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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
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(Mark One)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended September 30, 2000
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-25041
TICKETMASTER ONLINE - CITYSEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4546874
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification
organization) Number)
790 E. COLORADO BOULEVARD, SUITE 200, PASADENA, CA 91101
------------------------
(Address of principal executive offices)
TELEPHONE NUMBER (626) 405-0050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of September 30, 2000 there were 40,640,517 shares of the Registrant's Class
B Common Stock outstanding and 47,982,121 shares of the Registrant's Class A
Common Stock outstanding. Only the Company's Class B Common Stock is publicly
traded.
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TICKETMASTER ONLINE - CITYSEARCH, INC.
FORM 10-Q
INDEX
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PAGE
NO.
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PART I -FINANCIAL INFORMATION.........................................................................................3
Item 1. Financial Statements................................................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................13
PART II -OTHER INFORMATION...........................................................................................14
Item 1. Legal Proceedings..................................................................................14
Item 6. Exhibits and Reports on Form 8-K...................................................................15
SIGNATURES..................................................................................................16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ---------------
(unaudited) (see note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 30,297 $ 61,455
Marketable securities available for sale.................................... 17,583 26,299
Accounts receivable (net of allowance for doubtful accounts
of $1,380 and $738 respectively)........................ 8,896 3,774
Related party receivable.................................................... -- 1,942
Due from licensees.......................................................... 1,500 830
Prepaid expenses and other current assets................................... 5,225 3,826
----------- --------
Total current assets.................................................... 63,501 98,126
Investments...................................................................... 20,028 23,085
Computers, software, equipment and leasehold improvements, net................... 23,788 16,831
Goodwill and other intangibles, net.............................................. 613,607 662,921
Other long-term assets........................................................... 3,833 3,706
----------- --------
Total assets............................................................ $ 724,757 $ 804,669
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 2,822 $ 4,537
Accrued expenses............................................................ 14,279 9,100
Related party payable....................................................... 840 --
Deferred revenue............................................................ 8,836 5,979
Current portion of capital lease obligations................................ 481 957
----------- --------
Total current liabilities............................................... 27,258 20,573
Other long-term liabilities...................................................... 1,050 1,170
Capital lease obligations, net of current portion................................ 96 333
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares--2,000,000 at September 30, 2000
Issued and outstanding--none -- --
Class A Common Stock, $0.01 par value:
Authorized shares --100,000,000 at September 30, 2000
Issued and outstanding--47,982,121 and 52,840,565 at September 30, 2000
and December 31, 1999, respectively..................................... 480 529
Class B Common Stock--$0.01 par value:
Authorized shares--250,000,000 at September 30, 2000
Issued and outstanding--40,640,517 and 32,104,352 at September 30, 2000
and December 31, 1999, respectively..................................... 406 321
Class C Common Stock--$0.01 par value:
Authorized shares--2,883,506 at September 30, 2000
Issued and outstanding--none............................................ -- --
Additional paid-in capital.................................................. 976,072 919,348
Accumulated deficit......................................................... (280,481) (137,413)
Accumulated other comprehensive loss........................................ (124) (192)
----------- --------
Total stockholders' equity.............................................. 696,353 782,593
----------- --------
Total liabilities and stockholders' equity.......................... $ 724,757 $804,669
=========== ========
</TABLE>
See accompanying notes.
