplemental Disclosure of Non-Cash Transactions for 20022003
On February 4, 2002,June 23, 2003, IAC completed the acquisition of a controlling interest in Expedia.its merger with Hotels.com. IAC issued an aggregate of 20.6 million shares of IAC common stock, 13.1 million shares of $50 face value 1.99% cumulative convertible preferred stock of IAC and warrants to acquire 14.6 million shares of IAC common stock at an exercise price of $35.10.
On April 12, 2002, Ticketmaster acquired all of the equity interests of Soulmates Technology Pty Ltd ("Soulmates"), a global online personals company that provides dating and matchmaking services in nearly 30 countries worldwide. In connection with the acquisition, Ticketmaster issued 817,790 shares of Ticketmaster Class B common stock valued at approximately $23.6 million.
On May 1, 2002, IAC acquired all of the equity interests of TV Travel Shop. In connection with the acquisition, IAC issued 1.6 million shares of IAC common stock valued at approximately $48.1 million.
On May 31, 2002, the Company redeemed in full the Savoy Debentures. The Company recorded a loss of $2.0 million, of which $1.4 million was related to the write-off of deferred finance costs.
In connection with the VUE Transaction on May 7, 2002, shares of USANi LLC held by Liberty were exchanged for 7.122.2 million shares of IAC common stock.
On June 27, 2002, the Company and LibertyAugust 8, 2003, IAC completed the exchange of Liberty's Home Shopping Network ("Holdco") shares,its merger with the Company issuingExpedia.com. IAC issued an aggregate of 31.650.4 million shares of IAC common stock and 1.6 million shares of IAC Class B common stock.
In 2002, the Company incurred non-cash restructuring charges of $46.6 million related to various initiatives across business segments.
In 2002, the Company2003, Expedia incurred non-cash distribution and marketing expense of $37.3$42.0 million and non-cash compensation expense of $15.6$95.8 million. Amortization of non-cash distribution and marketing expense consists mainly of Hotels.com performance warrants issued to obtain distribution and non-cash advertising secured from Universal Television as part of a transaction with VUE in 2002. With the termination of the Travelocity affiliate agreement in September 2003, all outstanding unvested Travelocity warrants were cancelled.
In 2002, IAC recognized $23.0 million of paid-in-kind interest income on the VUE Series A Preferred received in connection with the VUE Transaction.
In 2002, the Company2003, Expedia recognized non-cash net revenues of $31.9$0.1 million as a result of deferred revenue recorded in connection with its various acquisitions.
In 2002 the Company recognized pre-tax losses of $123.6 million on equity losses in unconsolidated subsidiaries, resulting primarily from HOT Networks, which operates electronic retailing operations in
Europe. In 2002, the Company also recognized $22.2 million related to goodwill impairment, which was related to a contingent purchase price adjustment.
Supplemental Disclosure of Cash Flow Information:
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| (In thousands) | ||||||||||
Cash paid during the period for: | |||||||||||
Interest | $ | 77,156 | $ | 59,344 | $ | 37,962 | |||||
Income tax payments | 119,486 | 105,510 | 26,428 | ||||||||
Income tax refund | (7,405 | ) | (3,430 | ) | (967 | ) |
NOTE 15: 23—RELATED PARTY TRANSACTIONS
Continuing Operations
The Company has various agreements with Microsoft Corporation ("Microsoft"), including a services agreement for usewhich was the beneficial owner of data center services by Expediamore than 5% of IAC's outstanding common stock and Series A preferred stock during 2003, 2004 and 2005. These agreements include partner agreements, licensing agreements and support agreements with various subsidiaries, including Match.com and LendingTree. Total fees paid with respectrelated to these agreements in 2005, 2004 2003 and 20022003 were approximately $54.3$38.2 million, $42.0$41.7 million and $24.0$21.5 million, respectively. Amounts payable related to these various agreements at December 31, 2005 and 2004 and 2003 were $7.5$2.8 million and $7.6$4.1 million, respectively.respectively, and are included in "Accounts payable, trade" and "Other accrued liabilities" in the accompanying consolidated balance sheets.
In connection with the Spin-Off, the Company and Expedia entered into various agreements, including, among others, a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement. In addition, the Company and Expedia currently, and for the foreseeable future will continue to, work together pursuant to a variety of commercial relationships. Accordingly, in connection with the Spin-Off, the Company and Expedia entered into various commercial agreements, which generally include distribution agreements and services agreements. Total amounts received by the Company from Expedia related to these various agreements from August 9, 2005 to December 31, 2005 were approximately $9.0 million. Amounts receivable by the Company from Expedia related to these various agreements at December 31, 2005 were $5.3 million and are included in "Accounts and notes receivable, net" in the accompanying consolidated balance sheet. Total payments made by the Company to Expedia related to these various agreements from August 9, 2005 to December 31, 2005 were approximately $0.8 million. Amounts payable to Expedia by the Company related to these various agreements at December 31, 2005 were $0.7 million and are included in "Accounts payable, trade" and "Other accrued liabilities" in the accompanying consolidated balance sheet. The Company and Expedia are related parties since they are under common control.
During the period from January 1, 2005 through June 6, 2005 and during the year ended December 31, 2004, the Company paid $6.9 million and $5.7 million, respectively to the National Broadcasting Company related to television advertising. As a result of the sale of the Company's common and preferred interests in VUE on June 7, 2005, the National Broadcasting Company is no longer a related party at December 31, 2005. See Note 10 for further discussion of the sale of the Company's VUE interests.
During 2004, the Company launched a co-branded credit card program with a subsidiary of GE. Pursuant to the arrangement, the Company received approximately $1.9 million and $5.4 million during the period from January 1, 2005 through June 6, 2005 and the year ended December 31, 2004, respectively, in payments from the GE subsidiary, primarily in the form of revenue share payments in respect of purchases made pursuant to the co-branded card and sales and marketing support for the program. As a result of the sale of the Company's common and preferred interests in VUE on June 7, 2005, GE and its subsidiaries are no longer related parties at December 31, 2005.
At December 31, 2005, and 2004, and 2003, accounts"Accounts and notes receivable, net,net" and deferred charges and other"Other non-current assets" included amounts receivable from VUE of $45.1$38.3 million and $55.3$15.0 million and $100.0 million and $30.1 million, respectively, related to cross promotional advertising secured in connection with the transaction pursuant to which VUE was formed in 2002. As a result of the sale of the Company's common and preferred interests in VUE Transaction.on June 7, 2005, VUE is no longer a related party at December 31, 2005. See Note 10 for further discussion of the sale of the Company's VUE interests in 2005 and the consideration received for the sale.
In 2004, the Company received distributions totaling $17.6 million from VUE.
During 2005, 2004 and 2003, the Company received $4.6$32.7 million, $64.8 million and $2.0 million, respectively, which represents tax distributions relating to the Company's 5.44% investment in VUE. Additional VUE tax distributions on account of income related to IAC's preferred interests in VUE are the subject of a dispute between the Company and Vivendi Universal. Additionally, in 2004 the Company received a $13.0 million distribution from VUE that represented a partial return on investment.
During 2004, 2003 and 2002, the Company received $64.8 million, $63.9 million and $41.1 million, respectively, which represents interest income on the VUE Series B preferred equity interests.
During 2005, 2004 2003 and 2002,2003, the Company recognized $18.3 million, $39.9 million $37.3 million and $23.0$37.3 million, respectively, which represents paid-in-kind interest income on the VUE Series A preferred equity interests.
During 2004, the Company paid $4.6 million to National Broadcasting Company related to television advertising.
The Company has a secured, non-recourse note receivable of approximately $5.0 million from its Chairman and Chief Executive Officer. See Note 10.13 for further discussion.
In October 2000, a subsidiary of IAC and Nineteen Forty CC Inc. ("Nineteen Forty"), a company owned by Mr. Diller, the Chairman and Chief Executive Officer of IAC, acquired an aircraft for use by
Mr. Diller and other directors and executive officers of IAC in connection with IAC's business. the Company. In connection with this transaction, Nineteen Forty, which originally was under contract to purchase the aircraft, assigned to IAC its rights under the purchase agreement and, in exchange, IAC granted Nineteen Forty an option to acquire all or any portion ofIAC's interest in the aircraft ultimately acquired by IAC for its depreciated value on IAC's books. The aircraft is currently owned 77.2% by the IAC subsidiary and 22.8% by Nineteen Forty. IAC's ownership interest remains subject to Nineteen Forty's option. IAC pays all operating and maintenance expenses relating to the aircraft. IAC has entered into an agreement with Nineteen Forty pursuant to which IAC leases Nineteen Forty's 22.8% interest in the aircraft for lease payments of approximately $53,000$53 thousand per month.month and IAC pays all operating and maintenance expenses related to the aircraft. The foregoing payment rate wasterms were based on market lease rates for a similar aircraft.aircraft leases.
On December 20,In 2005 and 2004, IAC invested $500,000$0.5 million and $0.5 million, respectively, in convertible preferred stock of an online start-up venture controlled by IAC's Vice Chairman, Victor Kaufman. IAC has committed to invest a total of $2 million, which would give IAC preferred stock convertible into 20% of the outstanding common stock of the venture. IAC has various approval rights over significant
transactions, the right to appoint directors to the board of directors proportionate to its holdings, and various forms of anti-dilution protection for its investment. It also has the option to purchase additional preferred stock for $20 million such that IAC would hold a 50% ownership percentage in the venture, the right to purchase Mr. Kaufman's shares prior to March 31, 2012 at fair market value, and the right to put its investment to the venture at the time of the venture's first significant financing for the value of its stake implied by the terms of such financing, discounted by 30% to account for the illiquidity of the stock. Prior to making its investment, IAC received an analysis from an independent financial appraiser which concluded that the terms of IAC's investment, including the financial terms, were reasonable and consistent with, and in certain instances more favorable to IAC, than those contained in similar first-round financing transactions between unrelated parties. The terms of the transaction were negotiated between Mr. Kaufman and various members of IAC's senior management and approved by IAC's Audit Committee.
Under the USANi LLC Operating Agreement, USANi LLC was 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 final distribution was made in 2002 in the amount of $154.1 million relating to 2001 and through May 2002, as IAC now owns 100% of USANi LLC.
Discontinued Operations
AsThe Company has various agreements with Microsoft, including a services agreement for use of data center services by Expedia.com. Total fees paid with respect to these agreements from January 1, 2005 through August 8, 2005, the day prior to the Spin-Off and for the years ended December 31, 2004 and 2003 were approximately $13.1 million, $12.6 million and $20.5 million, respectively. Amounts payable related to these various agreements at December 31, 2004 was $3.4 million.
From January 1, 2005 through June 6, 2005, the day prior to the sale of the Company's VUE interests, and for the year ended December 31, 2004, Expedia paid $8.6 million and $4.6 million, respectively, to the National Broadcasting Company related to television advertising.
NOTE 24—RESTRUCTURING CHARGES
Restructuring related expenses, which are included in general and administrative expense in the accompanying consolidated statements of operations, were approximately $0.7 million, $1.5 million and $0.1 million in 2005, 2004 and 2003, respectively. Costs that relate to ongoing operations are not part of the Company's acquisitionrestructuring related expenses.
The 2005 amount is principally comprised of USA Cable and Studios USA from Universal in February 1998 (the "Universal Transaction"), the Company entered into several agreements with Universal which were terminatedseverance costs incurred in connection with the VUE Transactionshut down of certain HSN facilities as HSN migrated certain operations to its new fulfillment center in Tennessee. Also included are severance and are described below.
Universal provided certain support services to the Company under a Transition Services Agreement entered intoother costs incurred in connection with the Universal Transaction. For these services, which included useshut down of pre-production, productionIAC Search & Media's U.K. facility. These charges were partially offset by the settlement of an uncollectible receivable that had been previously written off related to the restructuring of HSN's UK offices.
