ITEM 2. PROPERTIES
Ticketmaster's corporate offices are located at 3701 Wilshire Boulevard, Los Angeles, California, where it currently leases approximately 68,600 square feet under a lease expiring in 2006. Ticketmaster leases office space in various cities throughout the United States, the United Kingdom, Ireland, Australia and Canada. As of December 31, 2000, Ticketmaster had approximately 623,700 square feet of space under lease, with scheduled expirations ranging from March 2001 to May 2009. In addition, Ticketmaster owns a small office in Vancouver, Canada.
Ticketmaster's city guide headquarters are located in Pasadena, California, where it currently leases approximately 46,300 square feet under a lease expiring in 2002. Ticketmaster also leases local office space for its city guides in approximately 32 cities throughout the United States and abroad. Local offices range in size from less than 2,000 square feet to 10,000 square feet and have lease terms that range from month-to-month to seven years. None of such leases expires later than 2005, except for the San Francisco lease which expires in 2006.
Ticketmaster's Internet personals businesses are located in Dallas, Texas, where it currently leases approximately 31,300 square feet under a lease expiring in 2005.
Ticketmaster believes that its facilities are adequate in the locations where it currently does business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time party to various legal proceedings arising in the ordinary course of our business. In addition to the legal proceedings described below, we are also party to various legal proceedings in which we are the plaintiff and seek injunctive relief and/or damages from third parties for breach of contract and unauthorized use of our intellectual property.
TICKETMASTER CONSUMER CLASS ACTION
During 1994, Ticketmaster was named as a defendant in 16 federal class action lawsuits filed in United States District Courts purportedly on behalf of consumers who were alleged to have purchased tickets to various events through Ticketmaster. These lawsuits alleged that Ticketmaster's activities violated antitrust laws. On December 7, 1994, the Judicial Panel on Multidistrict Litigation transferred all of the lawsuits to the United States District Court for the Eastern District of Missouri for
coordinated and consolidated pretrial proceedings. After an amended and consolidated complaint was filed by the plaintiffs, Ticketmaster filed a motion to dismiss and, on May 31, 1996, the District Court granted that motion ruling that the plaintiffs had failed to state a claim upon which relief could be granted. On April 10, 1998, the United States Court of Appeals for the Eighth Circuit issued an opinion affirming the district court's ruling that the plaintiffs lack standing to pursue their claims for damages under the antitrust laws and held that the plaintiffs' status as indirect purchasers of Ticketmaster's services did not bar them from seeking equitable relief against Ticketmaster. On July 9, 1998, the plaintiffs filed a petition for writ of certiorari to the United States Supreme Court seeking review of the decision dismissing their damage claims. Plaintiff's petition for writ of certiorari in the United States Supreme Court was denied on January 19, 1999. In November 2000, counsel for the purported class of plaintiffs and Ticketmaster reached an agreement in principle pursuant to which this litigation would be settled. The District Court approved the settlement agreement and is expected to enter an order concluding the litigation in the near future. We do not believe that the settlement will have a material impact on our financial condition or results of operations.
LITIGATION RELATING TO THE COMBINATION
On or about November 21, 2000, four Ticketmaster shareholders filed separate, virtually identical class action lawsuits against Ticketmaster, USA Networks and 15 of Ticketmaster's current and former directors. The lawsuits, all of which were filed in the Court of Chancery of the State of Delaware, were originally filed as SACHS V. CONN, ET AL., Case No. 18517 NC; BEER V. TICKETMASTER ONLINE-CITYSEARCH, INC., ET AL., Case No. 18520 NC; HARBOR FINANCE PARTNERS V. TICKETMASTER ONLINE-CITYSEARCH, ET AL., Case No. 18518 NC; and OSHER V. CONN, ET AL., Case No. 18516 NC. On or about December 1, 2000, one Ticketmaster shareholder filed a derivative lawsuit on Ticketmaster's behalf against USA Networks and the 15 directors of Ticketmaster. The lawsuit was originally filed as WALDMAN V. CONN, ET AL., Court of Chancery for the State of Delaware, Case No. 18526. The five lawsuits, all of which alleged that the terms of the Combination would unfairly benefit USA Networks at the expense of Ticketmaster and its shareholders, have since been consolidated into one lawsuit entitled IN RE TICKETMASTER SHAREHOLDER LITIGATION, Court of Chancery of the State of Delaware, Case No. 18516.
The consolidated lawsuit, which was filed on February 5, 2001, is brought by the plaintiffs derivatively on behalf of Ticketmaster. The plaintiffs allege that the Combination is the product of unfair self-dealing, and that the consideration that Ticketmaster paid to USA Networks was unfair and excessive. The plaintiffs further allege that the directors of Ticketmaster are not disinterested or independent and, therefore, were unable to give unbiased consideration to the transaction or to negotiate the terms of the transaction in good faith and with undivided loyalty. As their prayer for relief in the lawsuit, the plaintiffs sought to have the Court enjoin the defendants from consummating the Combination or, in the alternative, to have the Court rescind the Combination. In addition, the plaintiffs seek monetary damages, attorneys' fees and other costs of pursuing the lawsuit. None of the defendants has yet filed a response to the consolidated lawsuit. However, Ticketmaster believes that the suit is without merit, and expects all defendants to vigorously defend against the lawsuit.
TICKETS.COM LITIGATION
On July 23, 1999, TMCS and TM Corp filed a Complaint seeking damages and injunctive relief against Tickets.com, Inc. ("Tickets.com"), entitled TICKETMASTER CORPORATION AND TICKETMASTER ONLINE-CITYSEARCH, INC. V. TICKETS.COM, INC., Case No. 99-07654 HLH, in the United States District Court for the Central District of California. Ticketmaster claims that Tickets.com violates Ticketmaster's legal and contractual rights by, among other things, (i) providing deep-links to Ticketmaster's internal Web pages without Ticketmaster's consent, (ii) systematically, deceptively and intentionally accessing Ticketmaster's computers and computer systems and copying verbatim Ticketmaster event pages daily and extracting and reprinting Ticketmaster's Uniform Resource Locators ("URLs") and event data and information in
complete form on Tickets.com's Web site and (iii) providing false and misleading information about Ticketmaster, the availability of tickets on the Ticketmaster Web site, and the relationship between Ticketmaster and Tickets.com. On January 7, 2000, Ticketmaster filed a first amended complaint. Tickets.com filed a motion to dismiss Ticketmaster's first amended complaint on or about February 23, 2000, claiming that Tickets.com did not violate the Copyright Act or Lanham Act and that Ticketmaster's state law claims were preempted and/or did not state a valid claim for relief. The Court denied Tickets.com's motion as to Ticketmaster's claims for copyright infringement, violations of the Lanham Act, state law unfair competition and interference with prospective economic advantage. The Court granted Tickets.com's motion, but gave Ticketmaster leave to amend, as to Ticketmaster's claims for breach of contract, trespass, unjust enrichment and misappropriation. Ticketmaster filed a second amended complaint on April 21, 2000.
On March 3, 2000, Ticketmaster filed a motion for preliminary injunction, requesting the Court to enjoin Tickets.com from, among other things, deep-linking and "spidering" to Ticketmaster's internal Web pages, accessing Ticketmaster's computers and computer systems and copying Ticketmaster's event pages, and providing misleading and false information about Ticketmaster, the availability of tickets on the Ticketmaster Web site and the relationship between Ticketmaster and Tickets.com. On July 31, 2000, the Court held a hearing. The court took the matter under submission, and on August 11, 2000 issued a ruling denying Ticketmaster's motion for preliminary injunction. On September 8, 2000, Ticketmaster filed a notice of appeal of the Court's order denying Ticketmaster's motion for preliminary injunction. On January 11, 2001, the Ninth Circuit Court of Appeals affirmed the District Court's order denying Ticketmaster's motion for preliminary injunction.
On May 30, 2000, Tickets.com filed its Answer to Ticketmaster's second amended complaint and counterclaims against Ticketmaster Corporation and Ticketmaster Online-Citysearch, Inc. Tickets.com asserted claims for relief against Ticketmaster for violations of the Sherman Act, sections 1 and 2, violations of California's Cartwright Act, violations of California's Business and Professions Code section 17200, violations of common law restraint of trade and unfair competition and business practices, interference with contract and declaratory relief. Tickets.com claimed that Ticketmaster Corporation's exclusive agreements with Ticketmaster Online-Citysearch, Inc., venues, promoters and other third parties injure competition, violate antitrust laws, constitute unfair competition and interfere with Tickets.com's prospective economic advantages. On July 19, 2000, Ticketmaster filed a motion to dismiss any claim based in whole or in part on Ticketmaster's alleged litigation conduct as well as Tickets.com's ninth claim for relief under California's antitrust laws (the Cartwright Act). On September 25, 2000, the court entered an order denying Ticketmaster's motion on the ground that Tickets.com has the right to pursue some discovery on the issues raised in the motion before the issue can properly be resolved.
On November 30, 2000, counsel for Ticketmaster and counsel for Tickets.com met pursuant to the required Local Rule 6.2 Early Meeting of Counsel obligation. The parties exchanged information concerning witnesses and documents supporting each side's respective positions, and also exchanged proposals concerning the schedule for the case. Tickets.com has proposed a schedule that would result in a trial date in November 2001. Ticketmaster has proposed a schedule pursuant to which discovery would conclude in November 2001 and after motions and other pretrial matters a trial date would be set in October 2002. The court has not yet issued an order setting a pretrial discovery schedule and a trial date. Ticketmaster believes that Tickets.com's claims are without merit and intends to vigorously defend against those claims and pursue its claims against Tickets.com.
TICKETMASTER CASH DISCOUNT LITIGATION
On or about December 17, 1999, a purported class action lawsuit entitled ADRIANA GARZA, ET AL. V. SOUTHWEST TICKETING, INC., D/B/A TICKETRON, TICKETMASTER AND RAINBOW TICKETMASTER, TICKETMASTER TEXAS MANAGEMENT, TICKETMASTER LLC, TICKETMASTER GROUP, INC., TICKETMASTER ONLINE-CITYSEARCH, INC. AND THE
MAY DEPARTMENT STORES COMPANY, CASE NO. C-5714-99-B, was filed in state court in the District Court of Hidalgo County, Texas, 93(rd) Judicial District. The plaintiff filed an amended class action petition in state court on June 20, 2000, which claims that Ticketmaster's practice of offering cash discounts against the amount of its service charges at outlets violated various state laws, and asserting an additional claim that the cash discount program in question violates a provision in a Merchant Services Bankcard Agreement between Ticketmaster and Chase Merchant Services L.L.C. and First Financial Bank. Plaintiff claims all consumers using VISA and MasterCard to purchase tickets from Ticketmaster are third-party beneficiaries of this contract. Plaintiff also filed on July 14, 2000 an amended class certification motion. In addition to the nine-state class sought by Plaintiff's original class certification request, the amended motion seeks the certification of a nationwide class of VISA and MasterCard customers since approximately April 1998 to prosecute the alleged third-party beneficiary claim. Ticketmaster filed a summary judgment motion on May 1, 2000 and Plaintiff filed a second amended motion for partial summary judgment on May 24, 2000. Ticketmaster denies the allegations. On July 20, 2000, Ticketmaster removed the case to federal court in McAllen, Texas on the grounds that the newly added third-party beneficiary claim raises a federal question under the Truth-in-Lending Act. On August 1, 2000, Plaintiff filed a motion to remand the case to state court. In December 2000, the plaintiff and defendants reached a tentative settlement of all issues. This settlement will require court approval to be finalized. Once a preliminary approval of the settlement occurs, the terms of the settlement will be announced through notice to the putative class members. The parties agreed to a remand of the matter from federal court to state court on January 17, 2001. The case subsequently was voluntarily dismissed in state court and later refiled in federal court in Texarkana, Texas. On March 1, 2001, the federal court in Texarkana, Texas granted preliminarily approval of the settlement. We do not believe that the settlement will have a material impact on our financial condition or results of operations.