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TICKETMASTER ONLINE-CITYSEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
Revenues: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Ticketing operations............................ $ 34,065 $ 16,634 $ 102,745 $ 43,812
City guide and related.......................... 17,743 8,977 49,174 21,089
Sponsorship and advertising..................... 5,254 1,800 13,064 4,009
----------- ----------- ----------- -----------
Total revenues.............................. 57,062 27,411 164,983 68,910
Operating costs and expenses:
Ticketing operations............................ 26,030 12,305 77,568 32,612
City guide and related.......................... 12,886 8,582 39,015 19,052
Sales and marketing............................. 21,056 13,990 57,007 29,569
Research and development........................ 1,374 2,051 4,641 5,589
General and administrative...................... 7,048 4,087 19,808 9,994
Amortization of goodwill and other intangibles.. 36,994 18,606 107,265 44,294
Merger and other transaction costs.............. -- 514 -- 3,285
----------- ----------- ----------- -----------
Total costs and expenses.................... 105,388 60,135 305,304 144,395
----------- ----------- ----------- -----------
Loss from operations................................. (48,326) (32,724) (140,321) (75,485)
Interest income, net................................. 556 986 2,346 3,223
Equity in loss of unconsolidated affiliates.......... (1,194) -- (3,774) --
Other expenses....................................... (11) -- (289) --
----------- ----------- ----------- -----------
Loss before income taxes............................. (48,975) (31,738) (142,038) (72,262)
Income tax provision................................. 168 49 1,033 182
----------- ----------- ----------- -----------
Net loss ............................................ $ (49,143) $ (31,787) $ (143,071) $ (72,444)
=========== =========== =========== ===========
Basic and diluted net loss per share................. $ (0.55) $ (0.41) $ (1.65) $ (0.99)
=========== =========== =========== ===========
Shares used to compute basic and diluted net loss
per share............................................ 88,548 76,908 86,909 73,537
=========== =========== =========== ===========
</TABLE>
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TICKETMASTER ONLINE-CITYSEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
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(unaudited)
<S> <C> <C>
Operating activities
Net loss......................................................................... $ (143,071) $ (72,444)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 113,774 47,075
Deferred marketing...................................................... 937 --
Loss in unconsolidated affiliates....................................... 3,774 --
Advertising contributed by USA Networks, Inc........................... 1,607 --
Stock compensation...................................................... 1,030 --
Loss on disposal of fixed asset......................................... 229 --
Changes in operating assets and liabilities:
Accounts receivable................................................ (3,978) (1,693)
Related party receivable........................................... 1,942 (980)
Due from licensees................................................. (670) 167
Prepaid expenses and other current assets.......................... (1,237) (286)
Accounts payable................................................... (2,432) (763)
Accrued expenses................................................... 3,985 1,683
Related party payable.............................................. 840 --
Deferred revenue................................................... 2,416 404
-------------- ---------------
Net cash used in operating activities.......................... (20,854) (26,837)
Investing activities
Capital expenditures........................................................ (12,360) (7,123)
Investment in unconsolidated affiliates..................................... (10,064) (5,285)
Proceeds from sale of investment in unconsolidated affiliates............... 2,167 --
Acquisitions, net of cash acquired.......................................... (1,675) (102)
Proceeds from sale of marketable securities available for sale.............. 17,762 --
Purchase of marketable securities available for sale........................ (8,840) --
Loan to unconsolidated affiliate............................................ (859) --
Other....................................................................... 37 (223)
-------------- ---------------
Net cash used in investing activities.......................... (13,832) (12,733)
Financing activities
Net proceeds from exercise of options....................................... 4,338 2,471
Costs associated with initial public offering............................... -- (861)
Payments on capital leases.................................................. (722) (1,027)
-------------- ---------------
Net cash provided by financing activities...................... 3,616 583
Effect of exchange rate changes on cash and cash equivalents..................... (88) 39
-------------- ---------------
Net decrease in cash and cash equivalents........................................ (31,158) (38,948)
Cash and cash equivalents at beginning of period................................. 61,455 106,910
-------------- ---------------
Cash and cash equivalents at end of period....................................... $ 30,297 $ 67,962
============== ===============
</TABLE>
See accompanying notes.
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TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ticketmaster Online-Citysearch, Inc. (the "Company") is 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, astroabby.com and
livedaily.com, among others. In September 1998, our company was created by
combining Citysearch, Inc. ("Citysearch") and Ticketmaster Multimedia Holdings,
Inc. (Ticketmaster.com), then a wholly-owned online subsidiary of Ticketmaster
Corporation, to create Ticketmaster Online-Citysearch, a leading provider of
local city guides, local advertising and live event ticketing on the Internet.
In 1999, the Company acquired the Sidewalk.com entertainment city guide assets
of Microsoft Corporation, CityAuction, Inc., an online auction company, and
Match.com, Inc. and Web Media Ventures, L.L.C., both online personals companies.
In 2000, the Company acquired 2b Technology, Inc., a box office software and
ticketing company, and TicketWeb, Inc., a web-based live event ticketing
company. The Company has integrated these acquisitions into its other online
offerings.