The 2004 amount is principally comprised of asset impairments and post-productionseverance costs related to the shut down of certain HSN facilities information technology services, physical distribution, contract administration, legal servicesin Tennessee as noted above and office space, Universal chargedseverance and other costs associated with the Company $3.0elimination of certain non-core business lines at the Personals segment. These charges were partially offset by the reversal of reserves related primarily to the favorable resolution of a contractual arrangement with a supplier, as well as the settlement of an uncollectible receivable that had been previously written off related to the restructuring of HSN's U.K. offices.
The 2003 amount is principally comprised of $3.1 million forrelated to the period January 1write-down of a receivable from the 2002 restructuring of HSN's U.K. offices, $1.2 million related to May 7, 2002 of which $2.6 million was capitalized to production costs.
Universal and the Company entered into an International Television Distribution Agreement under which the Company paid to Universal a distribution fee of 10% on all programming owned orfacility closure costs at
controlleduDate's Derby, U.K. facility as the back-office operations of uDate were combined with Match International, and $1.4 million for PRC related to employee terminations due principally to the decline in the teleservicing market. Such restructuring charges were offset by the Company distributed outsidereversals of contingent costs for terminated employees, which were no longer probable of occurrence.
In 2005, 2004 and 2003, the charges associated with the restructurings were as follows (in thousands):
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||||
Continuing lease obligations | $ | 414 | $ | 83 | $ | 618 | ||||
Asset impairments | — | 3,390 | 3,061 | |||||||
Employee termination costs | 827 | 1,989 | (2,635 | ) | ||||||
Other | (564 | ) | (3,920 | ) | (1,023 | ) | ||||
$ | 677 | $ | 1,542 | $ | 21 | |||||
Continuing lease obligations primarily relate to vacated office space of IAC Search & Media's U.K. facility, uDate's Derby, UK facility as well as excess call center, warehouse and office space of PRC and HSN. Asset impairments relate primarily to the shut down of HSN's Salem, VA facility and leasehold improvements that were abandoned. Employee termination costs relate primarily to severance and other costs related to the shutdown of both the HSN facilities and the IAC Search & Media U.K. facility, the elimination of certain non-core businesses at the Personals operating segment as well as severance costs at PRC. Other in 2005 primarily relates to relocation costs at the Personals operating segment, offset by the settlement of the United States. Foruncollectible receivable related to HSN's U.K. offices.
As of December 31, 2005 and 2004, the period January 1remaining accrual balance related to May 7, 2002, the fee totaled $5.8restructuring charges was $1.9 million
The Company and Universal entered into a Domestic Television Distribution Agreement under which$1.8 million, respectively. During 2005, the Company distributedmade payments of approximately $1.5 million related principally to lease obligations for abandoned facilities and employee termination costs. In addition, the restructure accrual at December 31, 2005 increased by $0.9 million related to liabilities assumed in the IAC Search & Media acquisition. The 2005 balance relates primarily to ongoing obligations for facility leases and employee termination agreements, and are expected to be paid out according to the terms of these arrangements.
NOTE 25—BENEFIT PLANS
IAC has a retirement savings plan in the United States certain of Universal's television programming. For the period January 1 to May 7, 2002, Universal paid the Company $0.5 million.
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 earned a distribution fee and remitted the balance of revenues to a Universal entity. For the period January 1 to May 7, 2002, Films earned distribution fees of approximately $0.4 million from the distribution of these films. Films was responsible for collecting the full amountthat qualifies under Section 401(k) of the sale and remitting the net amount after its feeInternal Revenue Code. Participating employees may contribute up to Universal.
In addition, Films acquired home video distribution rights to16% of their pretax earnings, but not more than statutory limits. IAC contributes fifty cents for each dollar a number of "specialty video" properties. Universal holds a profit participationparticipant contributes in certain of these titles. No amounts were earned by Universal under this agreement to date.
Films was a party to a Videogram Fulfillment Agreementplan, with a Universal entity pursuantmaximum contribution of 3% of a participant's earnings. Matching contributions for all plans were $12.2 million, $8.4 million, and $5.9 million in fiscal 2005, 2004, and 2003, respectively. The increase in matching contributions in 2005 and 2004 was primarily related to which such entityacquisitions of various operating subsidiaries. Matching contributions are invested in the same manner as each participant's voluntary contributions in the investment options provided certain fulfillment services forunder the United States and Canadian home video markets. Inplan. Investment options in the period January 1plan include IAC common stock, but neither participant nor our matching contributions are required to May 7, 2002, Films incurred fees to Universal of approximately $0.7 million for such services.be invested in IAC common stock.
NOTE 16: 26—QUARTERLY RESULTS (UNAUDITED)
| Quarter Ended December 31(a)(b)(c) | Quarter Ended September 30 | Quarter Ended June 30 | Quarter Ended March 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share data) | ||||||||||||
Year Ended December 31, 2004 | |||||||||||||
Net revenue(d) | $ | 1,715,710 | $ | 1,505,081 | $ | 1,501,152 | $ | 1,470,737 | |||||
Gross profit | 919,265 | 847,973 | 827,171 | 774,319 | |||||||||
Operating (loss) income | (32,175 | ) | 111,988 | 110,114 | 42,579 | ||||||||
(Loss) earnings from continuing operations | (41,117 | ) | 91,524 | 91,564 | 43,790 | ||||||||
(Loss) earnings before preferred dividends | (42,603 | ) | 92,741 | 73,196 | 41,527 | ||||||||
Net (loss) earnings available to common shareholders | (45,867 | ) | 89,478 | 69,934 | 38,263 | ||||||||
(Loss) earnings per share from continuing operations available to common shareholders | |||||||||||||
Basic (loss) earnings per common share(e) | $ | (0.06 | ) | $ | 0.13 | $ | 0.13 | $ | 0.06 | ||||
Diluted (loss) earnings per common share(e) | $ | (0.06 | ) | $ | 0.12 | $ | 0.12 | $ | 0.05 | ||||
(Loss) earnings per share before preferred dividends available to common shareholders | |||||||||||||
Basic (loss) earnings per common share(e) | $ | (0.07 | ) | $ | 0.13 | $ | 0.10 | $ | 0.05 | ||||
Diluted (loss) earnings per common share(e) | $ | (0.07 | ) | $ | 0.12 | $ | 0.09 | $ | 0.05 | ||||
(Loss) earnings per share available to common shareholders | |||||||||||||
Basic (loss) earnings per common share(e) | $ | (0.07 | ) | $ | 0.13 | $ | 0.10 | $ | 0.05 | ||||
Diluted (loss) earnings per common share(e) | $ | (0.07 | ) | $ | 0.12 | $ | 0.09 | $ | 0.05 | ||||
Year Ended December 31, 2003 | |||||||||||||
Net revenue | $ | 1,804,603 | $ | 1,610,270 | $ | 1,526,511 | $ | 1,386,734 | |||||
Gross profit | 845,677 | 726,695 | 686,855 | 599,852 | |||||||||
Operating income | 178,569 | 10,863 | 111,754 | 98,997 | |||||||||
Earnings (loss) from continuing operations | 148,559 | 22,328 | 57,929 | (102,159 | ) | ||||||||
Earnings (loss) before preferred dividends | 156,018 | 21,980 | 96,194 | (106,796 | ) | ||||||||
Net earnings (loss) available to common shareholders | 152,755 | 18,716 | 92,930 | (110,060 | ) | ||||||||
Earnings (loss) per share from continuing operations available to common shareholders | |||||||||||||
Basic earnings (loss) per common share(e) | $ | 0.21 | $ | 0.03 | $ | 0.10 | $ | (0.22 | ) | ||||
Diluted earnings (loss) per common share(e) | $ | 0.19 | $ | 0.02 | $ | 0.09 | $ | (0.22 | ) | ||||
Earnings (loss) per share before preferred dividends available to common shareholders | |||||||||||||
Basic earnings (loss) per common share(e) | $ | 0.22 | $ | 0.03 | $ | 0.17 | $ | (0.23 | ) | ||||
Diluted earnings (loss) per common share(e) | $ | 0.20 | $ | 0.02 | $ | 0.16 | $ | (0.23 | ) | ||||
Net earnings (loss) per share available to common shareholders | |||||||||||||
Basic earnings (loss) per common share(e) | $ | 0.22 | $ | 0.03 | $ | 0.17 | $ | (0.23 | ) | ||||
Diluted earnings (loss) per common share(e) | $ | 0.20 | $ | 0.02 | $ | 0.16 | $ | (0.23 | ) |
| Quarter Ended March 31,(a)(b)(c) | Quarter Ended June 30,(b)(c)(d) | Quarter Ended September 30,(c)(e) | Quarter Ended December 31,(f) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share data) | ||||||||||||
Year Ended December 31, 2005 | |||||||||||||
Net revenue | $ | 1,136,145 | $ | 1,375,271 | $ | 1,449,936 | $ | 1,792,319 | |||||
Gross profit | 504,504 | 605,769 | 666,985 | 848,242 | |||||||||
Operating income | 56,319 | 66,518 | 21,317 | 200,075 | |||||||||
Earnings from continuing operations | 27,315 | 409,421 | 36,372 | 125,279 | |||||||||
Income (loss) from discontinued operations, net of tax | 44,897 | 211,961 | 33,117 | (12,212 | ) | ||||||||
Earnings before preferred dividends | 72,212 | 621,382 | 69,489 | 113,067 | |||||||||
Net earnings available to common shareholders | 68,949 | 618,119 | 68,077 | 113,067 | |||||||||
Earnings per share from continuing operations available to common shareholders | |||||||||||||
Basic earnings per share(g) | $ | 0.07 | $ | 1.26 | $ | 0.11 | $ | 0.39 | |||||
Diluted earnings per share(g) | $ | 0.07 | $ | 1.17 | $ | 0.10 | $ | 0.37 | |||||
Earnings per share available to common shareholders | |||||||||||||
Basic earnings per share(g) | $ | 0.20 | $ | 1.92 | $ | 0.21 | $ | 0.35 | |||||
Diluted earnings per share(g) | $ | 0.19 | $ | 1.77 | $ | 0.19 | $ | 0.33 | |||||
Year Ended December 31, 2004 | |||||||||||||
Net revenue | $ | 1,019,229 | $ | 976,570 | $ | 957,293 | $ | 1,235,187 | |||||
Gross profit | 426,434 | 409,035 | 412,082 | 544,480 | |||||||||
Operating income (loss) | 18,030 | 29,280 | 16,780 | (84,334 | ) | ||||||||
Earnings (loss) from continuing operations | 30,417 | 43,964 | 34,537 | (54,051 | ) | ||||||||
Income from discontinued operations, net of tax | 11,110 | 29,232 | 58,204 | 11,448 | |||||||||
Earnings (loss) before preferred dividends | 41,527 | 73,196 | 92,741 | (42,603 | ) | ||||||||
Net earnings (loss) available to common shareholders | 38,263 | 69,934 | 89,478 | (45,867 | ) | ||||||||
Earnings (loss) per share from continuing operations available to common shareholders | |||||||||||||
Basic earnings (loss) per share(g) | $ | 0.08 | $ | 0.12 | $ | 0.09 | $ | (0.17 | ) | ||||
Diluted earnings (loss) per share(g) | $ | 0.07 | $ | 0.11 | $ | 0.09 | $ | (0.17 | ) | ||||
Earnings (loss) per share available to common shareholders | |||||||||||||
Basic earnings (loss) per share(g) | $ | 0.11 | $ | 0.20 | $ | 0.26 | $ | (0.13 | ) | ||||
Diluted earnings (loss) per share(g) | $ | 0.10 | $ | 0.19 | $ | 0.24 | $ | (0.13 | ) |
quarter of 2005, the Company recognized an after-tax increase in non-cash compensation expense of $49.0 million related to the treatment of vested stock options in connection with the Spin-Off and an after-tax reduction in non-cash compensation expense of $3.5 million, included in continuing operations and $22.0 million included in discontinued operations, related to the cumulative effect of the change in IAC's estimate related to the number of stock-based awards that are expected to vest.
