Home Shopping Network 2008 Annual Report Download - page 31

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home and apparel categories (which are Cornerstone’s primary markets), the negative impact of this environment on
Cornerstone’s performance and the related reduction in market valuations for retailers.
In the fourth quarter of 2008, due to the deepening of the recession, the continuation of the weak conditions
in the retail consumer market and a significant decline in our stock price, we recognized an additional $2.9 billion of
asset impairment charges related to the write down of goodwill and intangible assets at our HSN and Cornerstone
reporting units.
Non-cash compensation expense increased $8.1 million as compared to the previous year which was
primarily due to the modification of stock-based compensation awards in connection with the spin-off.
HSNi’s operating income in 2007 decreased $43.4 million from 2006, primarily due to the decrease in
Adjusted EBITDA described above, a $4.4 million increase in amortization of non-cash marketing and a
$0.4 million increase in non-cash compensation expense, partially offset by a $21.5 million decrease in amortization
of intangibles resulting from certain intangible assets being fully amortized in 2006 and 2007. The amortization of
non-cash marketing referred to in this report consists of non-cash marketing and advertising secured by IAC from
Universal Television as part of the IAC transaction pursuant to which Vivendi Universal Entertainment, LLLP
("VUE") was created, and the subsequent transaction by which IAC sold its partnership interests in VUE.
Other (Expense) Income
2008
%
Change 2007
%
Change 2006
Interest income 480$ 90% 252$ (57%) 586$
Interest expense (16,420) NM - - -
Other income (expense)
- NM (256) (75%) (1,040)
Other (expense) income, net (15,940)$ NM (4)$ (99%) (454)$
As a percentage of total net sales -1% (56 bp) 0% 2 bp 0%
$.0
Year Ended December 31,
(Dollars in thousands)
Interest expense for the year ended December 31, 2008 primarily relates to the $150 million five-year term
loan and the $240 million of 11.25% senior notes which were issued in the third quarter of 2008 in connection with
the spin-off from IAC. Additionally, interest expense includes the cost on the $40 million draw on the credit facility
in the fourth quarter of 2008. HSNi repaid $20.0 million of the revolving credit facility as of December 31, 2008
and repaid the remaining $20.0 million in the first quarter of 2009.
Income Tax Provision
For the year ended December 31, 2008, HSNi recorded a tax benefit from continuing operations of $730.8
million, which represents an effective tax rate of 23%. The 2008 tax rate is lower than the federal statutory rate of
35% due principally to the non-deductible impairment charges of goodwill and intangible assets. This rate is also
lower than the 35% federal statutory rate due to the reversal of an interest accrual on a FIN 48 tax liability and
adjustments related to state income tax rates.
Included in the 2008 income tax benefit is the reversal of $753.3 million of deferred tax liabilities related to
the goodwill and intangible asset impairments. These deferred tax liabilities for both HSN and Cornerstone were
recorded upon the acquisition of certain business operations and interests in prior years in accordance with the
prescribed accounting rules. This remaining deferred tax liability represents future taxes that could be owed upon a
sale of the HSN and/or Cornerstone business operations.
In 2007 and 2006, HSNi recorded an income tax provision for continuing operations of $64.6 million and
$79.2 million, respectively, which represents effective tax rates of 38% and 37%, respectively. These tax rates are
higher than the federal statutory rate of 35% due principally to state and local income taxes.