CLASS ACTION LITIGATION RELATED TO MAGAZINE SALES
On or about December 18, 2000, Ticketmaster Corporation and Time, Inc. were named as defendants in a purported class action lawsuit filed in the Florida Circuit Court of the Thirteenth Judicial Circuit in Hillsborough County. The lawsuit is entitled VICTORIA MCLEAN V. TICKETMASTER CORPORATION AND TIME, INC., Case No. G0009564. The lawsuit alleges that the offering for sale by Ticketmaster Corporation of subscriptions to Entertainment Weekly magazine, a publication of Time, Inc., as an agent of Time, Inc., involves a pattern of criminal activity, conspiracy and unfair and deceptive trade practices by allegedly disclosing credit card account information to third parties without express written consent and unauthorized posting to credit card accounts. As the prayer for relief in the lawsuit, the plaintiff seeks to have the Court enjoin the business practices of which the plaintiff has complained. In addition, the plaintiff seeks treble monetary damages, as well as attorneys' fees and the costs for pursuing the action. On March 26, 2001, Ticketmaster Corporation and Time, Inc. filed a motion to dismiss the complaint on various grounds. That motion presently is scheduled to be heard by the Court on July 17, 2001. Ticketmaster believes the lawsuit is without merit and intends to vigorously defend against the lawsuit.
From time to time, federal, state and local authorities commence investigations or inquiries with respect to Ticketmaster's compliance with applicable antitrust, consumer protection, deceptive advertising, unfair business practice and other laws. Ticketmaster has historically cooperated in and satisfactorily resolved each such investigation or inquiry.
Ticketmaster believes that it has conducted its business in compliance with all applicable laws, including federal and state antitrust laws. In the opinion of Ticketmaster's management, none of Ticketmaster's legal proceedings will have a material adverse effect on Ticketmaster's financial position or results of operation. Ticketmaster has incurred significant legal expenses in connection with these
and other investigations and lawsuits and may incur additional significant legal expenses in the future should investigations or lawsuits be instituted.
Ticketmaster or its affiliates could become the subject of future governmental investigations or inquiries or be named as a defendant in claims alleging violations of federal or state antitrust laws or any other laws. Any adverse outcome in such litigation, investigation or proceeding against Ticketmaster or its affiliates could limit or prevent Ticketmaster from engaging in the ticketing business or subject Ticketmaster to potential damage assessments, all of which could have a material adverse effect on Ticketmaster's business, financial condition or results of operations. Regardless of its merit, source or outcome, any such litigation, investigation or proceeding would at a minimum be costly and could divert the efforts of our management and other personnel from productive tasks, which could have a material adverse effect on Ticketmaster's business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2000, TMCS entered into a contribution agreement with USA Networks, which set forth the terms and conditions of the Combination and required the approval of the stockholders of TMCS. Pursuant to an action by written consent, TM Corp, which held shares then representing approximately 84% of the outstanding voting power of TMCS, approved the Combination. Because TM Corp's written consent satisfied the stockholder approval requirements for the Combination under Delaware law, no separate vote of the TMCS stockholders was required. The information required by this Item is incorporated by reference from Ticketmaster's Definitive Information Statement filed with the Securities and Exchange Commission on January 11, 2001 pursuant to Section 14(c) of the Securities Exchange Act of 1934.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR OUR COMMON STOCK
Our Class B Common Stock began trading publicly on The Nasdaq National Market on December 3, 1998 under the symbol "TMCS." The following table lists quarterly information on the price range of our Class B Common Stock based on the high and low reported last sale prices for our common stock as reported on The Nasdaq National Market for the periods indicated below. These prices do not include retail markups, markdowns or commissions.
As of March 23, 2001, there were approximately 401 holders of record of our Class B Common Stock. We estimate there are more than 14,000 beneficial holders of our Class B Common Stock. On March 23, 2001, the last reported sale price on The Nasdaq National Market for the Class B Common Stock was $8.97.
On March 23, 2001, there were approximately 184 holders of record of our Class A Common Stock. There is no public market for the Class A Common Stock, but each share of Class A Common Stock will be automatically converted into one share of our Class B Common Stock upon any transfer of such share, subject to certain exceptions. In addition, each share of Class A Common Stock may be converted at any time into one share of Class B Common Stock at the option of the holder thereof.
We have not paid any dividends since our inception and do not intend to pay any dividends on our common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
We have used, and intend to continue to use, our Class B Common Stock to make tactical and strategic acquisitions and investments. In addition, we have issued, and may in the future issue, shares of our Class B Common Stock to raise additional funds to fund acquisitions, investments and operations. Typically, these issuances are not registered by us under the Securities Act of 1933, as amended (the "Securities Act"); rather we provide the party receiving such shares with registration rights permitting the registration of the resale of such shares by such persons under the Securities Act. In addition to issuances of shares that were not registered under the Securities Act that were reported
by us in our previously filed Quarterly Reports on Form 10-Q, we have made the following issuances for the following purposes.
(1) In September 1999, we issued 1,204,215 shares of our Class B Common Stock as consideration for the acquisition of all of the outstanding ownership units of Web Media Ventures, LLC (d/b/a One & Only Network). Such shares were issued to the former unit holders of One & Only Network. In December 1999, we issued an additional 61,962 shares of our Class B Common Stock to such persons in payment of the first of a series of three earn-out payments also in consideration of the acquisition of One & Only Networks. In March 2000, we issued an additional 65,793 shares of our Class B Common Stock to such persons in payment of the second of such series of earn-out payments. In June 2000, we issued an additional 560,380 shares of our Class B Common Stock to such persons in payment of the third and final of such series of earn-out payments.
(2) In December 1999, we issued 1,302,401 shares of our Class B Common Stock to TM Corp, which at that time was our majority stockholder, for an aggregate purchase price of $40 million. We have used the proceeds of this sale for general working capital.
(3) In December 1999, we issued 243,620 shares of our Class B Common Stock as partial consideration for our purchase of shares of Series D Preferred Stock of ActiveUSA.com, Inc. Such shares were issued to ActiveUSA.com, Inc.
(4) In January 2000, we issued 400,809 shares of our Class B Common Stock as consideration for the acquisition of all of the outstanding stock of 2b Technology, Inc. Such shares were issued to the former shareholders of 2b Technology. We issued an additional 57,196 shares of our Class B Common Stock in February 2000 to the former shareholders as part of a required post-closing adjustment. In December 2000, we issued an additional 299,954 shares of our Class B Common Stock to such persons in payment of all additional required post-closing adjustments and earn-out payments.
(5) In May 2000 we issued 1,841,204 shares of our Class B Common Stock as consideration for the acquisition of all of the outstanding stock of TicketWeb, Inc. Such shares were issued to certain of the former shareholders of TicketWeb.
(6) In January 2001, we issued 48,958,000 shares of our Class B Common Stock to TM Corp in exchange for the equity interests and assets contributed by TM Corp to us in the first step of the Combination. In addition, on the same date, we issued 53,302,401 shares of our Class B Common Stock and 42,480,143 shares of our Class A Common Stock to USA Networks in part as consideration for the capital stock of TGI contributed to us by USA Networks in the second step of the Combination and in part to replace the number of shares of our Class B and Class A Common Stock held by USA Networks through TM Corp prior to the Combination, which we now hold through TM Corp as a result of the Combination. The aggregate number of new shares issued by us in the Combination was 52,000,000 shares of our Class B Common Stock.
The sales of the securities described in items (1), (2), (3), (4), (5) and (6) above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below as of December 31, 2000, 1999 and 1998, and the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998 are derived from the audited financial statements of Ticketmaster. The selected financial data presented below for the years ended and at January 31, 1998 and 1997 are derived from audited financial statements of Ticketmaster.com as the predecessor entity. The selected Ticketmaster financial data set forth below are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of Ticketmaster and Notes thereto included elsewhere in this report. The selected financial data set forth below reflects the financial condition of Ticketmaster prior to the Combination, which occurred after December 31, 2000.
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(1) Reflects operating results including the amortization of goodwill and other intangible assets of CityAuction, Match.com, Web Media Ventures (One & Only Network), the Sidewalk assets, 2b Technology and TicketWeb from the date they were acquired.
(2) Includes the operating results of Citysearch from September 29, 1998 to December 31, 1998 as a result of the merger of Ticketmaster.com and Citysearch. The eleven-month period reflects our change in year-end to December 31 from January 31. Comparable amounts for the prior period are not presented because as a result of the merger such presentation would not be considered meaningful.
(3) These costs are primarily a result of advisory fees, regulatory filing fees and legal and accounting costs related to the Combination with Ticketmaster Group in 2000 and our terminated merger with certain assets owned by our majority stockholder and Lycos, Inc., as well as certain expenses related to the operation of Sidewalk city guides before the integration of these properties into the Citysearch network in 1999.
(4) Basic and diluted net income (loss) per share is based on the weighted average number of outstanding Class A and Class B Common Stock shares for the years ended December 31, 2000 and 1999 and for the eleven months ended December 31, 1998. Basic and diluted net income (loss) per share, for the years ended January 31, 1998 and 1997, is based on the number of shares of Citysearch common stock exchanged in the merger of Ticketmaster.com and Citysearch.
(5) Total assets at December 31, 2000, 1999 and 1998 reflect $562.5 million, $662.9 million and $299.6 million, respectively, of goodwill and other intangibles, net of accumulated amortization.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS REPORT. THE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR EXPECTATIONS AS OF THE DATE OF THIS REPORT AND WE TAKE NO OBLIGATION TO UPDATE THESE STATEMENTS. THE FORWARD-LOOKING STATEMENTS HEREIN DO NOT INCLUDE THE POTENTIAL IMPACT OF ANY MERGERS, ACQUISITIONS OR OTHER BUSINESS COMBINATIONS THAT HAVE BEEN COMPLETED AFTER DECEMBER 31, 2000, INCLUDING OUR COMBINATION WITH TICKETMASTER GROUP, INC. AND ITS SUBSIDIARIES (THE "COMBINATION"). THE DISCUSSION BELOW RELATES ONLY TO OUR OPERATIONS PRIOR TO THE COMBINATION, WHICH OCCURRED AFTER DECEMBER 31, 2000.
OVERVIEW
Ticketmaster (formerly known as Ticketmaster Online-Citysearch, Inc.) prior to the Combination was, and continues to be, a leading local portal and electronic commerce company that provides in-depth local content and services to help people get things done online. We offer practical tools for living that make the Internet an important part of people's everyday lives. Our principal operations are online city guides, online ticketing and online personals. Our family of Web sites includes citysearch.com, ticketmaster.com, match.com, museumtix.com, ticketweb.com, cityauction.com and livedaily.com, among others.
We derive revenues from three sources: online ticketing, city guide and related services (which includes online personals subscriptions) and sales of sponsorships and advertising. Prior to the Combination, and for purposes of our financial statements for the year ended December 31, 2000, we viewed our operations as being in one segment, with ongoing integration.