NOTE 17: INDUSTRY SEGMENTS
The overall concept that IAC employs in determining its Operating Segments is to present its results in a manner consistent with how the chief operating decision maker and executive management view the businesses; how the businesses are organized as to segment management; and the focus of the businesses with regards to the types of products or services offered or the target market. The USA Entertainment Group, Styleclick, ECS and Avaltus, a PRC subsidary, are presented as discontinued operations and, accordingly, are excluded from the schedules below except for the schedule of assets, in which they are included in Corporate and other.
During 2003, the Company switched from reporting adjusted EBITDA as its primary metric to Operating Income Before Amortization, concluding that EBITDA was not the best way to look at divisional performance as it did not include certain operating costs such as depreciation and disengagement costs. Operating Income Before Amortization is defined as operating income plus: (1) amortization of non-cash distribution, marketing and compensation expense; (2) amortization of intangibles and goodwill and intangibles impairment, if applicable; (3) pro forma adjustments for significant acquisitions; and (4) certain one-time items. The Company believes this measure is useful to investors because it represents the consolidated operating results from IAC's segments, taking into account depreciation, which it believes is an ongoing cost of doing business, but excluding the effects of non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses, including non-cash compensation associated with IAC's employees, non-cash payments to partners, and acquisition-related accounting. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by providing the comparable GAAP measure with equal or greater prominence, GAAP financial statements and detailed descriptions of the reconciling items and adjustments, including quantifying such items, to derive the non-GAAP measure.
The following table is a reconciliation of Operating Income Before Amortization to operating income and net earnings available to common shareholders in 2004, 2003 and 2002.
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| (In thousands) | ||||||||||
Operating Income Before Amortization | $ | 1,024,499 | $ | 860,064 | $ | 389,116 | |||||
Amortization of non-cash distribution and marketing expense | (18,030 | ) | (51,432 | ) | (37,344 | ) | |||||
Amortization of non-cash compensation expense | (241,726 | ) | (128,185 | ) | (15,637 | ) | |||||
Amortization of intangibles | (347,457 | ) | (268,504 | ) | (145,667 | ) | |||||
Goodwill impairment | (184,780 | ) | — | (22,247 | ) | ||||||
Merger costs(a) | — | (11,760 | ) | (7,910 | ) | ||||||
Pro forma adjustments(b) | — | — | (7,713 | ) | |||||||
Operating income | 232,506 | 400,183 | 152,598 | ||||||||
Interest income | 191,679 | 175,822 | 114,599 | ||||||||
Interest expense | (87,388 | ) | (92,913 | ) | (44,467 | ) | |||||
Equity in earnings (losses) of VUE | 16,188 | (224,468 | ) | 6,107 | |||||||
Equity in earnings (losses) in unconsolidated subsidiaries and other expenses | 25,691 | 3,767 | (115,640 | ) | |||||||
Income tax expense | (179,186 | ) | (70,691 | ) | (65,127 | ) | |||||
Minority interest in income of consolidated subsidiaries | (13,729 | ) | (65,043 | ) | (46,073 | ) | |||||
Gain on contribution of USA Entertainment to VUE, net of tax | — | — | 2,378,311 | ||||||||
Discontinued operations, net of tax | (20,900 | ) | 40,739 | 34,184 | |||||||
Cumulative effect of accounting change, net of tax | — | — | (461,389 | ) | |||||||
Preferred dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | |||||
Net earnings available to common shareholders | $ | 151,808 | $ | 154,341 | $ | 1,941,344 | |||||
Revenues: | |||||||||||
IAC Travel(on a comparable net basis)(c) | $ | 2,116,509 | $ | 1,670,499 | $ | 906,230 | |||||
Electronic Retailing | |||||||||||
HSN U.S. | 1,905,903 | 1,763,689 | 1,613,236 | ||||||||
HSN International | 476,260 | 466,732 | 309,012 | ||||||||
Total Electronic Retailing | 2,382,163 | 2,230,421 | 1,922,248 | ||||||||
Ticketing | 768,199 | 743,232 | 655,312 | ||||||||
Personals | 197,993 | 185,294 | 125,795 | ||||||||
IAC Local and Media Services | 294,732 | 230,265 | 30,832 | ||||||||
Financial Services and Real Estate | 189,783 | 55,795 | — | ||||||||
Teleservices | 293,895 | 294,273 | 294,139 | ||||||||
Intersegment Elimination(d) | (50,594 | ) | (21,310 | ) | (11,270 | ) | |||||
Total | $ | 6,192,680 | $ | 5,388,469 | $ | 3,923,286 | |||||
As reported: | |||||||||||
IAC Travel(c) | $ | 2,116,509 | $ | 2,610,148 | $ | 1,563,869 | |||||
Total | $ | 6,192,680 | $ | 6,328,118 | $ | 4,580,925 | |||||
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| (In thousands) | ||||||||||
Operating Income (Loss): | |||||||||||
IAC Travel | $ | 428,996 | $ | 346,951 | $ | 177,918 | |||||
Electronic Retailing | |||||||||||
HSN U.S.(e) | 141,737 | 117,468 | 98,738 | ||||||||
HSN International | 37,883 | 31,308 | (62,294 | ) | |||||||
Total Electronic Retailing | 179,620 | 148,776 | 36,444 | ||||||||
Ticketing | 137,928 | 116,471 | 96,931 | ||||||||
Personals | 18,850 | 14,130 | 22,639 | ||||||||
IAC Local and Media Services | (23,565 | ) | (29,421 | ) | (86,257 | ) | |||||
Financial Services and Real Estate | (7,577 | ) | (16,472 | ) | — | ||||||
Teleservices | (167,729 | ) | 12,460 | (26,395 | ) | ||||||
Corporate and other | (334,461 | ) | (191,957 | ) | (70,388 | ) | |||||
Intersegment Elimination(d) | 444 | (755 | ) | 1,706 | |||||||
Total | $ | 232,506 | $ | 400,183 | $ | 152,598 | |||||
Operating Income (Loss) Before Amortization: | |||||||||||
IAC Travel | $ | 627,269 | $ | 523,806 | $ | 279,772 | |||||
Electronic Retailing | |||||||||||
HSN U.S.(e) | 194,669 | 168,260 | 131,363 | ||||||||
HSN International | 39,193 | 32,646 | (61,583 | ) | |||||||
Total Electronic Retailing | 233,862 | 200,906 | 69,780 | ||||||||
Ticketing | 164,326 | 144,502 | 108,069 | ||||||||
Personals | 27,569 | 31,019 | 28,394 | ||||||||
IAC Local and Media Services | 26,467 | 26,227 | (32,295 | ) | |||||||
Financial Services and Real Estate | 21,425 | 1,197 | — | ||||||||
Teleservices | 17,051 | 12,460 | (4,148 | ) | |||||||
Corporate and other | (93,914 | ) | (79,298 | ) | (58,103 | ) | |||||
Intersegment Elimination(d) | 444 | (755 | ) | (2,353 | ) | ||||||
Total | $ | 1,024,499 | $ | 860,064 | $ | 389,116 | |||||
Assets: | |||||||||||
IAC Travel | $ | 8,286,407 | $ | 9,156,951 | $ | 2,680,512 | |||||
Electronic Retailing | |||||||||||
HSN U.S | 3,321,343 | 3,324,896 | 3,439,173 | ||||||||
HSN International | 646,789 | 579,899 | 450,455 | ||||||||
Total Electronic Retailing | 3,968,132 | 3,904,795 | 3,889,628 | ||||||||
Ticketing | 1,626,275 | 1,529,393 | 1,240,632 | ||||||||
Personals | 286,280 | 298,830 | 93,393 | ||||||||
IAC Local and Media Services | 801,347 | 442,272 | 96,752 | ||||||||
Financial Services and Real Estate | 1,077,461 | 799,377 | — | ||||||||
Teleservices | 234,095 | 419,369 | 439,336 | ||||||||
Corporate and other | 6,118,868 | 5,017,468 | 7,218,739 | ||||||||
Total | $ | 22,398,865 | $ | 21,568,455 | $ | 15,658,992 | |||||
Depreciation, amortization of intangibles and goodwill, including goodwill impairment and cable distribution fees: | |||||||||||
IAC Travel | $ | 223,052 | $ | 146,445 | $ | 76,433 | |||||
Electronic Retailing | |||||||||||
HSN U.S | 164,396 | 162,570 | 143,487 | ||||||||
HSN International | 14,796 | 14,221 | 9,308 | ||||||||
Total Electronic Retailing | 179,192 | 176,791 | 152,795 | ||||||||
Ticketing | 59,539 | 57,254 | 38,783 | ||||||||
Personals | 22,864 | 23,642 | 7,663 | ||||||||
IAC Local and Media Services | 56,252 | 59,020 | 53,916 | ||||||||
Financial Services and Real Estate | 28,983 | 17,413 | — | ||||||||
Teleservices(f) | 202,497 | 23,530 | 58,182 | ||||||||
Corporate and other | 9,962 | 5,764 | 9,887 | ||||||||
Total | $ | 782,341 | $ | 509,859 | $ | 397,659 | |||||
Capital expenditures: | |||||||||||
IAC Travel | $ | 60,018 | $ | 55,229 | $ | 49,955 | |||||
Electronic Retailing | |||||||||||
HSN U.S | 49,040 | 27,499 | 36,850 | ||||||||
HSN International | 8,843 | 4,904 | 16,601 | ||||||||
Total Electronic Retailing | 57,883 | 32,403 | 53,451 | ||||||||
Ticketing | 38,443 | 38,242 | 32,095 | ||||||||
Personals | 4,137 | 12,054 | 5,525 | ||||||||
IAC Local and Media Services | 11,462 | 7,339 | 4,408 | ||||||||
Financial Services and Real Estate | 2,912 | 2,214 | — | ||||||||
Teleservices | 11,836 | 11,578 | 12,356 | ||||||||
Corporate and other | 37,096 | 27,806 | 4,265 | ||||||||
Total | $ | 223,787 | $ | 186,865 | $ | 162,055 | |||||
commenced prospectively reporting revenue for Hotels.com on a net basis, consistent with Expedia's historical practice. Accordingly, we are including prior year results as though Hotels.com had reported revenue on a net basis for purpose of better comparability. There was no impact to operating income or Operating Income Before Amortization from the change in reporting.
The Company maintains operations in the United States, Germany, the United Kingdom, Canada and other international territories. Geographic information about the United States and international territories for the years ended December 31, 2004, 2003, and 2002 are presented below.