BASIS OF PRESENTATION
On September 28, 1998, Citysearch and "Ticketmaster.com" formed
Ticketmaster Online-Citysearch, Inc. (the "Merger"). 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 unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
SEGMENTS
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company identifies
its operating segments based on business activities, management responsibility
and geographical location. The Company's chief operating decision makers review
financial information to manage the business consistent with the manner
presented in the condensed consolidated financial statements. During the nine
months ended September 30, 2000 and 1999, the Company operated in a single
business segment operating as a local portal and online consumer service
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primarily in the United States. Through September 30, 2000, foreign operations
have not been significant in revenue. As the Company acquires and integrates new
businesses it continues to evaluate, based on the nature, size and integration
and management strategies of its businesses, whether it has separate reportable
segments.
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 is 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 are
the same for the three months and nine months ended September 30, 2000 and 1999
because the effects of outstanding stock options and warrants are antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's balances
to conform to the current year presentation.
NOTE 2 -- BUSINESS COMBINATIONS
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 458,005 shares of Class B
Common Stock to the former owners of 2b Technology representing a purchase price
of approximately $17.1 million. The purchase price will be increased for
additional shares to be issued upon achievement of revenue targets based on the
stock price at that time. The acquisition is being accounted for using the
purchase method of accounting. The acquisition resulted in $17.3 million of
goodwill being recorded initially with adjustments to be made at the issuance of
additional shares if the revenue targets are achieved. The total amount of
goodwill recorded 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 1,840,238 shares of Class B Common Stock to
the former owners of TicketWeb representing a purchase price of approximately
$35.3 million. The acquisition is being accounted for using the purchase method
of accounting. The acquisition resulted in $31.9 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 (Unaudited)
The following unaudited pro forma information presents a summary of
results of the Company assuming the acquisitions of CityAuction, Match.com, Web
Media Ventures, 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.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss................................ $(49,143) $(36,108) $(145,928) $(91,624)
Net loss per share...................... (0.55) (0.46) (1.65) (1.16)
</TABLE>
In addition to the above pro forma results, the Sidewalk transaction
resulted in an increase in our intangible assets. The amortization of these
additional intangibles for the three months and nine months ended September 30,
1999, in addition to the goodwill from the acquisitions discussed above, had
these transactions occurred on January 1, 1999, would have resulted in a net
loss of $50.4 million and $139.4 million, respectively, and a net loss per share
of $0.59 and $1.63, respectively, on a pro forma basis. The pro forma
information above excludes the impact of revenues and expenses associated with
the acquisitions as the impact is not material.
NOTE 3 -- SUBSEQUENT EVENT
Pending Transaction Regarding Ticketmaster Corporation
On October 23, 2000, the Company announced that it had called a
meeting of its Board of Directors to appoint a committee of independent
directors to consider possible transactions with Ticketmaster Corporation, a
wholly owned subsidiary of USA Networks, Inc. ("USAi"), which would allow the
companies to capture the benefits of jointly operating the ticketing and
reservation businesses of the Company and Ticketmaster Corporation. The Board
meeting was called at the request of USAi in order for the independent
committee to consider such possible transactions, which may include a merger
or other transaction which could involve the issuance to USAi of additional
shares of the Company's common stock. USAi is the Company's largest
stockholder. Also on October 23, 2000, the Company's Board of Directors met
and appointed the independent committee. There can be no assurance that any
transaction will occur or, if a transaction occurs, what the structure or
terms of such transaction would be.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
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 THE COMPANY'S EXPECTATIONS AS OF THE
DATE OF THIS DOCUMENT AND THE COMPANY UNDERTAKES 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 MAY BE
COMPLETED AFTER SEPTEMBER 30, 2000.
OVERVIEW
Ticketmaster Online-Citysearch, Inc. is 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, astroabby.com and livedaily.com,
among others.
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We derive revenues from three sources: online ticketing, city guide and
related services (which includes online personals subscriptions) and sales of
sponsorships and advertising. We view our operations as being in one segment,
with ongoing integration.
Online ticketing operations revenues are primarily comprised of
convenience charges which are charged on a per ticket purchased basis and
shipping and handling fees which are collected on a per order basis. The sale
of tickets for an event often begins several months prior to the scheduled
date of the event. Such ticket sales are seasonal in nature with the third
quarter of the year generally experiencing fewer onsales and the second
quarter experiencing the most onsales. Ticketing operations revenue is
recognized when the ticket is sold. 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.
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 pursuant to Statement of Position ("SOP")
No. 97-2, as amended by SOP No. 98-9. 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. 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.