Ticketing operations revenues primarily consist of convenience and handling charges generated through ticket sales. The sale of tickets for an event often commences several months prior to the scheduled date of the event. Ticketing operations revenue is recognized when the ticket is sold. The number of tickets sold can vary as a result of (i) additions or deletions to the list of client facilities serviced by TM Corp; (ii) fluctuation in the scheduling of events, particularly for popular performers; (iii) overall consumer demand for live entertainment events; and (iv) the percentage of tickets which are sold directly by clients or through other distribution systems offered by TM Corp and not through our Web site. The average convenience charge per ticket typically varies based upon numerous factors including the type of event as well as the services to be rendered to the client. If credit card chargeback or refund activity is likely to occur with respect to an event, for example, due to the cancellation of such event, an allowance is established for potential convenience charge refunds.
City guide and related revenues consist of revenues derived primarily from Web-based city guides in the forms of revenue from custom built Web sites and other consulting services and online personals subscriptions. In our owned and operated city guide markets, we derive our revenues primarily from the sale to local businesses of Web sites which we create, host and maintain, as well as place in our directory listings so that the businesses receive exposure to our users. Business Web site customers typically enter into one-year agreements that automatically convert to month-to-month contracts upon expiration. We recognize revenue from sales of local business Web sites on a monthly basis over the term of each contract as services are rendered. In partner-led markets, we derive licensing and royalty revenues from the licensing of our technology and business systems, from consulting services and from providing back office and hosting services. We do not expect to enter into additional domestic partnerships to launch city guides going forward. Licensing revenue under license agreements is recognized over the term of the license agreement or the period over which the relevant services are delivered for use of our business and technology systems. Royalty revenue is recognized as earned and
is typically a percentage of partner-led market revenues from Web site sales, banners, advertisements, sponsorships and other ancillary offerings. In our integrated personals operations, we derive subscription fee revenue from customers who subscribe for our online matchmaking and dating services for one to twelve months. Subscription fee revenues are recognized monthly over the contract term.
Sponsorship and advertising revenues are derived from local and national advertisers and are primarily recognized over the term of the promotion either ratably or based on our fulfillment of advertising campaign milestones.
See Note 1 of the Notes to our Consolidated Financial Statements.
OPERATING COSTS
Ticketing operations costs consist primarily of expenses associated with ticket fulfillment (including the license fee to TM Corp), Web site maintenance, service and network infrastructure maintenance and data communications. City guide and related costs consist primarily of the expenses associated with the design, layout, photography, customer service and editorial resources used in production and maintenance of business Web sites; editorial content and network infrastructure maintenance in connection with the city guide operations; and costs of affiliate referral commissions, customer service and network infrastructure maintenance associated with the online personals operations.
RECENT DEVELOPMENTS
On January 31, 2001, our company was combined with Ticketmaster Group and its subsidiaries in a transaction structured as an acquisition by us of such entities. In the first step, TM Corp contributed to us all of the equity interests of its subsidiaries (except for shares of our common stock that it holds), along with its assets that were freely assignable. The shares of our common stock that were then held by TM Corp were not contributed or canceled and continue to be held by TM Corp. In exchange for the contributions by TM Corp, we issued to TM Corp 48,958,000 shares of our Class B Common Stock. In the second step, USA Networks contributed to us all of the outstanding capital stock of Ticketmaster Group. In exchange for the capital stock of Ticketmaster Group, we issued to USA Networks 52,000,000 new shares of our Class B Common Stock at the time of the closing of the Combination. In addition, we issued to USA Networks a number of shares of our Class A and Class B Common Stock equal to the number of such shares indirectly held by USA Networks through TM Corp prior to the Combination. Upon completion of the Combination, Ticketmaster Group and the former subsidiaries of TM Corp whose equity interests were contributed to us became our direct subsidiaries and TM Corp became our indirect subsidiary. The acquisition has been accounted for as a combination between entities under common control in a manner similar to the pooling of interests method of accounting. As a result of the Combination, prior year financials will be restated in future filings to present the Company as if it had been combined with Ticketmaster Group which will be similar to the pro forma presentation reported in Schedule 14C filed with the SEC in January 2001.
On February 12, 2001, we completed an acquisition of ReserveAmerica Holdings, Inc. ("ReserveAmerica"), the leading provider of campsite reservations. We paid $24.9 million in cash for the initial consideration due in the transaction. The purchase price will be increased for additional shares of our common stock to be granted upon achievement of revenue targets based on our stock price at that time. The acquisition has been accounted for using the purchase method of accounting. The acquisition resulted in $24.6 million of goodwill to be recorded initially, with adjustments to be made upon the issuance of additional shares if the revenue targets are achieved. The total amount of goodwill recorded approximates the purchase price that we are amortizing over a period of ten years.
OPERATING LOSSES
We incurred net losses of $224.2 million, $121.4 million and $17.2 million for the years ended December 31, 2000 and 1999 and for the eleven months ended December 31, 1998, respectively. At December 31, 2000, we had an accumulated deficit of $361.6 million.
GOODWILL
The merger of Ticketmaster.com and Citysearch in September 1998 and USA Networks' acquisition of 1,997,502 shares of Class A Common Stock of Citysearch from holders of such Class A Common Stock for $17.2 million pursuant to the terms of the related merger agreement in November 1998 resulted in $160.2 million of goodwill that is being amortized over five years. We recorded an allocation of goodwill of $154.8 million, which is being amortized over ten years, resulting from the acquisition of Ticketmaster Group by USA Networks. The acquisitions of CityAuction, Inc., Match.com, Inc and Web Media Ventures, LLC (d/b/a One & Only Network) during 1999 and 2b Technology, Inc. and TicketWeb, Inc. during 2000 resulted in goodwill of $28.7, $42.4, $44.7, $20.5 and $33.5 million, respectively, which are each being amortized over five years, with the exception of CityAuction as the amortization was entirely accelerated in the year ended December 31, 2000. In addition, the fair value of the consideration provided in exchange for the Sidewalk assets and distribution agreement, plus transaction costs amounted to $338.8 million and has been recorded in goodwill and other intangible assets. The amount allocated to the intangible asset of $333.8 million is being amortized over five years. The allocation of $5 million to the distribution agreement is being amortized over four years with the amortization expense included in sales and marketing.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
TICKETING OPERATIONS REVENUES. Ticketing operations revenues were $135.6 million and $64.8 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 109%. The increase is primarily attributable to a significant increase in the number of tickets sold on ticketmaster.com (from 10.0 million to 19.0 million tickets), ticketing revenues due to the acquisitions of 2b Technology in January 2000 and TicketWeb in May 2000 and an increase in the average convenience and handling charge for tickets sold on ticketmaster.com which increased 6% (from $6.38 to $6.78). We did not recognize any revenues from 2b Technology or TicketWeb in the year ended December 31, 1999.
CITY GUIDE AND RELATED REVENUES. City guide and related revenues were $66.7 million and $33.9 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 97%. The increase is principally attributable to the acquisition of the personals companies, Match.com and Web Media Ventures in June 1999 and September 1999, respectively, growth in revenues from operations in the 25 markets into which the city guide expanded throughout 1999, revenue from new city guide advertising products and services and also to increases in partner-led market consulting fees. Revenues from the personals operations represented a significant portion of total city guide and related revenues in the year ended December 31, 2000. We began recognizing revenues from the Match.com and Web Media Ventures portions of our personals operations in the second and third quarters of 1999, respectively.
SPONSORSHIP AND ADVERTISING REVENUES. Sponsorship and advertising revenues were $18.4 million and $6.6 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 179%. The increase is primarily attributable to our growing success in leveraging our expanded footprint of local city guides to appeal to national advertisers, including a significant advertising relationship with Microsoft Corporation.
TICKETING OPERATIONS EXPENSES. Ticketing operations expenses were $102.2 million and $47.9 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 114%. Our gross margins in ticketing operations slightly decreased to approximately 24% in the year ended December 31, 2000 from approximately 26% in the year ended December 31, 1999 as a result of higher client commissions. Ticketing operations expenses are primarily variable in nature and fluctuate in relation to fluctuations in ticketing revenue. In addition, we expect that ticketing operations expenses will increase proportionally with ticketing revenues. Expenses also increased, to a lesser
extent, due to the acquisitions of 2b Technology in January 2000 and TicketWeb in May 2000 and from an increase in Ticketmaster.com technology staffing. We did not recognize any expenses from 2b Technology or TicketWeb in the year ended December 31, 1999.
CITY GUIDE AND RELATED EXPENSES. City guide and related expenses were $52.9 million and $30.3 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 43%. The increase is attributable to the full year impact of both the city guide expansion in the year ended December 31, 1999 and, to a lesser extent, the inclusion of costs associated with our personals operations acquired in 1999. We began recognizing personals costs from the Match.com and Web Media Ventures portions of personals operations in the second and third quarters of 1999, respectively. Our gross margins in city guide and related operations increased to 21% in the year ended December 31, 2000 from 11% in the year ended December 31, 1999. The improvement resulted from the inclusion of our personals operations (which carry a higher gross margin) for the full period as opposed to the inclusion for only part of the 1999 period. City guide and related expenses have both fixed and variable components and may continue to increase in future periods to the extent city guide and related revenues increase during such periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily of costs related to the compensation of sales and marketing personnel and both online and offline advertising expense. Sales and marketing expenses were $78.8 million and $47.3 million for the year ended December 31, 2000 and 1999, respectively. This represents an increase of 67%. The increase for the year ended December 31, 2000, as compared to the year ended December 31, 1999, is attributable to the full year impact of the city guide expansion in 1999, advertising contributed by USA Networks for which we paid no consideration and the addition of sales and marketing expenses associated with our personals operations. We began recognizing sales and marketing costs from the Match.com and Web Media Ventures portions of our personals operations in the second and third quarters of 1999, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses include the costs to develop, test and upgrade our online service and the enterprise management systems primarily for our city guide operations. These costs consist primarily of salaries for product development personnel, contract labor expense, consulting fees, software licenses, hardware costs and recruiting fees. Research and development expenses were $6.0 million and $7.5 million for the years ended December 31, 2000 and 1999, respectively. This represents a decrease of 19%. The decrease is attributable to a reclassification of a portion of such costs to city guide and related expenses and, to a lesser extent, a reduction in full-time employees and consultants expensed to research and development during the 2000 period. We believe that timely deployment of new and enhanced products and technology is critical to attaining our strategic objectives and to remaining competitive. Accordingly, we intend to continue recruiting and hiring experienced research and development personnel and making other investments in research and development. We have expensed research and development costs as incurred.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of administrative and executive personnel costs. General and administrative expenses were $27.5 million and $15.2 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 80%. The increase is due primarily to the costs of additional personnel needed for the continued growth of our city guide operations, increased depreciation expense resulting from capital expenditures during 1999 and 2000 and the inclusion of expenses associated with 2b Technology and TicketWeb, which we acquired in January 2000 and May 2000, respectively. We expect that general and administrative expenses will increase in absolute dollars in future periods.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles consists of goodwill associated with the acquisition of TM Corp by USA Networks, a portion of which was attributed to Ticketmaster.com, the merger of Citysearch and Ticketmaster.com and the acquisitions of CityAuction, Match.com, Web Media Ventures, 2b Technology, TicketWeb and the
Sidewalk assets. Amortization of goodwill and other intangibles was $163.3 million and $77.7 million for the years ended December 31, 2000 and 1999, respectively. This represents an increase of 110%. The increases are attributable to recognizing more of the full year impact of these acquisitions in the year ended December 31, 2000 and the accelerated amortization of the goodwill from the CityAuction acquisition.