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||||
| (In thousands) | |||||||||
Revenue | ||||||||||
United States | $ | 5,062,436 | $ | 5,226,813 | $ | 3,972,550 | ||||
All other countries | 1,130,244 | 1,101,305 | 608,375 | |||||||
$ | 6,192,680 | $ | 6,328,118 | $ | 4,580,925 | |||||
Long-lived assets | ||||||||||
United States | $ | 536,699 | $ | 541,872 | $ | 548,997 | ||||
All other countries | 58,343 | 60,276 | 48,499 | |||||||
$ | 595,042 | $ | 602,148 | $ | 597,496 | |||||
NOTE 18: FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies when available. The Company's financial instruments include letters of credit and bank guarantees. These commitments are in place to facilitate the commercial operations of certain IAC subsidiaries.
| December 31, 2004 | December 31, 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| (In thousands) | ||||||||||||
Cash and cash equivalents | $ | 1,157,462 | $ | 1,157,462 | $ | 899,062 | $ | 899,062 | |||||
Restricted cash | 41,377 | 41,377 | 31,356 | 31,356 | |||||||||
Accounts and notes receivable | 550,867 | 550,867 | 429,424 | 429,424 | |||||||||
Loans available for sale | 206,256 | 206,256 | — | — | |||||||||
VUE preferred equity interests | 2,042,706 | 2,042,706 | 2,002,801 | 2,002,801 | |||||||||
Long-term obligations and short-term borrowings | (1,361,988 | ) | (1,450,159 | ) | (1,122,947 | ) | (1,231,204 | ) | |||||
Derivative contracts | (23,199 | ) | (23,199 | ) | (10,124 | ) | (10,124 | ) | |||||
Letters of credit | — | 78,298 | — | 49,328 | |||||||||
Bank guarantees | — | 87,498 | — | 51,079 |
The carrying amounts of cash and cash equivalents and restricted cash reflected in the Consolidated Balance Sheets approximate fair value as they are maintained with various high-quality financial institutions or in short-term duration high-quality debt securities. The majority of our receivables result from the sale of services or products to individuals, mostly through the use of major credit cards. These receivables are short-term in nature and are generally settled shortly after the sale. The fair value of loans held for sale was estimated using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or fallout factor. The carrying value of the VUE preferred equity interests approximated their fair value based upon appropriate valuation methodologies, including reference to the underlying collateral. Market quotes were used to estimate the fair value of the 1998 Senior Notes and the 2002 Senior Notes as well as the derivative contracts. The carrying amounts for the remaining long-term obligations and short-term borrowings and all other financial instruments approximated their fair value.
NOTE 19: MARKETABLE SECURITIES AND INVESTMENTS HELD FOR SALE
At December 31, 2004, marketable securities available-for-sale were as follows (in thousands):
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Auction rate preferred securities | $ | 166,054 | $ | 33 | $ | — | $ | 166,087 | |||||
U.S. Government and agencies | 1,116,007 | 6 | (17,686 | ) | 1,098,327 | ||||||||
Non-US government securities and other fixed term obligations | 889,115 | 7,777 | (4,089 | ) | 892,803 | ||||||||
Corporate debt securities | 253,865 | 74 | (1,411 | ) | 252,528 | ||||||||
Total debt securities | 2,258,987 | 7,857 | (23,186 | ) | 2,243,658 | ||||||||
Total marketable securities | $ | 2,425,041 | $ | 7,890 | $ | (23,186 | ) | $ | 2,409,745 | ||||
The net unrealized losses on available for sale securities noted above includes $5.5 million of unrealized foreign exchange gains that have been recognized through earnings during the year ended December 31, 2004. The remaining net unrealized loss is included within other comprehensive income and is recorded net of a deferred tax benefit of $8,045 as of December 31, 2004. The proceeds from sales of available-for-sale marketable securities were approximately $3.4 billion, which resulted in gross realized gains of $5.3 million and gross realized losses of $2.0 million.
The contractual maturities of debt securities classified as available-for-sale as of December 31, 2004 are as follows (in thousands):
| Amortized Cost | Estimated Fair Value | |||||
---|---|---|---|---|---|---|---|
Due in one year or less | $ | 859,459 | $ | 862,969 | |||
Due after one year through two years | 585,349 | 578,605 | |||||
Due after two through five years | 697,950 | 686,664 | |||||
Due over five years | 116,229 | 115,420 | |||||
Total | $ | 2,258,987 | $ | 2,243,658 | |||
The following table provides the breakdown of the investments with unrealized losses at December 31, 2004 (in thousands):
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||
U.S. Government and agencies | $ | 452,964 | $ | (4,995 | ) | $ | 645,363 | $ | (12,691 | ) | $ | 1,098,327 | $ | (17,686 | ) | |||||
Non-U.S. Government Securities | 119,855 | (1,217 | ) | 56,150 | (839 | ) | 176,005 | (2,056 | ) | |||||||||||
Other fixed term obligations | 616,184 | (1,979 | ) | 3,095 | (54 | ) | 619,279 | (2,033 | ) | |||||||||||
Corporate Debt Securities | 218,545 | (868 | ) | 33,962 | (543 | ) | 252,507 | (1,411 | ) | |||||||||||
Total | $ | 1,407,548 | $ | (9,059 | ) | $ | 738,570 | $ | (14,127 | ) | $ | 2,146,118 | $ | (23,186 | ) | |||||
The gross unrealized losses related to fixed income securities were due primarily to changes in interest rates. The Company's management has determined that the gross unrealized losses on its marketable securities at December 31, 2004 are temporary in nature. The Company reviews its investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company's fixed income securities are rated investment grade or better.
From time to time the Company makes equity investments in non-publicly traded companies which are accounted for under the cost method as the Company does not have the ability to exercise significant influence over the respective company's operating and financial policies. These investments are included in "Long-term investments" on the accompanying consolidated balance sheets and have a carrying value of approximately $40 million as of December 31, 2004. The Company monitors its
investments for impairment on a quarterly basis and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. Factors used in determining an impairment include, but are not limited to, the current business environment including competition and uncertainty of financial condition; going concern considerations such as the rate at which the investee company utilizes cash, and the investee company's ability to obtain additional private financing to fulfill its stated business plan; the need for changes to the investee company's existing business model due to changing business environments and its ability to successfully implement necessary changes; and comparable valuations. If an investment is determined to be impaired, a determination is made as to whether such impairment is other-than-temporary. No other than temporary losses were recorded related to costs investments during the year ended December 31, 2004.
At December 31, 2003, marketable securities available-for-sale were as follows (in thousands):
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Auction rate preferred securities | $ | 447,176 | $ | — | $ | — | $ | 447,176 | |||||
Foreign debt securities | 33,606 | — | (170 | ) | 33,436 | ||||||||
U.S. Government and agencies | 1,055,836 | 867 | (5,109 | ) | 1,051,594 | ||||||||
Non-US government securities and other fixed term obligations | 753,478 | 930 | (985 | ) | 753,423 | ||||||||
Corporate debt securities | 134,099 | 536 | (529 | ) | 134,106 | ||||||||
Total debt securities | 1,977,019 | 2,333 | (6,793 | ) | 1,972,559 | ||||||||
Total marketable securities | $ | 2,424,195 | $ | 2,333 | $ | (6,793 | ) | $ | 2,419,735 | ||||
The net unrealized losses on available for sale securities noted above are recorded net of a deferred tax benefit of $1,793 as of December 31, 2003.
NOTE 20: EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At December 31, 2004, IAC beneficially owned 5.44% of the partnership common equity of VUE, plus certain preferred interests, which were acquired May 7, 2002. This common interest is accounted for using the equity method. Due to the significance of the results of VUE in relation to IAC's 2003 results, summary financial information for VUE is presented below. The statement of operations data is recorded on a one-quarter lag due to the timing of receiving information from the partnership. For 2004 and 2003 IAC recorded equity income (loss) of $16.2 million and $(224.5) million, respectively.
During the first quarter of 2003, IAC received the audited financial statements of VUE for the year ended December 31, 2002, which disclosed that VUE recorded an impairment charge for goodwill and intangible assets and other long-lived assets of $4.5 billion in the period May 7, 2002 to December 31, 2002 based upon VUE management's review of the estimated fair value of VUE as of December 31, 2002. Due to the one-quarter lag noted above, the charge was taken by IAC in the first quarter of 2003 and was approximately $245 million, before a tax benefit of $96 million.
IAC holds preferred and common interests in VUE. The value of these preferred interests is determined in part by the issuer's credit quality and IAC believes that actions taken by Vivendi, including the contribution of its interest in VUE to a new joint venture with the General Electric Co.
on May 11, 2004, do not adversely affect the value of IAC's preferred interests in VUE. These interests are senior to the common interests in VUE, and the terminal value of which, pursuant to the VUE agreements, do not vary based on the value of VUE's businesses. The Company's 5.44% common interest is generally subject to a call right of Universal Studios beginning in 2007, and a put right of IAC beginning in 2010, in both cases based generally on private market values at the time.
The Company has substantial investments in VUE as of December 31, 2004, including Preferred A interests and Preferred B interests with carrying values of approximately $614 million and $1.4 billion, respectively, and common interests with a carrying value of $782 million. The Company has reviewed the carrying value of these investments as of December 31, 2004 and believes they are not in excess of their fair value.
Summarized balances of the partnership are as follows:
| As of September 26, 2004 and for the Period October 1, 2003 to September 26, 2004 | ||
---|---|---|---|
| (In thousands) | ||
Current assets | $ | 1,988,454 | |
Non-current assets | 14,908,280 | ||
Current liabilities | 2,162,944 | ||
Non-current liabilities | 3,382,755 | ||
Net sales | 6,970,268 | ||
Gross profit | 1,980,193 | ||
Net income | 491,646 |
Prior to the third quarter of 2002, IAC beneficially owned 46.7% of the outstanding common stock of HOT Networks GmbH and Subsidiaries ("HOT Networks"), a German stock corporation, the subsidiaries of which operate electronic retailing operations in Europe. This investment was accounted for using the equity method until its consolidation in the third quarter of 2002. Due to the significance of the results of HOT Networks, in relation to IAC's results for 2002 prior to consolidation, summary financial information for HOT Networks is presented below. Since July 2002, IAC has owned 100% of the equity of HOT Networks and thus the balances are consolidated from that date forward.
| As of and for the year ended December 31, 2002 | |||
---|---|---|---|---|
| (In thousands) | |||
Current assets | $ | 26,684 | ||
Non-current assets | 200,775 | |||
Current liabilities | 20,343 | |||
Non-current liabilities | 550,302 | |||
Net sales | 63,228 | |||
Gross profit | 40,632 | |||
Net loss | (182,206 | ) |
Summarized aggregated financial information for the Company's remaining equity investments including Jupiter Shop Channel, TVSN (China), TM Mexico, TM Australia, GL Expedia (France), and eLong, Inc. (China) as of and for the year ended December 31, is summarized below:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||
Current assets | $ | 254,022 | $ | 134,579 | $ | 107,934 | ||||
Non-current assets | 86,490 | 60,020 | 48,189 | |||||||
Current liabilities | 138,304 | 92,726 | 78,530 | |||||||
Non-current liabilities | 27,532 | 35,788 | 27,851 | |||||||
Net sales | 541,875 | 360,470 | 261,185 | |||||||
Gross profit | 235,095 | 147,991 | 33,991 | |||||||
Net income (loss) | 17,854 | 7,985 | (24,585 | ) |
The following is a list of investments accounted for under the equity method, the principal market that the venture operates, and the relevant ownership percentage:
| 2004 | 2003 | 2002 | ||||
---|---|---|---|---|---|---|---|
HOT Networks (Europe)(a) | N/A | N/A | 46.7 | % | |||
Jupiter Shop Channel (Japan) | 30.0 | % | 30.0 | % | 30.0 | % | |
TVSN (China) | 21.0 | % | 21.0 | % | 21.0 | % | |
VUE (U.S.)(b) | 5.44 | % | 5.44 | % | 5.44 | % | |
TM Mexico (JV) | 50.0 | % | 50.0 | % | 49.0 | % | |
TM Australia (JV) | 50.0 | % | 50.0 | % | 50.0 | % | |
GL Expedia (France) | 49.9 | % | 47.0 | % | 47.0 | % | |
eLong, Inc. (China)(c) | 28.0 | % | — | — |
On August 4, 2004, IAC made an investment in eLong, Inc. ("eLong"), a Cayman Island company, whose principal business is the operation of an Internet based travel business in the People's Republic of China. The purchase price of the investment was approximately $59 million in cash that represented a 30% fully-diluted interest in eLong which is presently accounted for under the equity method. Concurrent with the original investment, eLong issued to IAC a warrant to acquire such additional eLong shares as would be necessary to provide IAC with a minimum aggregate investment of 51% of eLong shares on a fully diluted basis for approximately $6.21 per share.