OPERATING LOSSES
The Company incurred net losses of $49.1 million and $143.1 million for
the three months and nine months ended September 30, 2000, respectively, and
$31.8 million and $72.4 million for the corresponding periods of the preceding
year. At September 30, 2000, the Company had an accumulated deficit of $280.5
million.
RESULTS OF OPERATIONS
TICKETING OPERATIONS REVENUES. Ticketing operations revenues were $34.1
million and $102.7 million for the three months and nine months ended September
30, 2000, respectively, and $16.6 million and $43.8 million for the
corresponding periods of the preceding year. This represents increases of 105%
and 135%, respectively. The increases are primarily attributable to a
significant increase in the number of tickets sold on ticketmaster.com (from 2.5
million to 4.7 million tickets for the three months ended September 30, 1999 and
2000, respectively, and from 6.8 million to 14.4 million tickets for the nine
months ended September 30, 1999 and 2000, respectively). Additionally, the
average convenience charge for tickets sold on ticketmaster.com increased 4% in
the three months ended September 30, 2000 over the corresponding period in 1999
(from $6.45 to $6.72) and increased 7% in the nine months ended September 30,
2000 over the corresponding period in 1999 (from $6.34 to $6.79). Revenues also
increased, to a lesser extent, due to the acquisitions of 2b Technology in
January 2000 and TicketWeb in May 2000.
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The Company recognized no revenues from 2b Technology and TicketWeb in the three
months and nine months ended September 30, 1999.
CITY GUIDE AND RELATED REVENUES. City guide and related revenues
were $17.7 million and $49.2 million for the three months and nine months
ended September 30, 2000, respectively, and $9.0 million and $21.1 million
for the corresponding periods of the preceding year. This represents
increases of 98% and 133%, respectively. The increases are principally
attributable to the acquisition of the personals companies, Match.com and Web
Media Ventures, the expansion of the city guide network of owned & operated
markets (where we had local staff in 25 markets in the third quarter of 1999
and in 33 markets in the third quarter of 2000), increases in partner-led
market consulting fees and also to revenue from new city guide advertising
products and services. Revenues from the personals operations represented a
significant portion of total city guide and related revenues in the three
months and nine months ended September 30, 2000. The Company began
recognizing revenues from the Match.com and Web Media Ventures portions of
personals operations in the second and third quarters of 1999, respectively.
SPONSORSHIP AND ADVERTISING REVENUES. Sponsorship and advertising
revenues were $5.3 million and $13.1 million for the three months and nine
months ended September 30, 2000, respectively, and $1.8 million and $4.0 million
for the corresponding periods of the preceding year. This represents increases
of 192% and 226%, respectively. The increases are primarily attributable to the
Company's growing success in leveraging its expanded footprint of local cities
to appeal to national advertisers, including a significant advertising
relationship with the Microsoft Corporation.
TICKETING OPERATIONS EXPENSES. Ticketing operations expenses consist
primarily of expenses associated with ticket fulfillment (including the
license fee to Ticketmaster Corporation), Web site maintenance, service and
network infrastructure maintenance and data communications. Ticketing
operations expenses were $26.0 million and $77.6 million for the three months
and nine months ended September 30, 2000, respectively, and $12.3 million and
$32.6 million for the corresponding periods of the preceding year. This
represents increases of 112% and 138%, respectively. Our gross margins in
ticketing operations slightly decreased to approximately 24% and 25% in the
three months and nine months ended September 30, 2000 from approximately 26%
in each of the three months and nine months ended September 30, 1999 as a
result of an increase in variable costs related with ticket fulfillment.
Ticketing operations expenses are primarily variable in nature and fluctuate
in relation to fluctuations in ticketing revenue. In addition, the Company
expects 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. The Company
recognized no expenses from 2b Technology and TicketWeb in the three months
and nine months ended September 30, 1999.
CITY GUIDE AND RELATED EXPENSES. City guide and related expenses
consist primarily of the expenses associated with the design, layout,
photography, customer service and editorial resources used in the 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 online personals operations. City
guide and related expenses were $12.9 million and $39.0 million for the three
months and nine months ended September 30, 2000, respectively, and $8.6
million and $19.1 million for the corresponding periods of the preceding
year. This represents increases of 50% and 105%, respectively. The increases
are attributable to the growth in the city guide operations throughout 1999,
including the addition of eight additional owned and operated markets in the
periods following the nine months ended September 30, 1999 and the inclusion
of costs associated with our personals operations acquired in 1999. The
Company 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 27% and 21% in the three months and nine months ended September
30, 2000, respectively, from 4% and 10% in the corresponding periods of the
preceding year. In the three months ended September 30, 2000 gross margin
improvements in the
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Company's city guide operations was the principal driver of the improvement.