MERGER AND OTHER TRANSACTION COSTS. Merger and other transaction costs were $2.5 million and $4.2 million for the years ended December 31, 2000 and 1999, respectively. In 2000, these costs were attributable to the Combination with Ticketmaster Group and its subsidiaries. In 1999, these costs were primarily a result of advisory fees, regulatory filing fees and legal and accounting costs related to the terminated merger between us, certain assets owned by our majority shareholder and Lycos, Inc., as well as certain expenses related to the operation of the Sidewalk city guides before the integration of these properties into the city guide network.
INTEREST INCOME, NET. Net interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities available for sale, less interest expense on capital lease obligations. We had net interest income of $2.8 million and $4.2 million for the years ended December 31, 2000 and 1999, respectively. The changes in net interest income are primarily attributable to changes in the amount of our invested assets. We invest our cash balances in short-term investment grade, interest-bearing securities.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES. Equity in loss of unconsolidated affiliates of $3.9 million and $0.3 million for the years ended December 31, 2000 and 1999, respectively, represents our portion of net losses of foodline.com, Inc. and Active.com, Inc., two companies in which we made minority equity investments in late 1999. We recognize a portion of the gain or loss in these unconsolidated affiliates in periods during which our holdings of those companies' securities exceed specified percentages and we are deemed to exercise a measure of control over those companies as a result. In December 2000, foodline.com, Inc. filed for Chapter 7 bankruptcy protection and ceased operations. We will not recognize further losses in the operations of foodline.com, Inc.
INVESTMENT LOSSES, NET. Investment losses, net of $8.8 million in the year ended December 31, 2000 represents our losses in certain equity investments that suffered declines in value that were other than temporary, net of proceeds from the sale of an investment. We will continue to evaluate our investments in the future to determine if there are any future reductions in value.
OTHER INCOME (EXPENSE). Other income (expense) of $0.4 million in the year ended December 31, 2000 represents losses from the disposal of fixed assets, as well as losses we incurred from foreign currency translation.
INCOME TAXES. The provision for income taxes was $1.5 million and $0.5 million for the years ended December 31, 2000 and 1999, respectively. This provision reflects the income tax expense incurred by our foreign subsidiaries, and has increased as a result of increased ticketing profits in those markets and due to foreign taxes on our Japanese partner-led market consulting income and the sale of a Canadian investment which were recognized in the second and fourth quarters of 2000, respectively. Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of foreign income taxes and operating losses not benefited. We expect that our domestic tax provision will remain low throughout 2001 due to the availability of consolidated net operating losses following the Combination. The Company's balance sheet has a deferred tax asset for a net operating loss which is fully offset by a valuation allowance. The Company will retain the valuation allowance until it is likely that the Company will be able to utilize the net operating loss. Each quarter, the Company will evaluate the need for the full valuation allowance. If the valuation allowance is released, some of the benefit will be reflected in the income tax provision and some will be reflected through an adjustment to goodwill.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE ELEVEN MONTHS ENDED DECEMBER 31,
Results for the year ended December 31, 1999 are compared to the eleven months ended December 31, 1998 due to the change in our fiscal year-end in 1998. The difference of one month's operations is not considered to materially impact the comparison of the two periods.
TICKETING OPERATIONS REVENUES. Ticketing operations revenues were $64.8 million and $15.7 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase for the year ended December 31, 1999 over the eleven months ended December 31, 1998 is primarily attributable to a significant increase in the number of tickets sold (from 2.9 million to 10.0 million tickets) and a 17.1% increase in average convenience and handling charge revenue per ticket (from $5.45 to $6.38).
CITY GUIDE AND RELATED REVENUE. City guide and related revenues were $33.9 million and $5.4 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase is attributable to inclusion of the city guide operations for a full twelve months versus the inclusion of three months of the city guide operations subsequent to the merger of Citysearch and Ticketmaster.com in September 1998, growth in the city guide operations during 1999, the addition of approximately six months of revenue from the match.com portion of the personals operations and the addition of approximately three months of revenue from the One & Only Network portion of the personals operations. There were no revenues from personals operations in the 1998 period.
SPONSORSHIP AND ADVERTISING REVENUES. Sponsorship and advertising revenues were $6.6 million and $6.8 million, for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The decrease is associated with the loss of one major promotional agreement which represented $3.0 million in revenues for the eleven months ended December 31, 1998, offset in part by growth in the city guide operations and opportunities to generate sponsorship and advertising in 1999 and an increase in the amount of sponsorship and advertising activity in our ticketing operations.
TICKETING OPERATIONS EXPENSES. Ticketing operating expenses were $47.9 million and $9.8 million for the year ended December 31, 1999 and for the eleven months ended December 31,1998, respectively. Our gross margins in ticketing operations declined to approximately 26% in 1999 from approximately 37% in 1998 as a result of the license arrangement with TM Corp which commenced in October 1998 in connection with the merger of Citysearch and Ticketmaster.com. Ticketing operations expenses are primarily variable in nature and have increased during the periods presented in conjunction with the increase in ticketing operations revenue and will continue to increase in future periods to the extent ticketing operations revenues increase during such periods.
CITY GUIDE AND RELATED EXPENSES. City guide and related expenses were $30.3 million and $4.0 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase is attributable to growth in city guide operations in 1999, including the addition of 25 new owned and operated markets, the inclusion of a full twelve months of the city guide operations as compared to the three months subsequent to the merger of Citysearch and Ticketmaster.com in September 1998 in the period ended December 31, 1998 and, to a lesser extent, the inclusion of costs associated with our personals operations in 1999. There were no personals costs in the 1998 period. Our gross margins in city guide operations declined to 11% in 1999 from 25% in 1998 as a result of costs associated with the expansion into new markets where sales had not yet commenced.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $47.3 million and $6.8 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase is attributable to the growth of our city guide operations in 1999, the inclusion of a full twelve months of the city guide operations in 1999 as compared to the three months subsequent to the merger of Citysearch and Ticketmaster.com in September 1998 for the eleven
months ended December 31, 1998 and, to a lesser extent, the addition of sales and marketing expenses associated with our personals operations in the last half of 1999. There were no personals costs in the 1998 period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were $7.5 million and $1.7 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase is attributable to inclusion of a full twelve months of research and development costs of city guide operations in 1999 as compared to the three months subsequent to the merger of Citysearch and Ticketmaster.com in September 1998 and, to a lesser extent, the growth of city guide operations in 1999. We have expensed research and development costs as incurred, except that certain qualifying Web site software development costs of $4.4 million were capitalized during 1999 for our ticketing, city guide and personals operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $15.2 million and $3.5 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The increase was attributable to the inclusion of general and administrative expenses relating to city guide expenses for a full twelve months in 1999 as compared to the three month period subsequent to the merger of Citysearch and Ticketmaster.com in September 1998 in the period ended December 31, 1998, the growth of city guide operations in 1999 and, to a lesser extent, the inclusion of general and administrative expenses relating to personals operations in the last half of 1999. We had no costs associated with personals operations in 1998.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles was $77.7 million and $16.3 million for the year ended December 31, 1999 and the eleven months ended December 31, 1998, respectively, primarily relating to the merger of Citysearch and Ticketmaster.com and the acquisition of TM Corp. Amortization of goodwill in the prior year periods began during the three-month period ending September 30, 1998 as the acquisition of TM Corp did not occur until the end of June 1998.
MERGER AND OTHER TRANSACTION COSTS. Merger and other transaction costs were $4.2 million for the year ended December 31, 1999. There were no merger or other transaction costs in 1998. These costs are primarily a result of advisory fees, regulatory filing fees and legal and accounting costs related to the terminated merger between Ticketmaster Online-Citysearch, certain assets owned by our majority stockholder and Lycos, Inc., as well as certain expenses related to the operation of the Sidewalk city guides before the integration of these properties into the Citysearch network.
INTEREST INCOME, NET. We had net interest income of $4.2 million and $54,000 for the year ended December 31, 1999 and the eleven months ended December 31, 1998, respectively. The increase was due primarily to the inclusion of 12 months of net interest income from the cash acquired in the merger of Citysearch and Ticketmaster.com in September 1998 in the year ended December 31, 1999.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES. Equity in loss of unconsolidated affiliates of $272,000 represents the percentage of ownership portion of net losses of foodline.com, Inc. for the ownership period from October 1999 during the year ended December 31, 1999.
INCOME TAXES. The provision for income taxes was $464,000 and $2.9 million for the year ended December 31, 1999 and for the eleven months ended December 31, 1998, respectively. The provision for income taxes in 1999 relates to our international ticketing operations. Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of state income taxes and generating losses not benefited.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $25.5, $35.3 and $0.4 million for the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998, respectively. Net cash
used in operating activities was primarily due to net losses, offset in large part by non-cash depreciation and amortization expense of $173.1, $82.1 and $17.4 million, respectively.
Net cash used in investing activities was $7.7, $51.8 and $1.1 million for the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998, respectively. Net cash used in investing activities in the years ended December 31, 2000 and 1999 consisted primarily of purchases of short-term marketable securities, capital expenditures for computers, software, equipment and leasehold improvements, offset in the 2000 period mostly by proceeds from the sale of marketable securities to fund operations. Net cash used in investing activities in the eleven months ended December 31, 1998 consisted primarily of capital expenditures for computers, software, equipment and leasehold improvements.
Net cash provided by financing activities was $4.0, $41.7 and $50.6 million for the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998, respectively. Net cash provided by financing activities for the year ended December 31, 2000 was primarily attributable to proceeds from employee stock option exercises, offset by payments on capital leases. Net cash provided by financing activities for the year ended December 31, 1999 was primarily attributable to the $40.0 million additional investment by USA Networks (through its wholly-owned subsidiary TM Corp) in exchange for 1.3 million shares of our Class B Common Stock. The cash provided by financing activities for the eleven months ended December 31, 1998 was attributable to proceeds of $105.4 million from our initial public offering offset by the repayment of the $50.0 million convertible promissory note issued to us by USA Networks.
We had cash, cash equivalents and marketable securities available for sale of $40.1 million and $87.8 million at December 31, 2000 and 1999, respectively. As of December 31, 2000, we had no material commitments other than those under existing capital and operating lease agreements. We have experienced a substantial increase in our capital expenditures and investing activities consistent with our infrastructure build out and expansion into other businesses that compliment our current offerings. We will continue to evaluate possible acquisitions of, or investments in, businesses, products and technologies that are complementary to ours, which may require the use of cash. As a result of the Combination with Ticketmaster Group in January 2001, we have entered into a revolving credit facility with USA Networks that provides us with $25 million in available credit through May 1, 2001 (the "Revolver") and thereafter must be repaid upon demand. As of March 23, 2001, we owed USA Networks $24 million related to the terms of the Combination (the "Demand Note") and this amount must be repaid upon demand. We also had $0.2 million in outstanding letters of credit which were guaranteed by USA Networks (the "LOCs"). Both the Demand Note and the LOCs reduce the amount of available credit under the Revolver. Our management believes that existing cash and cash equivalents, marketable securities, the Revolver, amounts available from other sources, including USA Networks, and the positive cash flow from the ticketing operations we acquired in the Combination will be sufficient to meet our working capital and capital expenditures requirements for at least the next twelve months. Thereafter, we may be required to raise additional funds. We cannot assure you that we will not choose to or be required to raise additional financing prior to such time. If additional funds are raised through the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, we cannot assure you that additional financing will be available when needed or that, if available, such financing will include terms favorable to us or our stockholders. If such financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in debt instruments of the U.S. Government and its agencies and in high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.