On November 4, 2004 eLong completed an initial public offering of its shares, which diluted IAC's ownership percentage to approximately 28% immediately following the transaction. As a result the Company recognized a $2.1 million increase in the basis of its investment, net of deferred taxes, related to the excess of the price received for the shares issued over the carrying value of IAC's investment. The Company has accordingly recorded this increase through additional-paid-in-capital. The initial
public offering also resulted in the warrant becoming subject to the mark-to-market provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." As such, the Company has recorded an unrealized gain of $27.2 million, net of deferred taxes of $16.4 million, related to the warrant that has been recorded in other comprehensive income at December 31, 2004.
On December 16, 2004, IAC notified eLong of its intent to exercise its warrant to acquire its additional eLong shares. The transaction was completed on January 10, 2005. Please refer to Note 25, Subsequent Events, for further discussion.
NOTE 21: DISCONTINUED OPERATIONS27—SUBSEQUENT EVENTS (UNAUDITED)
During January 2006, $68.2 million par value of Convertible Notes was converted by the second quarter of 2003, ECS, Styleclick, Inc. and Avaltus, Inc., a subsidiary of PRC, ceased operations due to the lack of consumer acceptance in the marketplace as well as management concerns about the viability of the businesses. Accordingly, the results of operations and statement of position of these businesses are presented as discontinued operations for all periods presented. See below for "Results of Discontinued Operations".
Contribution of the USA Entertainment Group to VUE
On May 7, 2002, IAC completed the VUE Transaction, pursuant to which it contributed its Entertainment Group to Vivendi Universal Entertainment LLLP, a joint venture with Vivendi ("VUE"). The joint venture was initially controlled by Vivendi and its subsidiaries, with the common interests owned 93.06% by Vivendi and its subsidiaries, 5.44% by IAC and its subsidiaries and 1.5% by Mr. Diller (subject to the assignments discussed below). During 2004, Vivendi and General Electric Company ("GE") completed their combination of the businesses of National Broadcasting Company, Inc. ("NBC"), a subsidiary of GE, and those of Universal, the affiliate of Vivendi that controls VUE. As a result of this transaction, NBC controls VUE and Universal.
In connection with the VUE Transaction, IAC and its subsidiaries received the following at the closing: (i) approximately $1.62 billion in cash, debt-financed by VUE, subject to tax-deferred treatment for a 15-year period; (ii) a $750holders. Upon conversion, 2.6 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 Vivendi at its then accreted face value with a maximum of approximately 56.6 million IAC common shares, provided that Vivendi may substitute cash in lieu of shares of IAC common stock (but not IAC 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 IAC 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 that were exchangeable into IAC common shares, including USANi LLC interests obtained from Liberty in connection with a related transaction. In connection with the transaction, IAC retired approximately 320.9 million USANi LLC shares previously owned by Vivendi, thereby reducing IAC's fully diluted shares to approximately 472 million shares as of June 30, 2002.
Related to the transaction, Liberty exchanged 7,079,726 shares of USANi LLC for shares of IAC common stock and subsequently transferred to Universal 252.6 million shares of IACExpedia 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.
IAC contributed to VUE: USA Cable, which includes USA Network, SCI FI Channel, TRIO and Newsworld International; Studios USA, which produces and distributes television programming; USA Films, which produces and distributes films. Vivendi contributed the film, television and theme park businesses of its subsidiary, Universal Studios, Inc. In addition, IACwere issued to a subsidiary of Vivendi ten-year warrants to acquire shares of IAC 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. The transaction has been accounted for as an asset sale. Barry Diller, IAC's chairman and chief executive officer, received a common interest in VUE with a 1.5% profit sharing percentage, with a minimum value of $275.0 million (economic interests in a portion of his common interests have been assigned by Mr. Diller to three executive officers of IAC), in return for his agreeing to specified non-competition provisions and agreeing to serve as chairman and chief executive officer of VUE. IAC and Mr. Diller agreed that they would not compete with Vivendi's television and filmed entertainment businesses (including VUE) for a minimum of 18 months from the closing of the VUE transaction. Mr. Diller served as chairman and chief executive officer of VUE from May 2002 until March 2003. During 2004, Universal acquired Mr. Diller's common interest in VUE in accordance with the contractual terms of the VUE Partnership Agreement, with Mr. Diller and his assignees receiving their proportionate share of the proceeds.
IAC's contribution of businesses to VUE and the receipt of consideration by IAC results in an after tax gain of $2.4 billion. The gain was determined as follows (in thousands):
Estimated fair value: | |||||
Class A preferred interest in VUE | $ | 514,000 | |||
Class B preferred interest in VUE | 1,428,530 | ||||
Common interest in VUE | 1,000,000 | ||||
Cash | 1,618,710 | ||||
Estimated step-up in fair value of Home Shopping resulting from cancellation of USANi LLC shares | 1,213,876 | ||||
Total book value of consideration | 5,775,116 | ||||
Entertainment net assets sold, net of minority interest | (498,046 | ) | |||
Transaction costs | (29,544 | ) | |||
Pre-tax gain | 5,247,526 | ||||
Tax provided | (2,058,342 | ) | |||
Taxable gain before allocation to warrant value | 3,189,184 | ||||
Fair value of warrants | (810,873 | ) | |||
Gain on transaction | $ | 2,378,311 | |||
As a result of the step-up in the fair value of Home Shopping resulting from the cancellation of USANi LLC shares of $1.2 billion, the Company obtained an independent valuation of the assets and liabilities acquired, including identification of intangible assets other than goodwill, which identified $487.7 million of intangible assets, including $285.4 million for trade names (indefinite lived asset), and definite lived assets of $144.5 million for distribution agreements, $30.3 million for merchandise
agreements, $23.9 million for technology and $3.7 million for customer lists. Intangible assets with definite lives will be amortized over a weighted average life of 4 years. None of the amounts allocated to goodwill or intangible assets are tax deductible. The Company recorded no adjustmentsholders. After giving effect to the historical carrying value of assets and liabilities, other than to goodwill and intangible assets, as a result ofconversion, the step-up in fair value.
Results of Discontinued Operations
ECS, Styleclick, Inc., Avaltus, Inc. and the USA Entertainment Group are presented as discontinued operations for all applicable periods presented. The revenues and net earnings, net of the effect of any minority interest for the aforementioned discontinued operations for the applicable periods, were as follows:
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||||
| (In thousands) | |||||||||
Net revenue | $ | — | $ | 9,439 | $ | 633,749 | ||||
(Loss) income before tax and minority interest | $ | (2,852 | ) | $ | (5,049 | ) | $ | 69,668 | ||
Tax (expense) benefit | (18,048 | ) | 52,024 | 34,836 | ||||||
Minority interest in income of consolidated subsidiaries | — | (6,236 | ) | (70,320 | ) | |||||
Net (loss) earnings | $ | (20,900 | ) | $ | 40,739 | $ | 34,184 | |||
The loss from discontinued operations in 2004 was principally due to an adjustment in the second quarter of 2004 to the deferred tax liability of our investment in Styleclick to reflect minority interest, which resulted in a reduction of a tax benefit recorded in 2002 when the deferred tax liabilities of our investment in Styleclick were originally reversed. Income from discontinued operations in 2003 was principally due to a tax benefit recognized due to the shut-down of Styleclick. The 2002 results primarily reflect the operations of USA Entertainment through May 7, 2002 as well as a tax benefit recorded in connection with the reversal of a deferred tax liability related to our investment in Styleclick.
NOTE 22: EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of Basic and Diluted earnings per share.
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Earnings (loss) from continuing operations before cumulative effect of accounting change available to common shareholders: | 2004 | 2003 | 2002 | |||||||
| (In thousands, except per share data) | |||||||||
Numerator: | ||||||||||
Earnings from continuing operations | $ | 185,761 | $ | 126,657 | $ | 1,997 | ||||
Preferred stock dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | ||||
Net earnings (loss) available to common shareholders | 172,708 | 113,602 | (9,762 | ) | ||||||
Effect of dilutive securities | — | (6,155 | ) | (5,296 | ) | |||||
Net earnings (loss) available to common shareholders after assumed conversions | $ | 172,708 | $ | 107,447 | $ | (15,058 | ) | |||
Denominator: | ||||||||||
Basic shares outstanding | 695,979 | 600,063 | 426,317 | |||||||
Other dilutive securities including stock options, warrants and restricted stock and share units | 46,444 | 43,268 | — | |||||||
Denominator for basic and diluted earnings per share—weighted average shares(a) | 742,423 | 643,331 | 426,317 | |||||||
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Earnings before cumulative effect of accounting change available to common shareholders: | 2004 | 2003 | 2002 | |||||||
| (In thousands, except per share data) | |||||||||
Numerator: | ||||||||||
Earnings before cumulative effect of accounting change | $ | 164,861 | $ | 167,396 | $ | 2,414,492 | ||||
Preferred stock dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | ||||
Net earnings available to common shareholders | 151,808 | 154,341 | 2,402,733 | |||||||
Effect of dilutive securities | — | (6,155 | ) | (5,296 | ) | |||||
Net earnings available to common shareholders after assumed conversions | $ | 151,808 | $ | 148,186 | $ | 2,397,437 | ||||
Denominator: | ||||||||||
Basic shares outstanding | 695,979 | 600,063 | 426,317 | |||||||
Other dilutive securities including stock options, warrants and restricted stock and share units | 46,444 | 43,268 | — | |||||||
Denominator for basic and diluted earnings per share—weighted average shares(a) | 742,423 | 643,331 | 426,317 | |||||||
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||||
| (In thousands, except per share data) | |||||||||
Net earnings available to common shareholders: | ||||||||||
Numerator: | ||||||||||
Net earnings available to common shareholders | $ | 164,861 | $ | 167,396 | $ | 1,953,103 | ||||
Preferred stock dividends | (13,053 | ) | (13,055 | ) | (11,759 | ) | ||||
Net earnings available to common shareholders | 151,808 | 154,341 | 1,941,344 | |||||||
Effect of dilutive securities | — | (6,155 | ) | (5,296 | ) | |||||
Net earnings available to common shareholders after assumed conversions | $ | 151,808 | $ | 148,186 | $ | 1,936,048 | ||||
Denominator: | ||||||||||
Basic shares outstanding | 695,979 | 600,063 | 426,317 | |||||||
Other dilutive securities including stock options, warrants and restricted stock and share units | 46,444 | 43,268 | — | |||||||
Denominator for basic and diluted earnings per share—weighted average shares(a) | 742,423 | 643,331 | 426,317 | |||||||
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||||
| (In thousands, except per share data) | |||||||||
Earnings (loss) per share: | ||||||||||
Basic earnings per share from income (loss) from continuing operations | $ | 0.25 | $ | 0.19 | $ | (0.02 | ) | |||
Gain on contribution of USA Entertainment to VUE, net of taxes | — | — | 5.58 | |||||||
Discontinued operations, net of taxes | (0.03 | ) | 0.07 | 0.08 | ||||||
Basic earnings per share from income from continuing operations before cumulative effect of accounting change | 0.22 | 0.26 | 5.64 | |||||||
Cumulative effect of accounting change, net of taxes | — | — | (1.08 | ) | ||||||
Basic earnings per share from net income | $ | 0.22 | $ | 0.26 | $ | 4.55 | ||||
Diluted earnings per share from income (loss) from continuing operations | $ | 0.23 | $ | 0.17 | $ | (0.04 | ) | |||
Gain on contribution of USA Entertainment to VUE, net of taxes | — | — | 5.58 | |||||||
Discontinued operations, net of taxes | (0.03 | ) | 0.06 | 0.08 | ||||||
Diluted earnings per share from income from continuing operations before cumulative effect of accounting change | 0.20 | 0.23 | 5.62 | |||||||
Cumulative effect of accounting change, net of taxes | — | — | (1.08 | ) | ||||||
Diluted earnings per share from net income | $ | 0.20 | $ | 0.23 | $ | 4.54 | ||||
NOTE 23: NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
In December 2002, the Company issued $750.0 million aggregateremaining outstanding principal amount of 7.0% Seniorthe Convertible Notes (see Note 5). The notes, by their terms, are fully and unconditionally guaranteed by USANi LLC (the "Guarantor"). USANi LLC is wholly owned by the Company.
