MTCH

Business Context and Reporting Period

Company: USA Interactive, Inc. (USA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: USA is a multi-brand interactive commerce company operating via the Internet, television, and telephone. The company is organized into three primary segments: Electronic Retailing (HSN, International TV Shopping), Information and Services (Ticketmaster, Match.com, Citysearch, Precision Response), and Travel Services (Expedia, Hotels.com, Interval International).
Key Structural Changes: In 2002, USA contributed its entertainment businesses to a joint venture with Vivendi (VUE), acquired a controlling interest in Expedia, and completed the acquisition of Interval International. In early 2003, USA completed the acquisition of the remaining shares of Ticketmaster and announced a merger to acquire the remaining shares of Expedia.

Key Financial Metrics (Year Ended Dec 31, 2002)

Note: 2002 Net Earnings include a one-time after-tax gain of $2.38 billion from the contribution of the USA Entertainment Group to VUE and a cumulative effect of accounting change charge of $461.4 million related to the adoption of SFAS No. 142 (Goodwill).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 33.2% to $4.62 billion, driven primarily by the inclusion of Expedia (acquired Feb 2002) and Interval (acquired Sept 2002), as well as organic growth in Ticketing and Hotels.com.
• Profitability: Operating profit swung from a loss of $216.4 million in 2001 to a profit of $86.8 million in 2002. This improvement was significantly aided by the elimination of goodwill amortization under new accounting rules (SFAS 142) and the inclusion of profitable travel segments.
• Discontinued Operations: The USA Entertainment Group (USA Network, Sci-Fi Channel, Studios USA, USA Films) was contributed to VUE and is reported as discontinued operations. This resulted in a significant non-cash gain.
• Balance Sheet Expansion: Total assets more than doubled to $15.7 billion, largely due to the acquisition of Expedia and the receipt of $1.62 billion in cash proceeds from the VUE transaction.
• Debt: Long-term obligations increased to $1.21 billion, including the issuance of $750 million in 7.0% Senior Notes in December 2002.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Strategic Focus: Management is shifting focus from media/entertainment to interactive commerce. The company plans to simplify its corporate structure by acquiring remaining shares of Expedia and Ticketmaster.
• Stock Repurchases: In March 2003, the Board authorized the repurchase of up to 30 million shares of USA common stock.
• Segment Performance:
  • HSN: Adjusted EBITDA increased 17.2% despite revenue declines due to disengagement from broadcast stations and a shift to higher-margin products.
  • Ticketing: Revenue increased 13.0% with strong growth in international markets and online sales.
  • Hotels.com: Revenue surged 76.2% driven by the new brand launch and expansion into international markets.
  • Expedia: Contributed $553.7 million in revenue and $162.8 million in Adjusted EBITDA for the period held (Feb-Dec 2002).

Risks and Contingencies

• Key Personnel: The company is heavily dependent on Chairman and CEO Barry Diller, who controls approximately 66% of the voting power.
• System Integrity: Reliance on complex IT infrastructure creates risks regarding security, data breaches, and system interruptions.
• Regulatory Environment: Subject to changing laws regarding Internet taxation, consumer privacy, and telemarketing (e.g., "Do Not Call" registry).
• Travel Sensitivity: Travel businesses (Expedia, Hotels.com) are sensitive to terrorism, economic downturns, and airline industry volatility.
• Legal Proceedings: Pending litigation includes shareholder suits regarding the Expedia and Ticketmaster mergers, consumer class actions against HSN regarding computer sales, and antitrust-related litigation involving Ticketmaster and Tickets.com.

Unusual Items

• Goodwill Impairment: Recorded a $461.4 million after-tax charge as a cumulative effect of adopting SFAS 142, primarily related to write-downs of Citysearch and Precision Response goodwill.
• Restructuring: Incurred $74.4 million in restructuring charges in 2002, including the shutdown of HSN-Espanol and HSE-Italy operations.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the SFAS 142 impairment testing for Citysearch and Precision Response, given the significant write-downs.
• VUE Transaction Terms: Review the specific terms of the Vivendi Universal Entertainment (VUE) joint venture, particularly the valuation of preferred interests and the potential for future cash distributions or equity settlements.
• Expedia Merger Completion: Monitor the progress and regulatory approval of the proposed merger to acquire the remaining 40% of Expedia shares announced in March 2003.
• HSN Disengagement Costs: Track the total costs associated with the transition from broadcast to cable distribution, which management estimates at approximately $100 million.
• Styleclick/ECS Wind-down: Confirm the timeline and financial impact of winding down the ECS and Styleclick operations following the loss of their last major client.
• Legal Exposure: Assess the potential financial impact of pending shareholder litigation regarding the Expedia and Ticketmaster transactions.