SEASONALITY
Ticketmaster's ticket sales are occasionally impacted by fluctuations in the availability of events for sale to the public, which vary depending upon scheduling by the client. The second quarter of the year generally experiences the most events.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, with notes thereto and the report of Ernst & Young, LLP, our independent auditors, are set forth as indicated in Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Directors" and "Executive Officers" in the definitive Proxy Statement for our 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Directors" and "Executive Officers" in the definitive Proxy Statement for our 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Voting Securities and Principal Stockholders" in the definitive Proxy Statement for our 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the definitive Proxy Statement for our 2001 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
Schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included.
(A)(2) FINANCIAL STATEMENTS:
The following financial statements of Ticketmaster are included in response to Item 8 of this report.
(A)(3) EXHIBITS FILED AS PART OF THIS REPORT:
- ------------------------
* Confidential treatment has been granted with respect to portions of this exhibit.
** Reflects management contracts and compensatory plans.
+ Filed herewith.
(A) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on September 30, 1998.
(B) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 6, 1998.
(C) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 20, 1998.
(D) Incorporated by reference to exhibits filed in response to Item 7, "Exhibits," of the Report on form 8-K filed by USA Networks, Inc. (File No. 000-20570) with the Commission on February 26, 1998.
(E) Incorporated by reference to the Registrant's Report on Form 10-K filed with the Commission on March 31, 1999.
(F) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-1 (File No. 333-81761) filed with the Commission on June 29, 1999.
(G) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Report on Form 10-Q filed with the Commission on August 16, 1999.
(H) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Report on Form 10-Q filed with the Commission on November 15, 1999.
(I) Incorporated by reference to exhibits filed in response to Item 8, "Exhibits," of the Registrant's Registration Statement on Form S-8 (File No. 333-30794) filed with the Commission on February 18, 2000.
(J) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-3 (File No. 333-30884) filed with the Commission on February 22, 2000.
(K) Incorporated by reference to the Registrant's Report on Form 10-K filed with the Commission on March 23, 2000.
(L) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Report on Form 10-Q filed with the Commission on May 15, 2000.
(M) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-3 (File No. 333-39230) filed with the Commission on June 14, 2000.
(N) Incorporated by reference to exhibits filed in response to Item 8, "Exhibits," of the Registrant's Registration Statement on Form S-8 (File No. 333-41018) filed with the Commission on July 7, 2000.
(O) Incorporated by reference to exhibits to the Registrant's Definitive Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 filed with the Commission on January 11, 2001.
(P) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Registrant's Registration Statement on Form S-3 (File No. 333-54304) filed with the Commission on January 25, 2001.
(B) REPORTS ON FORM 8-K:
(1) On October 20, 2000, the Registrant filed a Current Report on Form 8-K in connection with the release of the registrant's financial results for the quarter ended September 30, 2000.
(2) On October 27, 2000, the Registrant filed a Current Report on Form 8-K relating to information concerning the registrant contained in a Current Report on Form 8-K filed by USA Networks, Inc. on October 26, 2000.
(3) On November 21, 2000, the Registrant filed a Current Report on Form 8-K in connection with the announcement of the registrant's execution of an agreement providing for the acquisition of Ticketmaster Corporation by the registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 2001
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Daniel Goodman, Bradley Serwin and Thomas J. McInerney, jointly and severally, his or her attorney-in-fact, each with the power of substitution for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
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 and on the dates indicated:
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Ticketmaster
We have audited the accompanying consolidated balance sheets of Ticketmaster (formerly Ticketmaster Online-Citysearch, Inc.) as of December 31, 2000 and December 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of Ticketmaster's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ticketmaster at December 31, 2000, and the consolidated results of their operations and their cash flows for each of the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California January 29, 2001
TICKETMASTER
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
TICKETMASTER
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
TICKETMASTER CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
TICKETMASTER
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TICKETMASTER
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
See accompanying notes.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION, FORMATION AND BUSINESS
RECENT DEVELOPMENTS
On November 21, 2000, the Company and USAi issued a joint press release announcing that they had entered into a definitive Contribution Agreement, dated as of November 20, 2000, pursuant to which USAi would contribute the business and operations of Ticketmaster Corp. to the Company in exchange for the issuance to USAi of 52 million shares of Class B Common Stock in addition to the shares of Class A and Class B Common Stock that USAi currently beneficially owns. This combination was completed on January 31, 2001 and upon completion, the Company was renamed "Ticketmaster" (see Note 14).
BASIS OF PRESENTATION AND MERGER
Prior to the Merger (as defined below), Ticketmaster Multimedia Holdings, Inc. (the predecessor company) ("Ticketmaster.com") was a wholly owned subsidiary of Ticketmaster Corporation ("Ticketmaster Corp."). Ticketmaster Corp. is a wholly owned subsidiary of Ticketmaster Group, Inc. ("Ticketmaster Group"), which is a wholly owned subsidiary of USA Networks, Inc. ("USAi").
In July 1997, USAi acquired a controlling interest in Ticketmaster Group through the issuance of shares of USAi common stock ("Ticketmaster Acquisition" by USAi). In June 1998, USAi completed its acquisition of Ticketmaster Group in a tax-free merger ("Tax-free Merger" and collectively with the Ticketmaster Acquisition by USAi is the "Ticketmaster Transaction"), pursuant to which each outstanding share of Ticketmaster Group common stock not owned by USAi was exchanged for 1.126 shares of USAi common stock. A portion of the Ticketmaster Group acquisition cost has been allocated to the assets acquired and liabilities assumed of Ticketmaster.com based on the fair value of the respective portion of Ticketmaster.com acquired in the Ticketmaster Transaction.
On September 28, 1998, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of August 12, 1998 (the "Merger Agreement"), by and among Citysearch, Inc. ("Citysearch"), USAi, Ticketmaster Group, Ticketmaster.com and Tiberius, Inc. ("Tiberius"), a wholly-owned subsidiary of Citysearch, Tiberius was merged with and into Ticketmaster.com, with Ticketmaster.com continuing as the surviving corporation and as a wholly-owned subsidiary of Citysearch (the "Merger"). In connection with the Merger Agreement, all issued and outstanding shares of Ticketmaster.com's Common Stock held by Ticketmaster Corp. were converted into an aggregate of 37,238,000 shares of Citysearch Common Stock and such shares were subsequently reclassified as Class A Common Stock of the Company. The Merger was accounted for using the "reverse purchase" method of accounting, pursuant to which Ticketmaster.com was treated as the acquiring entity for accounting purposes, and the assets acquired and liabilities assumed of Citysearch were recorded at their respective fair values. The accompanying financial statements prior to the Merger reflect the financial position, results of operations and cash flows of Ticketmaster.com. The accompanying financial statements, subsequent to the Merger, include the assets and liabilities of Citysearch and the results of operations of Citysearch from September 28, 1998. In connection with the Merger the name of the combined company was changed from Citysearch, Inc. to Ticketmaster Online- Citysearch, Inc. ("the Company"). References throughout these financial statements to Ticketmaster.com and Citysearch relate to the individual businesses of Ticketmaster.com and Citysearch, respectively.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
1. ORGANIZATION, FORMATION AND BUSINESS (CONTINUED) The Merger costs and the determination of the excess of Merger costs over net assets acquired are set forth below (in thousands):
The initial investment at cost represents the previous purchases of shares of Series E Preferred Stock by USAi, which were converted into 3,244,641 shares of Class A Common Stock in connection with the Merger, which, prior to the Merger, represented approximately 11.8% of the Citysearch outstanding equity.
The value of the non-monetary exchange between Ticketmaster.com and Citysearch was determined by Ticketmaster.com based on the fair value of the 50.7% of Citysearch acquired in the transaction. The fair value of Citysearch before the Merger was $238.4 million based on an assumed fair value of $8.67 per share of Citysearch's Common Stock outstanding at September 28, 1998, including outstanding stock options under the treasury method. The fair value of Citysearch attributable to outstanding shares of Common Stock at September 28, 1998 was $218.9 million and the fair value of Citysearch attributable to outstanding stock options at September 28, 1998, under the treasury stock method, was $19.5 million.
On October 2, 1998 USAi commenced a tender offer (the "Tender Offer") to purchase up to 20% of each Citysearch stockholder's Common Stock at a per share purchase price of $8.67 in cash, up to an aggregate of 2,924,339 shares. The Tender Offer expired on November 3, 1998 and 1,997,502 shares were tendered for purchase for a total of $17.3 million.
In connection with the Merger Agreement, Ticketmaster.com also entered into a License and Services Agreement (the "License Agreement") with Ticketmaster Corp. and USAi to remain perpetually in effect unless terminated as allowed under the License Agreement. For a license fee, Ticketmaster Corp. granted Ticketmaster.com, among other things, the exclusive worldwide right to use the trademarks of Ticketmaster Corp. in connection with the sale of tickets and merchandise via electronic interactive services.
On December 2, 1999 USAi invested an additional $40 million in the Company through the acquisition of 1.3 million shares of Class B Common Stock by its wholly-owned subsidiary Ticketmaster Corp. The strategic investment increased available cash, including marketable securities, to approximately $88 million at year-end and strengthened the Company's ability to execute its growth strategies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
1. ORGANIZATION, FORMATION AND BUSINESS (CONTINUED) PRO FORMA FINANCIAL DATA REFLECTING THE MERGER (UNAUDITED)
The following unaudited pro forma information presents a summary of results of the Company assuming the Merger, Ticketmaster Transaction and the Tender Offer had occurred as of January 1, 1998, with pro forma adjustments to give effect to amortization of goodwill, certain other adjustments to conform to the terms of the License Agreement, and the related income tax effects. The pro forma information also gives effect to the Company's change in year ended January 31 to December 31. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on January 1, 1998.
BUSINESS
Ticketmaster.com was formed in December 1993 to administer the online business of Ticketmaster Corp. which is a leading provider of automated ticketing services in the United States, with clients including many of the country's most well-known entertainment facilities, promoters and professional sports franchises. Ticketmaster.com commenced online ticket sales in November 1996 providing a ticketing outlet via the World Wide Web ("Web") which gives users access to live event tickets and event information in the United States, Canada and the United Kingdom. Ticketmaster.com's operations are the online distribution mechanism for Ticketmaster Corp., which utilizes Ticketmaster Corp.'s business relationships and brand name.
Citysearch was organized on September 20, 1995. Citysearch produces and delivers comprehensive local city guides on the Web, providing up-to-date information regarding arts and entertainment events, community events, community activities, recreation, business, shopping, professional services and news/ sports/weather to consumers in metropolitan areas. Citysearch designs and produces custom-built Web sites and related services for local businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand their sites.