The following tables present condensed consolidating financial information for the years ended December 31, 2004, 2003, and 2002 for: (1) the Company on a stand-alone basis; (2) the Guarantor, USANi LLC, on a stand-alone basis; (3) the combined non-guarantor subsidiaries of the Company (including the subsidiaries of USANi LLC (collectively, the "Non-Guarantor Subsidiaries"); and (4) the Company on a consolidated basis.
As of and for the year ended December 31, 2004:
| IAC | USANi LLC | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||||
Balance Sheet of December 31, 2004: | |||||||||||||||
Current assets | $ | 99,991 | $ | 3,059,413 | $ | 1,725,348 | $ | — | $ | 4,884,752 | |||||
Property and equipment, net | — | 56,841 | 457,676 | — | 514,517 | ||||||||||
Goodwill and other intangible assets, net | — | — | 13,767,409 | — | 13,767,409 | ||||||||||
Investment in subsidiaries | 18,450,945 | 2,393,786 | 77,620 | (20,922,351 | ) | — | |||||||||
Other assets | 160,111 | 2,709,288 | 362,448 | — | 3,231,847 | ||||||||||
Net non-current assets of discontinued operations | — | — | 340 | — | 340 | ||||||||||
Total assets | $ | 18,711,047 | $ | 8,219,328 | $ | 16,390,841 | $ | (20,922,351 | ) | $ | 22,398,865 | ||||
Current liabilities | $ | 1,833 | $ | 397,409 | $ | 2,237,169 | $ | (2 | ) | $ | 2,636,409 | ||||
Net current liabilities of discontinued operations | — | — | 9,306 | — | 9,306 | ||||||||||
Long-term debt, less current portion | 750,407 | — | 46,308 | — | 796,715 | ||||||||||
Other liabilities and minority interest | 693,553 | 1,058,429 | 1,170,619 | — | 2,922,601 | ||||||||||
Intercompany liabilities | 1,231,420 | 1,683,125 | (2,914,545 | ) | — | — | |||||||||
Common stock exchangeable for preferred interest | 1,428,530 | — | — | — | 1,428,530 | ||||||||||
Interdivisional equity | — | — | 15,814,140 | (15,814,140 | ) | — | |||||||||
Shareholder's equity | 14,605,304 | 5,080,365 | 27,844 | (5,108,209 | ) | 14,605,304 | |||||||||
Total liabilities and shareholders' equity | $ | 18,711,047 | $ | 8,219,328 | $ | 16,390,841 | $ | (20,922,351 | ) | $ | 22,398,865 | ||||
| IAC | USANi LLC | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Statement of operations for the year ended December 31, 2004: | ||||||||||||||||
Revenue | $ | — | $ | — | $ | 6,192,680 | $ | — | $ | 6,192,680 | ||||||
Operating expenses | — | (321,917 | ) | (5,638,257 | ) | — | (5,960,174 | ) | ||||||||
Interest (expense) income, net | (168,772 | ) | 192,351 | 80,712 | — | 104,291 | ||||||||||
Other income (expense) | 169,912 | 121,051 | (1,958 | ) | (247,126 | ) | 41,879 | |||||||||
Provision for income taxes | 185,334 | (45,224 | ) | (319,296 | ) | — | (179,186 | ) | ||||||||
Minority interest | (713 | ) | — | (13,016 | ) | — | (13,729 | ) | ||||||||
Earnings (loss) from continuing operations | 185,761 | (53,739 | ) | 300,865 | (247,126 | ) | 185,761 | |||||||||
Discontinued operations, net of tax | (20,900 | ) | — | (20,900 | ) | 20,900 | (20,900 | ) | ||||||||
Earnings (loss) before preferred dividends | 164,861 | (53,739 | ) | 279,965 | (226,226 | ) | 164,861 | |||||||||
Preferred dividends | (13,053 | ) | — | — | — | (13,053 | ) | |||||||||
Net earnings (loss) available to common shareholders | $ | 151,808 | $ | (53,739 | ) | $ | 279,965 | $ | (226,226 | ) | $ | 151,808 | ||||
Cash flows for the year ended December 31, 2004: | ||||||||||||||||
Cash flows (used in) provided by operations | $ | (200,354 | ) | $ | (37,979 | ) | $ | 1,511,561 | $ | — | $ | 1,273,228 | ||||
Cash flows (used in) provided by investing activities | (200,565 | ) | (943,235 | ) | 390,606 | — | (753,194 | ) | ||||||||
Cash flows provided by (used in) financing activities | 397,039 | 1,138,794 | (1,795,479 | ) | — | (259,646 | ) | |||||||||
Net cash used in discontinued operations | — | — | (17,528 | ) | — | (17,528 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 3,880 | — | 11,660 | — | 15,540 | |||||||||||
Cash and cash equivalents at the beginning of the period | — | 523,634 | 375,428 | — | 899,062 | |||||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | 681,214 | $ | 476,248 | $ | — | $ | 1,157,462 | ||||||
As of and for the year ended December 31, 2003:
| IAC | USANi LLC | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Balance Sheet as of December 31, 2003: | ||||||||||||||||
Current assets | $ | 43,843 | $ | 2,172,126 | $ | 1,999,007 | $ | — | $ | 4,214,976 | ||||||
Property and equipment, net | — | 11,659 | 461,518 | — | 473,177 | |||||||||||
Goodwill and other intangible assets, net | — | — | 13,787,524 | — | 13,787,524 | |||||||||||
Investment in subsidiaries | 17,872,126 | 2,376,750 | (25,177 | ) | (20,223,699 | ) | — | |||||||||
Other assets | 110,736 | 2,668,157 | 313,545 | — | 3,092,438 | |||||||||||
Net non-current assets of discontinued operations | — | — | 340 | — | 340 | |||||||||||
Total assets | $ | 18,026,705 | $ | 7,228,692 | $ | 16,536,757 | $ | (20,223,699 | ) | $ | 21,568,455 | |||||
Current liabilities | $ | (46,648 | ) | $ | 82,536 | $ | 1,815,936 | $ | 10,295 | $ | 1,862,119 | |||||
Net current liabilities of discontinued operations | — | — | 16,062 | — | 16,062 | |||||||||||
Long-term debt, less current portion | 748,897 | 360,299 | 10,901 | — | 1,120,097 | |||||||||||
Other liabilities and minority interest | 1,960,429 | 873 | 764,738 | 22 | 2,726,062 | |||||||||||
Intercompany liabilities | (480,088 | ) | 1,364,618 | (884,530 | ) | — | — | |||||||||
Common stock exchangeable for preferred interest | 1,428,530 | — | — | — | 1,428,530 | |||||||||||
Interdivisional equity | — | — | 15,253,053 | (15,253,053 | ) | — | ||||||||||
Shareholders' equity | 14,415,585 | 5,420,366 | (439,403 | ) | (4,980,963 | ) | 14,415,585 | |||||||||
Total liabilities and shareholders' equity | $ | 18,026,705 | $ | 7,228,692 | $ | 16,536,757 | $ | (20,223,699 | ) | $ | 21,568,455 | |||||
Statement of operations for the year ended December 31, 2003: | ||||||||||||||||
Revenue | $ | — | $ | — | $ | 6,328,118 | $ | — | $ | 6,328,118 | ||||||
Operating expenses | (2,917 | ) | (180,745 | ) | (5,744,273 | ) | — | (5,927,935 | ) | |||||||
Interest (expense) income, net | (15,167 | ) | 54,030 | 44,046 | — | 82,909 | ||||||||||
Other income (expense) | 144,741 | (72,985 | ) | (1,455 | ) | (291,002 | ) | (220,701 | ) | |||||||
Provision for income taxes | — | — | (70,691 | ) | — | (70,691 | ) | |||||||||
Minority interest | — | — | (18,513 | ) | (46,530 | ) | (65,043 | ) | ||||||||
Earnings (loss) from continuing operations | 126,657 | (199,700 | ) | 537,232 | (337,532 | ) | 126,657 | |||||||||
Discontinued operations, net of tax | 40,739 | — | 40,739 | (40,739 | ) | 40,739 | ||||||||||
Earnings (loss) before preferred dividends | 167,396 | (199,700 | ) | 577,971 | (378,271 | ) | 167,396 | |||||||||
Preferred dividends | (13,055 | ) | — | — | — | (13,055 | ) | |||||||||
Net earnings (loss) available to common shareholders | $ | 154,341 | $ | (199,700 | ) | $ | 577,971 | $ | (378,271 | ) | $ | 154,341 | ||||
Cash flows for the year ended December 31, 2003: | ||||||||||||||||
Cash flows (used in) provided by operations | $ | (31,196 | ) | $ | (37,083 | ) | $ | 1,372,947 | $ | — | $ | 1,304,668 | ||||
Cash flows used in investing activities | (724,799 | ) | (825,965 | ) | (219,308 | ) | — | (1,770,072 | ) | |||||||
Cash flows provided by (used in) financing activities | 828,456 | (99,070 | ) | (1,297,026 | ) | — | (567,640 | ) | ||||||||
Net cash used in discontinued operations | (72,461 | ) | — | (13,171 | ) | — | (85,632 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 19,624 | — | 19,624 | |||||||||||
Cash and cash equivalents at beginning of period | — | 1,485,754 | 512,360 | — | 1,998,114 | |||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 523,636 | $ | 375,426 | $ | — | $ | 899,062 | ||||||
For the year ended December 31, 2002:
| IAC | USANi LLC | Non-Guarantor Subsidiaries | Total Eliminations | IAC Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | |||||||||||||||
Statement of operations for the year ended December 31, 2002: | ||||||||||||||||
Revenue | $ | — | $ | — | $ | 4,580,925 | $ | — | $ | 4,580,925 | ||||||
Operating expenses | (7,098 | ) | (48,653 | ) | (4,372,576 | ) | — | (4,428,327 | ) | |||||||
Interest (expense) income, net | (14,452 | ) | 42,591 | 41,993 | — | 70,132 | ||||||||||
Other income (expense) | 23,547 | (160,729 | ) | (104,411 | ) | 132,060 | (109,533 | ) | ||||||||
Provision for income taxes | — | — | (65,127 | ) | — | (65,127 | ) | |||||||||
Minority interest | — | — | (1,993 | ) | (44,080 | ) | (46,073 | ) | ||||||||
Earnings (loss) from continuing operations | 1,997 | (166,791 | ) | 78,811 | 87,980 | 1,997 | ||||||||||
Discontinued operations, net of tax | 34,184 | 33,237 | 25,035 | (58,272 | ) | 34,184 | ||||||||||
Gain on sale of Entertainment | 2,378,311 | — | — | — | 2,378,311 | |||||||||||
Cumulative effect of accounting change, net of tax | (461,389 | ) | — | (461,389 | ) | 461,389 | (461,389 | ) | ||||||||
Earnings (loss) before preferred dividends | 1,953,103 | (133,554 | ) | (357,543 | ) | 491,097 | 1,953,103 | |||||||||
Preferred dividends | (11,759 | ) | — | — | — | (11,759 | ) | |||||||||
Net earnings (loss) available to common shareholders | $ | 1,941,344 | $ | (133,554 | ) | $ | (357,543 | ) | $ | 491,097 | $ | 1,941,344 | ||||
Cash flows for the year ended December 31, 2002: | ||||||||||||||||
Cash flows (used in) provided by operations | $ | (193,530 | ) | $ | (600,383 | ) | $ | 1,572,394 | $ | — | $ | 778,481 | ||||
Cash flows provided by (used in) investing activities | 13,082 | 910,975 | (654,420 | ) | 47,000 | 316,637 | ||||||||||
Cash flows provided by (used in) financing activities | 180,448 | 971,883 | (432,810 | ) | (47,000 | ) | 672,521 | |||||||||
Net cash used by discontinued operations | — | — | (172,832 | ) | — | (172,832 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 11,131 | — | 11,131 | |||||||||||
Cash and cash equivalents at beginning of period | — | 203,263 | 188,913 | — | 392,176 | |||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 1,485,738 | $ | 512,376 | $ | — | $ | 1,998,114 | ||||||
NOTE 24: RECONCILIATION OF NON-GAAP MEASURE
The following table reconciles Operating Income before Amortization to operating income (loss) for the Company's reporting segments and to net earnings available to common shareholders in total (in millions, rounding differences may occur):
| For the year ended December 31, 2004: | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income before Amortization | Amortization of non-cash items | Operating Income (loss) | ||||||||
IAC Travel | $ | 627.3 | $ | (198.3 | ) | $ | 429.0 | ||||
HSN U.S.(a) | 194.7 | (52.9 | ) | 141.7 | |||||||
HSN International | 39.2 | (1.3 | ) | 37.9 | |||||||
Ticketing | 164.3 | (26.4 | ) | 137.9 | |||||||
Personals | 27.6 | (8.7 | ) | 18.8 | |||||||
IAC Local and Media Services | 26.5 | (50.0 | ) | (23.6 | ) | ||||||
Financial Services and Real Estate | 21.4 | (29.0 | ) | (7.6 | ) | ||||||
Teleservices | 17.1 | (184.8 | ) | (167.7 | ) | ||||||
Corporate Expense and other adjustments | (94.0 | ) | (240.5 | ) | (334.5 | ) | |||||
Intersegment Elimination | 0.5 | — | 0.5 | ||||||||
TOTAL | $ | 1,024.5 | $ | (792.0 | ) | $ | 232.5 | ||||
Other income, net | 146.2 | ||||||||||
Earnings from continuing operations before income taxes and minority interest | 378.7 | ||||||||||
Income tax expense | (179.2 | ) | |||||||||
Minority interest in income of consolidated subsidiaries | (13.7 | ) | |||||||||
Earnings from continuing operations | 185.8 | ||||||||||
Discontinued operations | (20.9 | ) | |||||||||
Earnings before preferred dividends | 164.9 | ||||||||||
Preferred dividends | (13.1 | ) | |||||||||
Net earnings available to common shareholders | $ | 151.8 | |||||||||
| For the year ended December 31, 2003: | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income before Amortization | Amortization of non-cash items | Merger Costs | Operating Income (loss) | ||||||||||
IAC Travel | $ | 523.8 | $ | (165.2 | ) | $ | (11.7 | ) | $ | 347.0 | ||||
HSN U.S.(a) | 168.3 | (50.8 | ) | — | 117.5 | |||||||||
HSN International | 32.6 | (1.3 | ) | — | 31.3 | |||||||||
Ticketing | 144.5 | (27.9 | ) | (0.1 | ) | 116.5 | ||||||||
Personals | 31.0 | (16.9 | ) | — | 14.1 | |||||||||
IAC Local and Media Services | 26.2 | (55.6 | ) | — | (29.4 | ) | ||||||||
Financial Services and Real Estate | 1.2 | (17.7 | ) | — | (16.5 | ) | ||||||||
Teleservices | 12.5 | — | — | 12.5 | ||||||||||
Corporate Expense and other adjustments | (79.3 | ) | (112.6 | ) | — | (191.9 | ) | |||||||
Intersegment Elimination | (0.8 | ) | — | — | (0.8 | ) | ||||||||
TOTAL | $ | 860.1 | $ | (448.1 | ) | $ | (11.8 | ) | $ | 400.2 | ||||
Other expenses, net | (137.8 | ) | ||||||||||||
Earnings from continuing operations before income taxes and minority interest | 262.4 | |||||||||||||
Income tax expense | (70.7 | ) | ||||||||||||
Minority interest in income of consolidated subsidiaries | (65.0 | ) | ||||||||||||
Earnings from continuing operations | 126.7 | |||||||||||||
Discontinued operations | 40.7 | |||||||||||||
Earnings before preferred dividends | 167.4 | |||||||||||||
Preferred dividends | (13.1 | ) | ||||||||||||
Net earnings available to common shareholders | $ | 154.3 | ||||||||||||
| For the year ended December 31, 2002: | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income before Amortization | Amortization of non-cash items | Merger Costs | Pro Forma Adjustments(b) | Operating income (loss) | ||||||||||||
IAC Travel | $ | 279.8 | $ | (91.9 | ) | $ | (2.3 | ) | $ | (7.7 | ) | $ | 177.9 | ||||
HSN U.S.(a) | 131.4 | (32.6 | ) | — | — | 98.7 | |||||||||||
HSN International | (61.6 | ) | (0.7 | ) | — | — | (62.3 | ) | |||||||||
Ticketing | 108.1 | (11.1 | ) | — | — | 96.9 | |||||||||||
Personals | 28.4 | (5.8 | ) | — | — | 22.6 | |||||||||||
IAC Local and Media Services | (32.3 | ) | (48.3 | ) | (5.6 | ) | — | (86.3 | ) | ||||||||
Teleservices | (4.1 | ) | (22.2 | ) | — | — | (26.4 | ) | |||||||||
Corporate Expense and other adjustments | (58.1 | ) | (12.3 | ) | — | — | (70.3 | ) | |||||||||
Intersegment Elimination | (2.4 | ) | 4.1 | — | — | 1.7 | |||||||||||
TOTAL | $ | 389.1 | $ | (220.9 | ) | $ | (7.9 | ) | $ | (7.7 | ) | $ | 152.6 | ||||
Other expenses, net | (39.4 | ) | |||||||||||||||
Earnings from continuing operations before income taxes and minority interest | 113.2 | ||||||||||||||||
Income tax expense | (65.1 | ) | |||||||||||||||
Minority interest in income of consolidated subsidiaries | (46.1 | ) | |||||||||||||||
Earnings from continuing operations | 2.0 | ||||||||||||||||
Gain on contribution of USA Entertainment to VUE | 2,378.3 | ||||||||||||||||
Discontinued operations | 34.2 | ||||||||||||||||
Earnings before cumulative effect of accounting change | 2,414.5 | ||||||||||||||||
Cumulative effect of accounting change | (461.4 | ) | |||||||||||||||
Earnings before preferred dividends | 1,953.1 | ||||||||||||||||
Preferred dividends | (11.8 | ) | |||||||||||||||
Net earnings available to common shareholders | $ | 1,941.3 | |||||||||||||||
NOTE 25: SUBSEQUENT EVENTS$45.8 million.
On December 16, 2004, IAC notified eLong of its intent to exercise its warrant to acquire its additional eLong shares. The transaction was completed on January 10, 2005. Following the exercise of the warrant, IAC owns approximately 52% of the outstanding capital stock of eLong on a fully diluted basis, representing approximately 96% of the total voting power of eLong. Accordingly, the Company will begin to consolidate the results of eLong effective January 10, 2005.
On March 1, 2005,February 8, 2006, IAC announced that it is acquiring Cornerstone Brands, Inc. from a groupits Board of private investors. Cornerstone includes a portfolioDirectors authorized the repurchase of leading print catalogs and online retailing sites that sell home products and leisure and casual apparel. The company will joinup to 42 million shares of IAC's Electronic Retailing segment and HSN. The transaction is expected to closeoutstanding common stock. Under the new authorization, IAC may purchase shares over an indefinite period of time in the second quarter of 2005open market, depending on those factors IAC management deems relevant at any particular time, including, without limitation, market conditions, share price and the anticipated purchase price is approximately $720 million, net of expected tax benefits, payable primarily in cash.future outlook.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of the Company's Disclosure Controls and Procedures
The Company monitors and evaluates on an ongoing basis its disclosure controls and procedures in order to improve their overall effectiveness. In the course of these evaluations, the Company modifies and refines its internal processes as conditions warrant.
As required by Rule 13a-15(b), IAC management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended)Act) for the Company. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004.2005, except for Cornerstone Brands, which was acquired on April 1, 2005 and IAC Search & Media (formerly known as Ask Jeeves), which was acquired on July 19, 2005. The combined assets and revenue of Cornerstone Brands and IAC Search & Media were approximately 31% and 14% of the respective amounts in the consolidated financial statements as of and for the year ended December 31, 2005. In making this assessment, our management used the criteria for effective internal control over financial reporting described in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that, as of December 31, 2004,2005, the Company's internal control over financial reporting is effective.
Ernst & Young LLP, our independent registered public accounting firm, audited the Company's consolidated financial statements included in this annual report on Form 10-K in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has issued an attestation report, included herein, on management's assessment of the Company's internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
The Company monitors and evaluates on an ongoing basis its internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, the Company modifies and refines its internal processes as conditions warrant. As required by Rule 13a-15(d), IAC management, including the Chief Executive Officer and the Chief Financial Officer, also conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 20042005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
IAC/InterActiveCorp
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that IAC/InterActiveCorp maintained effective internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). IAC/InterActiveCorp's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that IAC/InterActiveCorp maintained effective internal control over financial reporting as of December 31, 2004,2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, IAC/InterActiveCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the related consolidated balance sheets of IAC/InterActiveCorp and subsidiaries as of December 31, 20042005 and 2003,2004, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 20042005 and our report dated March 11, 20058, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 11, 20058, 2006
None.
The information required by Part III (Items 10, 11, 12, 13 and 14) has been incorporated herein by reference to IAC's definitive Proxy Statement to be used in connection with its 20052006 Annual Meeting of Stockholders, or the 20052006 Proxy Statement, as set forth below, in accordance with General Instruction G(3) of Form 10-K.
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors and executive officers of IAC and their compliance with Section 16(a) of the Exchange Act is set forth in the sectionsections entitled "Election of Directors and Management Information" and "Executive Compensation—Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the 20052006 Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
Information regarding compensation of directors and executive officers of IAC is set forth in the section entitled "Executive Compensation" in the 20052006 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding ownership of IAC Common Stock,common stock, Class B Common Stockcommon stock and Preferred StockSeries B preferred stock and securities authorized for issuance under IAC's equity compensation plans is set forth in the sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the 20052006 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions with IAC is set forth in the section entitled "Certain Relationships and Related Party Transactions" in the 20052006 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information regarding the fees and services of IAC's independent auditors is set forth in the section entitled "Fees Paid to Our Independent Auditors" in the 20052006 Proxy Statement and is incorporated herein by reference.
Item 15.Exhibits and Financial Statement Schedules
(a) List of Documents filed as part of this Report
Report of Independent Registered Public Accounting Firm: Ernst & Young LLP.
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 2003 and 2002.2003.
Consolidated Balance Sheets as of December 31, 20042005 and 2003.2004.
Consolidated Statements of Stockholders'Shareholders' Equity for the Years Ended December 31, 2005, 2004 2003 and 2002.2003.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 2003 and 2002.2003.