Citysearch has two primary means of providing its local city guides. In its "owned and operated" markets, Citysearch systematically produces the majority of its own content, hires and deploys a direct sales force to sell custom-built business Web sites as well as related services to local and regional businesses, and launches a presence in the market. In its partner-led markets, Citysearch contracts with a local media company to provide assistance in developing, designing and launching a city guide. Under these contracts, the partners license Citysearch's business and technology systems and pay a license fee and/or make royalty payments to Citysearch based on certain revenues generated by the media partners from the operation of their sites and pay Citysearch for additional consultation and design services not provided for under the license fee.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
1. ORGANIZATION, FORMATION AND BUSINESS (CONTINUED) Customers include hotels, restaurants, taverns, movie theaters, museums and retail stores. The Company currently owns and operates sites in over 80 cities throughout the continental United States. The growth in cities is a result of aggressive expansion in addition to the acquisition of certain assets associated with the entertainment city guide portion of the Sidewalk.com Web site ("Sidewalk") from Microsoft Corporation ("Microsoft"). Through partnership and licensing agreements, the Company has an Internet presence in three domestic cities, as well as, over twenty international cities.
During 1999, the Company entered into the online auctions and personals businesses through its acquisitions of CityAuction, Inc. ("CityAuction"), Match.com, Inc. ("Match.com"), and Web Media Ventures LLC ("Web Media"). CityAuction provides users the ability to auction their belongings over the Web to consumers in their own hometowns. Match.com and Web Media currently operate as two separate online personals operations under the same management team. In 2000, the Company acquired 2b Technology, Inc. ("2b Technology"), a box office software and ticketing company, and TicketWeb, Inc. ("TicketWeb"), a Web-based live event ticketing company. The Company has integrated these acquisitions into its other online offerings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TICKETMASTER.COM BASIS OF PRESENTATION
Prior to the Merger, the accompanying consolidated financial statements present the operating results and cash flows of the predecessor company, Ticketmaster.com, a wholly owned subsidiary of Ticketmaster Corp. The financial statements include revenues related to the convenience and handling charges in connection with tickets sold via the Internet and advertising sales on Ticketmaster.com's Web site. Costs of ticketing revenues have been allocated from Ticketmaster Corp. to Ticketmaster.com on a per ticket sold basis. The financial statements include operating expenses which have been allocated to Ticketmaster.com by Ticketmaster Corp. on a specific identification basis. Further, Ticketmaster.com shared certain employees and other resources with Ticketmaster Corp. Allocations from Ticketmaster Corp. for indirect expenses for such shared resources have been made primarily on a proportional cost allocation method based on tickets sold and related revenues. Management believes these allocations are reasonable and that such expenses would not differ materially had Ticketmaster.com operated on a stand-alone basis for all periods presented. The financial statements of Ticketmaster.com prior to the merger do not necessarily reflect the results of operations or financial position that would have existed had Ticketmaster.com been an independent company.
SEGMENTS
The Company identifies its operating segments based on business activities, management responsibility and geographical location. The Company's chief operating decision maker reviews financial information to manage the business consistent with the manner presented in the consolidated financial statements. During the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998, the Company operated in a single business segment operating as a local portal and online consumer service primarily in the United States. Through December 31, 2000, foreign operations have not been significant in revenue. As a result of the combination with Ticketmaster Group (the "Combination"), prior year financials will be restated in future filings to present the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Company as if it had been combined with Ticketmaster Group which will be similar to the presentation reported in Schedule 14C filed with the SEC in January 2001.
CHANGE IN YEAR-END
The statements of operations and cash flows for the eleven months ended December 31, 1998 reflect a change in Ticketmaster.com's year-end as a result of the purchase of Ticketmaster Group by USAi.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts 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. Investments in which the Company owns less than a 20% interest, where it cannot exercise significant influence and which are not considered investments in marketable securities with a readily determinable fair market value are accounted for at cost. 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.
ESTIMATES USED IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, although management does not believe that any differences would materially affect the Company's consolidated financial position or results of operations.
Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts and estimates for deferral of revenues and accruals of expenses.
REVENUE RECOGNITION
Revenue from advertising and sponsorship agreements is recognized when the service is provided or over the term of the promotion. Revenue from the sale of tickets is recognized when tickets are sold.
City guide and related revenues include revenue from the sale of subscriptions for custom-built business Web sites (designed and developed by Citysearch) in its owned and operated markets, the performance of consultation and design services, licensing and royalty revenues from the sale of licenses for the use of Citysearch's business and technology systems in its partner-led markets, and the sale of classified advertising for the online personals divisions. License and royalty revenue is less than ten percent of consolidated revenue in all periods presented.
The Company recognizes subscription revenues from infosites and online personals classifieds after the site has been built and upon confirmation of payment, respectively, over the period the services are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provided. Royalty revenues are recognized when earned based on the revenues generated by the license or based on the minimum royalty provisions in the contract. Revenues from consultation and design services are recognized as the services are provided.
Revenues from the sale of licenses for use of the Company's business and technology systems to its partner-led markets are generally recognized over the term of the license agreement or the period over which the relevant services are delivered. The Company's license agreements have terms ranging from five to eight years.
Deferred revenue primarily consists of prepayments of subscription services, for both infosites and personals, and licensing agreements, advertising and sponsorship revenue, and revenue from Web site support agreements with joint venture partners of Ticketmaster Corp. Web site support is recognized straight line over the life of the agreement.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES AVAILABLE FOR SALE
The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and of high-quality corporate issuers. All highly liquid instruments with an original maturity of three months or less are considered cash equivalents and those with original maturities greater than three months and current maturities less than twelve months from the balance sheet date are considered short-term investments.
The Company's marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of other comprehensive loss included in stockholders' equity. Realized gains or losses and other than temporary declines in value, if any, on available-for-sale securities will be reported in other income or expense as incurred.
ACCOUNTS RECEIVABLE
Concentration of credit risk with respect to trade receivables is limited based on the transaction size, the use of credit card and bank drafts as method of payment, the large volume of transactions and geographic dispersion of the Company's customers. The Company generally does not require collateral; however, credit losses have been historically within management's expectations and have not been significant.
COMPUTERS, SOFTWARE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Computers, software, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Development costs for internal use software incurred in the application development stage are capitalized. Software development costs incurred in the preliminary project and post implementation stages of a project are expensed as incurred. Capitalized software is depreciated over the estimated useful live of the assets, which ranges from one to three years.
Assets acquired under capitalizable lease arrangements are recorded at the present value of the minimum lease payments. Amortization of assets capitalized under capital leases and leasehold
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) improvements are computed using the straight-line method over the life of the asset or term of the lease, whichever is shorter, and is included in depreciation expense.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant.
GOODWILL AND OTHER INTANGIBLES
Goodwill of $154.8 million, representing amounts allocated to Ticketmaster.com from the purchase of Ticketmaster Group by USAi, is being amortized by the straight-line method over ten years.
As a result of the Merger and the Tender Offer, the Company recorded goodwill of $160.6 million, which is being amortized using the straight-line method over five years, and intangibles relating to non-competition agreements of $500,000, which is being amortized using the straight-line method over 2.5 years.
The Company's acquisitions of CityAuction, Match.com and Web Media in 1999 and 2b Technology and TicketWeb in 2000 resulted in goodwill of $28.7, $42.4, $44.7, $20.5 and $33.5 million, respectively. In addition, the fair value of the consideration provided in exchange for the Sidewalk assets and distribution agreement, plus transaction costs amounted to $333.8 million and $5.0 million, respectively, and has been recorded in other intangible assets and deferred marketing, respectively. The Sidewalk intangible is being amortized over five years. The distribution agreement is being amortized over four years with the amortization expense included in sales and marketing.
Accumulated amortization at December 31, 2000 and 1999 was $257.3 and $94.0 million, respectively.
INCOME TAXES
Prior to the Merger, Ticketmaster.com's results have been included in Ticketmaster Corp.'s consolidated federal and state income tax returns. The income tax provision was calculated and deferred tax assets and liabilities were recorded as if Ticketmaster.com had operated as an independent company. Prior to the Merger, Ticketmaster Corp. paid all taxes for Ticketmaster.com and, as such, income taxes payable and deferred tax assets have been included in due to (from) Ticketmaster Corp. Subsequent to the Merger, the Company files its Federal and State income tax returns on a stand-alone basis.
Deferred tax assets and liabilities are recognized with respect to differences between the financial statement carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected in the years in which these temporary differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIC AND DILUTED LOSS PER SHARE
Basic loss per share is determined by dividing the net loss by the weighted average shares of Common Stock outstanding during the period. Diluted loss per share are determined by dividing the net loss by the weighted average shares of Common Stock outstanding plus the dilutive effects of stock options, warrants and other convertible securities. Basic and diluted loss per share is the same for the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998 because the effects of outstanding stock options and warrants are antidilutive.
The number of shares used in computing basic and diluted loss per share for the eleven month period ended December 31, 1998 includes the number of shares of Citysearch Common Stock exchanged in the Merger plus shares of Class A Common Stock of Citysearch outstanding and the number of shares of Class B Common Stock issued from the date of the Merger through December 31, 1998 calculated on a weighted average basis.
FINANCIAL INSTRUMENTS
The estimated fair values of cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying value because of the short term maturity of these instruments are indicative of market interest rates.
ADVERTISING COSTS
Advertising costs are expensed as incurred. For the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998, advertising costs amounted to $37.7, $16.0 and $1.5 million respectively.
The Company has entered into several barter arrangements whereby the Company either assists in the design and hosting of a Web site in exchange for broadcast advertising or provides online advertising in return for television and online advertising. The fair value of these services was determined based on the cost of the services provided. The Company valued these barter transactions at $1.7, $1.1 and $0.3 million for the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998. For the year ended December 31, 2000, $1.1 million and $0.6 million of the revenue was included in city guide and related revenue and sponsorship and advertising revenue, respectively, with the full amount recognized in sales and marketing expense. For the year ended December 31, 1999 and the eleven months ended December 31, 1998, the full amounts of $1.1 and $0.3 million are included in City guide and related revenue as well as recognized in sales and marketing expense in the accompanying consolidated statements of operations.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company periodically reviews its long-lived assets including its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
STOCK-BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In cases where exercise prices are less than fair value as of the grant date, compensation is recognized over the vesting period.
FOREIGN CURRENCY
The functional currency of the Company's international subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," to provide guidance on the recognition, presentation and disclosure of revenues in financial statements. The Company believes that its revenue recognition practices are in conformity with the guidelines in SAB 101, and therefore this pronouncement has no impact on its financial statements.
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation: an interpretation of APB Opinion No. 25." Interpretation No. 44 provides clarification of certain issues, such as the determination of who is an employee, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. The Company believes that its practices are in conformity with this guidance, and therefore Interpretation No. 44 has no impact on its financial statements.
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires any shipping and handling costs billed to customers in a sale transaction to be classified as revenue. The Company believes that its revenue recognition of shipping and handling fees is in conformity with the consensus and therefore it has no impact on its financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' balances to conform to the current year presentation.
3. ACQUISITIONS
ACQUISITION OF CITYAUCTION, INC.
On March 29, 1999, the Company completed the acquisition of CityAuction, a person-to-person online auction community. In connection with the acquisition, the Company issued an aggregate of 793,726 shares of its Class B Common Stock for all the outstanding capital stock of CityAuction representing an aggregate purchase price of $27.3 million. The acquisition was accounted for using the purchase method of accounting which resulted in approximately $28.7 million of goodwill which is amortized over five years. The results of operations of CityAuction are included in the accompanying statement of operations from the date of acquisition.
During the quarter ended December 31, 2000, the Company determined that its investment in CityAuction had suffered a decline in value. As such, the Company accelerated the amortization of goodwill associated with CityAuction, resulting in additional amortization expense of $18.7 million to fully reduce the carrying amount to its estimated fair value of zero.
ACQUISITION OF MATCH.COM, INC.
On June 14, 1999, the Company completed the acquisition of Match.com, an Internet personals company. In connection with the acquisition, the Company issued 1,924,777 shares of Class B Common Stock to the former owners of Match.com representing a total purchase price of approximately $43.5 million. The acquisition was accounted for using the purchase method of accounting which resulted in approximately $42.4 million of goodwill which is being amortized over five years. The results of operations of Match.com are included in the accompanying statement of operations from the date of acquisition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. ACQUISITIONS (CONTINUED)
ACQUISITION OF WEB MEDIA VENTURES, L.L.C.
On September 13, 1999, the Company purchased all the outstanding limited liability company units ("Units") of Web Media. Web Media is an Internet personals company distributing its services through a network of affiliated Internet sites. In connection with the acquisition, the Company issued 1,204,215 million shares of Class B Common Stock in exchange for all of the Web Media Units and became obligated to issue $2.2 million of Class B Common Stock payable at the end of each quarter following the closing of the transaction and an additional number of shares of Class B Common Stock no later than 270 days after the closing of the transaction with the last installment subject to adjustment based on the achievement of certain revenue targets by Web Media. As a result, an additional 688,135 shares were issued resulting in a total purchase price of $45.0 million. The acquisition was accounted for using the purchase method of accounting. The acquisition has resulted in $44.7 million of goodwill which is being amortized by the Company over a period of five years. The results of operations of Web Media are included in the accompanying statement of operations from the date of acquisition.
TRANSACTION REGARDING SIDEWALK.COM
On September 17, 1999, the Company acquired certain assets associated with the entertainment city guide (A&E) portion of Sidewalk from Microsoft. The Company also entered into a four year distribution agreement with Microsoft pursuant to which the Company became the exclusive provider of local city guide content on the Microsoft Network ("MSN") and the Company's internet personals Web sites became the premier provider of personals content to MSN. In addition, the Company and Microsoft entered into additional cross-promotional arrangements. In connection with these transactions, the Company issued to Microsoft 7.0 million shares of its Class B Common Stock and two warrants to purchase an aggregate of 4.5 million shares of its Class B Common Stock. The first warrant for 3.0 million shares has an initial exercise price of $30 per share, which adjusts downward by $0.0625 for each $0.0625 increase in the price of the Class B Common Stock over $30 at the time the warrant is exercised. At December 31, 2000, the exercise price of this warrant was determined to be $30. The second warrant for 1.5 million shares has a fixed exercise price of $60 per share of Class B Common Stock. Both warrants expire on September 17, 2004, five years from the date of issuance. The Company granted Microsoft certain registration rights in connection with the transaction. The impact of the Company's ownership of the Sidewalk assets is included in the accompanying statement of operations from the date the transaction closed.
The fair value of the consideration provided in exchange for the Sidewalk assets and distribution agreement, including transaction costs, amounted to $338.8 million where $333.8 million has been recorded in goodwill and other intangibles in the accompanying consolidated balance sheet and $5.0 million has been allocated to the distribution agreement and recorded as deferred marketing in the accompanying balance sheet. The Sidewalk intangible of $333.8 million is being amortized over five years. The distribution agreement of $5.0 million is being amortized over four years with the amortization expense included in sales and marketing.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. ACQUISITIONS (CONTINUED) ACQUISITION OF 2B TECHNOLOGY, INC.
On January 31, 2000, the Company completed the acquisition of 2b Technology, Inc ("2b Technology"), a ticketing and software licensing company. In connection with the acquisition, the Company issued an aggregate of 757,959 shares of Class B Common Stock to the former owners of 2b Technology representing a purchase price of approximately $20.4 million. The acquisition is being accounted for using the purchase method of accounting. The acquisition resulted in $20.5 million of goodwill which is being amortized by the Company over a period of five years. The results of operations of 2b Technology are included in the accompanying statement of operations from the date of acquisition.
ACQUISITION OF TICKETWEB, INC.
On May 26, 2000, the Company completed the acquisition of TicketWeb, Inc ("TicketWeb"), a web-based live event ticketing company. In connection with the acquisition, the Company issued 1,841,204 shares of Class B Common Stock to the former owners of TicketWeb representing a purchase price of approximately $35.4 million. The acquisition is being accounted for using the purchase method of accounting. The acquisition resulted in $33.5 million of goodwill being recorded. The total amount of goodwill recorded is being amortized by the Company over a period of five years. The results of operations of TicketWeb are included in the accompanying statement of operations from the date of acquisition.
PRO FORMA FINANCIAL DATA 2000 ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information presents a summary of results of the Company assuming the acquisitions of CityAuction, Match.com, Web Media, the Sidewalk assets, 2b Technology and TicketWeb had occurred as of January 1, 1999, with pro forma adjustments to give effect to amortization of goodwill. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on January 1, 1999.
PRO FORMA FINANCIAL DATA 1999 ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information presents a summary of results of the Company assuming the acquisitions of CityAuction, Match.com, Web Media and the Sidewalk assets had occurred as of January 1, 1998, with pro forma adjustments to give effect to amortization of goodwill. The pro
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. ACQUISITIONS (CONTINUED) forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on January 1, 1998.
4. EQUITY INVESTMENTS
In September 1999, the Company purchased a minority equity position in FairMarket, Inc. ("FairMarket"), a privately-held, online auction company in exchange for cash and other consideration consisting of a license to FairMarket of the CityAuction auction technology and the Company's agreement to a multi-year Auction Services Agreement with FairMarket. The FairMarket investment is being accounted for using the cost method of accounting.
In October 1999, the Company purchased a minority equity position in foodline.com, Inc ("foodline.com"), a privately-held, online restaurant reservations company in exchange for $5.0 million cash. The Company and foodline.com also entered into a multi-year content sharing and distribution agreement. In March 2000, the Company sold $2.2 million of its interest in foodline.com for cost. The foodline.com investment is being accounted for using the equity method of accounting. In December 2000, foodline.com filed for Chapter 7 bankruptcy protection and ceased operations. The Company will recognize no further losses in the operations of foodline.com.
In December 1999, the Company purchased a minority equity position in Active.com, Inc. ("Active.com"), a privately-held online local participatory sports registration and reservation company in exchange for $12.5 million cash and a commitment by the Company to provide $3.0 million in services to Active.com. The Company and Active.com also entered into a multi-year content sharing and distribution agreement. During the year ended December 31, 2000, Active.com held an additional round of financing during which the Company invested an additional $1.0 million. The Active.com investment is being accounted for using the cost method of accounting; however, at various times throughout the year ended December 31, 2000, the Company's ownership interest required recognizing equity losses in Active.com.
In April 2000, the Company, along with several prominent Japanese companies, purchased an ownership interest in a joint venture called Walkerplus.com, Inc ("Walkerplus"), a privately-held, Japanese arts and entertainment online guide, in exchange for $2.9 million cash. The Company also entered into an exclusive five-year license to provide technology and business methods to the joint venture. The Walkerplus investment is being accounted for using the cost method of accounting.
During the year ended December 31, 2000, the Company determined that certain equity investments had suffered declines in value that were other than temporary. As a result, the Company recognized losses totaling $10.2 million to both reduce its investments in FairMarket, foodline.com and
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
4. EQUITY INVESTMENTS (CONTINUED) Active.com to their aggregate fair value of $8.7 million, net of recognized equity losses, and to write-off their respective notes receivables.
In February 1997, Citysearch entered into a partnership with the Toronto Star newspaper to launch Citysearch sites in Ontario, Canada. Citysearch contributed the Company's technology through a licensing agreement valued by the other partners at $391,000 and cash of $580,000 in exchange for a 20% interest in the partnership. The Company carries its investment in Toronto Star Citysearch at zero as the Company's proportionate share of losses exceeded the total amount invested. During the year ended December 31, 2000 the Company sold its investment in Toronto Star Citysearch for $1.4 million. The resulting gain is included in investment losses, net on the accompanying statement of operations.
5. COMPUTERS, SOFTWARE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Computers, software, equipment and leasehold improvements consisted of the following (in thousands):
Depreciation and amortization expense was $9.8 million, $4.3 million and $1.1 million for the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998, respectively.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. INVESTMENTS
At December 31, 2000 and 1999, marketable securities available-for-sale were as follows (in thousands):
The contractual maturities of debt securities classified as available-for-sale as of December 31, 2000 are as follows (in thousands):
Gross realized gains and losses from the sale of securities were not material. The specific identification method is used to determine a cost basis for computing realized gains and losses.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate:
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
The valuation allowance increased by approximately $28.0 and $20.0 million during the years ended December 31, 2000 and 1999, respectively. The valuation allowance recorded in connection with the Citysearch Merger was approximately $30.0 million. If the related deferred tax assets become realizable in the future, the reversal of the valuation allowance will be recorded as a reduction of goodwill. Also, approximately $3.5 million of the valuation allowance relates to stock option deductions, which if realized, will be charged to paid in capital. The Company had net operating loss carryforwards for federal and state income tax purposes at December 31, 2000 of approximately $176.0 million and $135.0 million, respectively. The federal carryforwards expire principally in the period from 2010 to 2019, and the state carryforwards expire principally in the period from 2004 to 2005. Utilization of the net operating loss carryforwards is subject to limitations as a result of ownership changes as defined in the Internal Revenue Code.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
8. DEFINED CONTRIBUTION PLANS
Prior to 1999, Ticketmaster.com participated in the Ticketmaster Corp. 401(k) defined contribution plan (the 401(k) Plan), covering substantially all Ticketmaster.com employees, which contains an employer matching feature of 25% up to a maximum of 6% of the employee's compensation. Ticketmaster.com's contribution for the 401(k) Plan eleven months ended December 31, 1998 was $16,000.
In July 1997, Citysearch established a defined contribution plan for certain qualified employees as defined in the plan. Participants may contribute from 1% to 20% of pretax compensation subject to certain liabilities. The plan does provide for certain discretionary contributions by the Company as defined in the plan. No Company contributions were made for the years ended December 31, 2000 or 1999 or the eleven months ended December 31, 1998. As a result of the merger, Ticketmaster.com employees incorporated their balances from the Ticketmaster Corp. 401(k) plan into the Citysearch plan.
9. RELATED PARTY TRANSACTIONS
Prior to the Merger, Ticketmaster.com was part of a consolidated group and, as such, had significant transactions with related entities.
In connection with the Merger, the Company entered into a license agreement with Ticketmaster Corp. (the License Agreement) under which the Company is required to pay Ticketmaster Corp. a royalty based on a percentage of the net profit the Company derives from online ticket sales. Ticketing operations cost primarily consists of costs associated with ticketing fulfillment provided by Ticketmaster Corp. including royalty fees of $31.2, $15.1 and $1.5 million as incurred under the License Agreement for the years ended December 31, 2000 and 1999 and the eleven months ended December 31, 1998, respectively. Included in related party receivable at December 31, 2000 and 1999 was $0.2 and $1.5 million representing unpaid ticketing fees, net of amounts due to Ticketmaster Corp. for direct expenses and royalty fees under the License Agreement.
Concurrently with the execution of the Merger Agreement, the Company received a $50 million loan from USAi in exchange for a convertible promissory note ("Convertible Note"). The Convertible Note, in the principal amount of $50 million, bore interest at a rate per annum of 7.00%. On December 10, 1998, the Company repaid the Convertible Note and paid total interest of $1.2 million covering the period August 13 to December 31, 1998. Interest expense on the Convertible Note was $710,000 during the eleven month period ended December 31, 1998.