Notes to Consolidated Financial Statements.
Schedule Number | | |
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II | Valuation and Qualifying |
All other financial statements and schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required.
The documents set forth below, numbered in accordance with Item 601 of Regulation S-K, are filed herewith or incorporated herein by reference to the location indicated.
Exhibit No. | Description | Location | ||
---|---|---|---|---|
2.1 | ||||
Exhibit 2.1 to the Registrant's | ||||
3.1 | Restated Certificate of Incorporation of | Exhibit 3.1 to the Registrant's | ||
3.2 | Certificate of Designations of Series B Cumulative Convertible Preferred Stock of IAC/InterActiveCorp. | Exhibit 3.2 to the Registrant's Registration Statement on Form 8-A/A, filed on August 12, 2005. |
Amended and Restated Bylaws of | Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on September 20, 2002. | |||
4.1 | Indenture, dated as of | |||
Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 (No. 333-102713), filed on January 24, 2003. | ||||
4.2 | Form of 7% Senior Notes due 2013. | Exhibit B to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 (No. 333-102713), filed on January 24, 2003. | ||
4.3 | Indenture (relating to the Zero Coupon Subordinated Convertible Notes of Ask Jeeves, Inc.), dated as of June 4, 2003, by and between Ask Jeeves, Inc. and The Bank of New York, as Trustee. | Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on July 22, 2005. | ||
4.4 | Form of Zero Coupon Convertible Subordinated Note of Ask Jeeves, Inc. | Exhibit 4.2 to the Registrant's Current Report on Form 8-K, filed on July 22, 2005 (included within Exhibit 4.1). | ||
4.5 | Supplemental Indenture (relating to the Zero Coupon Subordinated Convertible Notes of Ask Jeeves, Inc.), dated as of July 19, 2005, by and among the Registrant, Ask Jeeves, Inc. and the Bank of New York Trust Company, N.A., as Trustee. | Exhibit 4.3 to the Registrant's Current Report on Form 8-K, filed on July 22, 2005. | ||
4.6 | Second Supplemental Indenture (relating to the Zero Coupon Subordinated Convertible Notes of Ask Jeeves, Inc.), dated as of August 9, 2005, by and among the Registrant, Ask Jeeves, Inc. and the Bank of New York Trust Company, N.A., as Trustee. | Exhibit 4.4 to the Registrant's Current Report on Form 8-K, filed on September 22, 2005. | ||
4.7 | In accordance with Item 601 (b) (4) (iii) (A) of Regulation S-K, certain instruments relating to long-term obligations of the Registrant have been omitted but will be furnished to the Commission upon request. | |||
4.8 | Equity Warrant Agreement, dated as of February 4, 2002, between the Registrant and The Bank of New York, as equity warrant agent. | Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for fiscal year ended December 31, 2001. | ||
Equity Warrant Agreement, dated as of May 7, 2002, between the Registrant and The Bank of New York, as equity warrant agent. | Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed May 17, 2002. | |||
Forms of Equity Warrant Agreement and Optionholder Equity Warrant Agreement, in each case, between the Registrant and Mellon Investor Services LLC, as equity warrant agent. | Exhibits 4.2 and 4.4 to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (SEC File No. 333-104973), filed on August 6, 2003. | |||
Amended and Restated Governance Agreement, among the Registrant, Liberty Media Corporation and Barry Diller, dated as of August 9, 2005. | Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | |||
10.2 | Amended and Restated Stockholders Agreement between Liberty Media Corporation and Barry Diller, dated as of August 9, 2005. | Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.3 | Tax Sharing Agreement between the Registrant and Expedia, Inc., dated as of August 9, 2005. | Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.4 | Employee Matters Agreement between the Registrant and Expedia, Inc., dated as of August 9, 2005. | Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.5 | Transition Services Agreement between the Registrant and Expedia, Inc., dated as of August 9, 2005. | Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.6* | IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan. | Incorporated by reference to Annex J to the Registrant's Definitive Proxy Statement, included in Amendment No. 3 to the Registrant's Registration Statement on Form S-4, filed with the Commission on June 17, 2005 (SEC File No. 333-124303). | ||
10.7* | Form of Restricted Stock Unit Agreement for the IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan. | Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.8* | Amended and Restated 2000 Stock and Annual Incentive Plan. | Appendix B to the Registrant's Definitive Proxy Statement, dated April 30, 2003. | ||
10.9* | HSN, Inc. 1997 Stock and Annual Incentive Plan. | Appendix F to the Registrant's Definitive Proxy Statement, dated January 12, 1998. | ||
10.10* | Form of Restricted Stock Unit Agreement for the Amended and Restated 2000 Stock and Annual Incentive Plan and the HSN, Inc. 1997 Stock and Annual Incentive Plan. | Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated February 16, 2005. | ||
10.11* | Home Shopping Network, Inc. 1996 Stock Option Plan for Employees. | Exhibit A to the Home Shopping Definitive Proxy Statement, dated March 28, 1996. | ||
10.12* | Summary of Non-Employee Director Compensation Arrangements. | Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | ||
10.13* | Deferred Compensation Plan For Non-Employee Directors. | Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | ||
10.14* | Silver King Communications, Inc. Directors' Stock Option Plan. | Appendix H to the Registrant's Definitive Proxy Statement, dated November 20, 1996. | ||
10.15* | IAC/InterActiveCorp Executive Deferred Compensation Plan. | Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | ||
10.16* | Stock Option Agreement between the Registrant and Barry Diller, dated as of June 7, 2005. | Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005. | ||
10.17* | Equity and Bonus Compensation Agreement, dated as of August | Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | ||
Exhibit | ||||
Exhibit | ||||
Employment Agreement between | Exhibit | |||
Exhibit | ||||
Employment Agreement between Gregory R. Blatt and the Registrant, dated as of November 5, 2003. | Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | |||
Employment Agreement between | ||||
Exhibit | ||||
Shareholders Agreement, dated December 12, 1996, relating to Jupiter Shop Channel Co. Ltd. among Jupiter Programming Co. Ltd., Home Shopping Network, Inc. and Jupiter Shop Channel Co. Ltd. | Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | |||
Services and Trademark License Agreement, dated as of December 12, 1996, between Home Shopping Network, Inc. and Jupiter Shop Channel Co. Ltd. | Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | |||
21.1† | Subsidiaries of | |||
23.1† | Consent of Ernst & Young LLP. | |||
31.1† | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2† | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1†† | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
32.2†† | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 16, 200513, 2006
IAC/INTERACTIVECORP | ||||
By: | /s/ BARRY DILLER Barry Diller Chairman of the Board, |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 2005.13, 2006.
Name | Title | |
---|---|---|
/s/ BARRY DILLER Barry Diller | Chairman of the Board, Chief Executive Officer and Director | |
/s/ VICTOR A. KAUFMAN Victor A. Kaufman | Vice Chairman and Director | |
/s/ THOMAS J. MCINERNEY Thomas J. McInerney | Executive Vice President and Chief Financial Officer | |
/s/ MICHAEL H. SCHWERDTMAN Michael H. Schwerdtman | Senior Vice President and Controller (Chief Accounting Officer) | |
William H. Berkman | Director | |
/s/ EDGAR BRONFMAN, JR. Edgar Bronfman, Jr. | Director | |
/s/ DONALD R. KEOUGH Donald R. Keough | Director | |
/s/ MARIE-JOSÉE KRAVIS Marie-Josée Kravis | Director | |
Bryan Lourd | Director | |
/s/ ARTHUR C. MARTINEZ Arthur C. Martinez | Director | |
/s/ STEVEN RATTNER Steven Rattner | Director | |
/s/ GEN. H. NORMAN SCHWARZKOPF Gen. H. Norman Schwarzkopf | Director | |
/s/ ALAN G. SPOON Alan G. Spoon | Director | |
/s/ DIANE VON FURSTENBERG Diane Von Furstenberg | Director |
IAC/INTERACTIVECORP AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Description | Balance at Beginning of Period | Charges to Earnings | Charges to Other Accounts | Deductions | Balance at End of Period | Balance at Beginning of Period | Charges to Earnings | Charges to Other Accounts | Deductions | Balance at End of Period | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | (In thousands) | ||||||||||||||||||||||||||||||
2005 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 19,150 | $ | 21,206 | $ | 12,876 | (1) | $ | (22,139 | )(2) | $ | 31,093 | ||||||||||||||||||||
Inventory reserves | 37,882 | 4,311 | 5,577 | (1) | (5,822 | )(3) | 41,948 | |||||||||||||||||||||||||
Sales returns accrual | 29,933 | 5,326 | 7,059 | (1) | (3,316 | ) | 39,002 | |||||||||||||||||||||||||
Loans held for sale reserve | 1,144 | 4,649 | — | (2,729 | ) | 3,064 | ||||||||||||||||||||||||||
Deferred tax valuation allowance | 104,711 | 12,516 | (4) | (75,563 | )(5) | — | 41,664 | |||||||||||||||||||||||||
Other reserves | 4,705 | 2,981 | ||||||||||||||||||||||||||||||
2004 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 30,999 | $ | 6,325 | $ | 594 | $ | (15,083) | (1) | $ | 22,835 | $ | 24,940 | $ | 6,805 | $ | 1,730 | $ | (14,325 | )(2) | $ | 19,150 | ||||||||||
Inventory reserves | 34,607 | 4,369 | 80 | (1,174) | (8) | 37,882 | 34,607 | 4,369 | 80 | (1,174 | )(3) | 37,882 | ||||||||||||||||||||
Sales returns accrual | 29,441 | 3,052 | — | (297 | ) | 32,196 | 29,338 | 404 | — | 191 | 29,933 | |||||||||||||||||||||
Loans held for sale reserve | — | 155 | 989 | — | 1,144 | |||||||||||||||||||||||||||
Deferred tax valuation allowance | 390,531 | (9) | 7,175 | (131,867) | (2) | (127,460) | (3) | 138,379 | 263,586 | (6) | — | (36,738 | )(7) | (122,137 | )(8) | 104,711 | ||||||||||||||||
Other reserves | 18,993 | 19,207 | 4,935 | 4,705 | ||||||||||||||||||||||||||||
2003 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 29,036 | $ | 21,638 | $ | (352 | ) | $ | (19,323) | (1) | $ | 30,999 | $ | 23,667 | $ | 19,552 | $ | 705 | $ | (18,984 | )(2) | $ | 24,940 | |||||||||
Inventory reserves | 33,444 | 1,413 | (243 | ) | (7) | (8) | 34,607 | 33,444 | 1,413 | (243 | ) | (7 | )(3) | 34,607 | ||||||||||||||||||
Sales returns accrual | 24,036 | 5,297 | 160 | (52 | ) | 29,441 | 24,036 | 5,302 | — | — | 29,338 | |||||||||||||||||||||
Deferred tax valuation allowance | 336,800 | (34,243) | (5) | (35,626) | (4) | — | 266,931 | (9) | 217,422 | (34,243 | )(9) | (27,979 | )(10) | — | 155,200 | (6) | ||||||||||||||||
Other reserves | 12,949 | 18,993 | 3,787 | 4,935 | ||||||||||||||||||||||||||||
2002 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 16,116 | $ | 27,337 | $ | 9,668 | (6) | $ | (24,085) | (1) | $ | 29,036 | ||||||||||||||||||||
Inventory reserves | 38,170 | (4,944 | ) | 303 | (7) | (85 | )(8) | 33,444 | ||||||||||||||||||||||||
Sales returns accrual | 21,925 | 2,111 | — | — | 24,036 | |||||||||||||||||||||||||||
Deferred tax valuation allowance | 75,834 | (29,008 | )(5) | 289,974 | (6) | — | 336,800 | |||||||||||||||||||||||||
Other reserves | 4,369 | 12,949 |