On December 2, 1999 USAi invested an additional $40 million in the Company through the acquisition of 1.3 million shares of Class B Common Stock by its wholly-owned subsidiary Ticketmaster Corp. Also during the years ended December 31, 2000 and 1999, the Company received additional equity investments of $7.3 and $0.2 million from USAi in the form of advertising on its wholly-owned television properties, Sci-Fi Channel and USA Network for no additional shares.
Revenues from affiliated companies for the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998 amounted to $0.7, $1.1 and $0.5 million, respectively, primarily for Web site maintenance and license fee revenue. Included in related party receivables at December 31, 2000 and 1999 was $227,000 and $480,000 receivable from these affiliated companies.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Company has three classes of common stock. Holders of each share of Class A Common Stock have 15 votes. Each share of Class A Common Stock will automatically convert into one share of Class B Common Stock upon a "transfer," as defined, of such share except for transfers to certain parties. Holders of Class B Common Stock have rights in the Company's Restated Certificate of Incorporation similar to holders of Class A Common Stock except each share of Class B Common Stock carries one vote. Holders of Class C Common Stock have no voting rights. In December 1998, the Company completed its initial public offering of 8,050,000 shares of Class B Common Stock resulting in the receipt of net proceeds of $104.1 million.
At December 31, 2000 the Company has reserved shares of Class B Common Stock for future issuance, excluding the potential conversion of Class A Common Stock, as follows (in thousands):
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders.
1996 STOCK OPTION PLAN
The Citysearch 1996 Stock Option Plan (1996 Stock Plan) authorized members of management to grant non-statutory stock options or incentive stock options to employees and consultants of the Company and its subsidiaries. As of December 31, 2000 the maximum number of shares of Common Stock to be issued under the Plan was 5,500,000 shares. Options granted under the 1996 Stock Plan are exercisable at various dates over their ten-year life and vest principally 25% after the first year and ratably over the remaining vesting period which is generally another three years. At December 31, 2000 there were options to purchase 1,078,635 shares of the Company's Class A Common Stock outstanding at a weighted average exercise price of $5.56 per share. No additional shares will be granted under this option plan.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) 1998 STOCK OPTION PLAN
The Company adopted the 1998 Stock Plan and reserved 4,000,000 shares of Class B Common Stock of the Company for issuance thereunder. The 1998 Stock Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options and stock purchase rights ("SPRs") to employees, directors and consultants. Options granted under the 1998 Stock Plan are exercisable at various dates over their ten-year life and vest principally 25% after the first year and ratably over the remaining vesting period which is generally another two to three years. Unless terminated sooner, the 1998 Stock Plan will terminate automatically in September 2008. At December 31, 2000, there were options to purchase 2,901,832 shares of the Company's Class B Common Stock outstanding at a weighted average exercise price of $27.12 per share and 165,000 restricted shares of Class B Common Stock outstanding. Options to purchase 763,141 shares of Class B Common Stock were available for future grants at December 31, 2000. The outstanding restricted shares generally vest over three years with 20-25% of the shares vesting in the first and second years, and 50-60% of the shares vesting in the third year. Each restricted share may be purchased by the grantee for $0.01 per share and may be repurchased by the Company for $0.01 per share until the repurchase right lapses (the shares "vest"). For the year ended December 31, 2000, the Company recorded compensation expense in the amount of $1.4 million. As of December 31, 2000, the Company had outstanding shares of restricted stock the value of which the Company expects to amortize over 2001 and 2002 in the aggregate amount of approximately $5.0 million.
1999 STOCK OPTION PLAN
The Company adopted the 1999 Stock Plan and reserved 11,000,000 shares of Class B Common Stock of the Company for issuance thereunder. The 1999 Stock Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options and SPRs to employees, directors and consultants. Options granted under the 1999 Stock Plan are exercisable at various dates over their ten-year life and vest principally 25% after the first year and ratably over the remaining vesting period which is generally another two to three years. Unless terminated sooner, the 1999 Stock Plan will terminate automatically in December 2009. At December 31, 2000, there were options to purchase 5,447,162 shares of the Company's Class B Common Stock outstanding at a weighted average exercise price of $28.40 per share. Options to purchase 5,551,559 shares of Class B Common Stock were available for future grants at December 31, 2000.
2000 TICKETWEB STOCK OPTION PLAN
Upon acquiring TicketWeb, the Company adopted the 2000 TicketWeb Stock Plan and reserved 130,582 shares of Class B Common Stock of the Company for issuance thereunder. The 2000 TicketWeb Stock Plan provides for the grant of incentive stock options to the former employees of TicketWeb (including officers and employee directors) and for the grant of nonstatutory stock options and SPRs to the former employees, directors and consultants of TicketWeb. Options granted under the 1999 Stock Plan are exercisable at various dates over their ten-year life and vest principally 20% after the first year and ratably over the remaining vesting period which is generally another four years. Unless terminated sooner, the 2000 TicketWeb Stock Plan will terminate automatically in January 2010.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) At December 31, 2000, there were options to purchase 42,291 shares of the Company's Class B Common Stock outstanding at a weighted average exercise price of $11.14 per share. No additional shares will be granted under this option plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Purchase Plan and reserved an aggregate of 1,000,000 shares of Class B Common Stock thereunder. The number of shares reserved will be increased automatically each year on the first day of the of the Company's fiscal year beginning in 2000 by an amount equal to (i) 200,000 shares of Class B Common Stock or (ii) a lesser amount determined by the Board of Directors. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. Each offering period under the Purchase Plan will run for six months, other than the initial offering period, which commenced in December 1998 and ended on August 14, 1999. Thereafter, new six-month offering periods will commence each February 15 and August 15. The Company has not sold any shares under this plan to date.
STOCK OPTION TABLE
The following table summarizes certain information related to options for Common Stock:
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) Additional information with respect to outstanding options as of December 31, 2000 is as follows:
Pro forma information regarding the effect on operations is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. Pro forma information includes options granted subsequent to the Merger using the Black-Scholes method at the date of grant based on the following assumptions:
This option valuation model requires input of highly subjective assumptions. 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 value estimate, in management's opinion, the existing model does 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 option's vesting period. The Company's pro forma information follows:
The effects of applying SFAS 123 in this pro forma disclosure of the eleven months ended December 31, 1998 are not indicative of future amounts as the options include only three months of grants from the date of the Merger. Additional awards in future years are anticipated. The weighted-
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) average fair value of options granted during the years ended December 31, 2000 and 1999 was $14.96 and $11.11, respectively, for options granted with an exercise price equal to the deemed fair market value, at the date of grant, of the underlying Common Stock. Through December 31, 2000, the Company recorded compensation expense related to certain stock options issued with exercise prices below the fair market value of the related common stock.
11. COMMITMENTS
LEASES
The Company has noncancelable capital lease obligations for computers and equipment and leases its facilities and other office equipment under noncancelable operating lease agreements expiring through 2006. Certain of the Company's leases provide for free rent and escalations. The Company is responsible for other costs such as property taxes, insurance, maintenance and utilities.
The following is a schedule of future minimum lease payments at December 31, 2000 (in thousands):
During the years ended December 31, 2000 and 1999 and the eleven month period ended December 31, 1998, rent expense allocated from Ticketmaster Corp. and related to other leased facilities amounted to $4.3, $3.3, $0.6 million, respectively. The total costs and accumulated depreciation of equipment under capital leases amounted to $4.6 and $4.2 million, respectively, as of December 31, 2000, and $4.6 and $1.4 million, respectively, as of December 31, 1999.
12. LITIGATION
The Company from time to time is party to various legal proceedings arising in the ordinary course of business. The Company is the plaintiff in various legal proceeding seeking injunctive relief and/or damages from third parties for breach of contract and unauthorized use of the Company's intellectual property. Management does not believe that any of the above matters will have a material adverse impact on its operating results, financial position or cash flows.
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
12. LITIGATION (CONTINUED) The Company is defendant to a counter-claim brought by Tickets.com, Inc. in a lawsuit filed by the Company against Tickets.com. Tickets.com asserted claims for relief against the Company for violations of antitrust laws and laws governing restraint of trade and unfair competition and business practices, interference with contract and declaratory relief. Tickets.com seeks monetary damages which, if awarded, would have a material adverse affect on the Company. The Company is vigorously defending against the counter-claim and does not currently believe it will incur material damages in connection therewith.
The Company is the nominal defendant in a shareholder derivative lawsuit brought by the plaintiffs on behalf of the Company against its directors in connection with the Combination. The plaintiffs allege, among other things, that the Combination is the product of unfair self-dealing, and that the consideration that the Company paid to USAi is unfair and excessive. The Company has indemnified its directors in connection with this suit. The plaintiffs seek to have the Court rescind or modify the Combination and also seek monetary damages, attorneys' fees and other costs of pursuing the lawsuit, which, if awarded, could have a material adverse affect on the Company. The Company believes that the suit is without merit, and expects all defendants to vigorously defend against the lawsuit and does not currently believe that the Combination will be rescinded or modified or that it will incur material damages on its behalf or on behalf of its directors in connection therewith.
13. QUARTERLY RESULTS (UNAUDITED)
Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding.
14. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITION OF TICKETMASTER GROUP, INC. AND ITS SUBSIDIARIES
On January 31, 2001, pursuant to a contribution agreement dated November 20, 2000 between the Company and USAi, the Company issued 52,000,000 shares of Class B Common Stock to USAi in exchange for Ticketmaster Group and its subsidiaries. Ticketmaster Group provides automated ticketing
TICKETMASTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) services to its client venues, promoters and sport franchises, which provide patrons with the alternatives of purchasing tickets through operator-staffed call centers, the Internet and independent sales outlets. The Combination will be accounted for as an exchange between entities under common control in a manner similar to the pooling of interests method of accounting. As a result of the Combination, prior year financials will be restated in future filings to present the Company as if it had been combined with Ticketmaster Group which will be similar to the presentation reported in Schedule 14C filed with the SEC in January 2001. Effects of the Combination are not included in the consolidated financial statements as the Combination was not consummated until after December 31, 2000.
The following unaudited pro forma information presents a summary of results of the Company assuming the acquisition of Ticketmaster Group and its subsidiaries had occurred as of January 1, 1999. The unaudited pro forma financial data reflects the adjustments that will result from the combination as if it had occurred as of the beginning of the periods presented. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on January 1, 1999.
ACQUISITION OF RESERVEAMERICA HOLDINGS, INC.
On February 12, 2001, the Company completed the acquisition of ReserveAmerica Holdings, Inc. ("ReserveAmerica"), the leading provider of campsite reservations. The Company paid $24.9 million in cash for the initial consideration due in the transaction. The purchase price will be increased for additional shares of the Company's common stock to be granted upon achievement of revenue targets based on the stock price at that time. The acquisition has been accounted for using the purchase method of accounting. The acquisition resulted in $24.6 million of goodwill recorded initially with adjustments to be made upon the issuance of additional shares if the revenue targets are achieved. The total amount of goodwill to be recorded approximates the purchase price which is being amortized by the Company over a period of ten years.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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(a) Represents amounts written off against the allowance for doubtful accounts, net of recoveries and reversals.
(b) In the year ended December 31, 2000 this relates to the amount from the acquisition of TicketWeb, Inc.
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