In the nine months ended September 30, 2000 the improvement resulted from the
inclusion of the 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 $21.1 million and $57.0 million for the three months
and nine months ended September 30, 2000, respectively, and $14.0 million and
$29.6 million for the corresponding periods of the preceding year. This
represents increases of 51% and 93%, respectively. The increase for the three
months and nine months ended September 30, 2000, as compared to the three
months and nine months ended September 30, 1999, is attributable to the
growth of our city guide operations following the period ended September 30,
1999 from 25 markets to 33 markets, advertising contributed by USAi for which
no consideration was paid by the Company and, to a lesser extent, the
addition of sales and marketing expenses associated with our personals
operations. The Company began recognizing sales and marketing costs from the
Match.com and Web Media Ventures portions of 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 $1.4 million and
$4.6 million for the three months and nine months ended September 30, 2000,
respectively, and $2.1 million and $5.6 million for the corresponding periods
of the preceding year. This represents decreases of 33% and 17% for the three
months and nine months ended September 30, 2000. The decreases are
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 expensed to research and development during the 2000 period. The
Company believes that timely deployment of new and enhanced products and
technology is critical to attaining its strategic objectives and to remaining
competitive. Accordingly, the Company intends to continue recruiting and
hiring experienced research and development personnel and making other
investments in research and development. As such, the Company expects to
continue to experience significant research and development expenditures in
future periods. The Company has 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 $7.0 million and $19.8 million for
the three months and nine months ended September 30, 2000, respectively, and
$4.1 million and $10.0 million for the corresponding periods of the preceding
year. This represents increases of 72% and 98%, respectively. The increases
for the three months and nine months ended September 30, 2000 are due
primarily to the costs of additional personnel needed for the continued
growth of the Company's city guide, increased depreciation expense resulting
from capital expenditures during 1999 and 2000 and the inclusion of expenses
associated with 2b Technology and TicketWeb which were acquired in January
2000 and May 2000, respectively. The Company expects 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 Ticketmaster Corporation by USAi, 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 $37.0 million and $107.3 million for the three months
and nine months ended September 30, 2000, respectively, and $18.6 million and
$44.3 million for the corresponding periods of the preceding year. This
represents increases of 99% and 142%. The increases are attributable to
recognizing more of the full year impact of these acquisitions in the 2000
periods.
MERGER AND OTHER TRANSACTION COSTS. Merger and other transaction costs
were not present in the three months and nine months ended September 30, 2000
and were $514,000 and $3.3 million for the
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corresponding periods of the preceding year. These costs are primarily a result
of advisory fees, regulatory filing fees and legal and accounting costs related
to the terminated merger between the Company, certain assets owned by the
Company's majority shareholder and Lycos, Inc.
INTEREST INCOME, NET. Net interest income consists primarily of
interest earned on the Company's cash, cash equivalents and marketable
securities available for sale, less interest expense on capital lease
obligations. The Company had net interest income of $556,000 and $2.3 million
for the three months and nine months ended September 30, 2000, respectively, and
$1.0 million and $3.2 million for the corresponding periods of the preceding
year. The changes in net interest income are primarily attributable to changes
in the amount of invested assets. The Company invests its cash balances in
short-term investment grade, interest-bearing securities.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES. Equity in loss of
unconsolidated affiliates of $1.2 million and $3.8 million for the three months
and nine months ended September 30, 2000, respectively, represents the Company's
portion of net losses of foodline.com, Inc. and ActiveUSA.com, Inc., two
companies in which the Company made minority equity investments in late 1999.
The Company is only obligated to recognize a portion of the gain or loss in
these unconsolidated affiliates in periods during which the Company's holdings
of those companies' securities exceed specified percentages and the Company is
deemed to exercise a measure of control over those companies as a result. The
Company did not have equity investments in these companies during the three
months and nine months ended September 30, 1999.
INCOME TAXES. The provision for income taxes was $168,000 and $1.0
million for the three months and nine months ended September 30, 2000,
respectively, and $49,000 and $182,000 for the corresponding periods of the
preceding year. This provision reflects the income tax expense incurred by the
Company's foreign subsidiaries, and has increased as a result of increased
ticketing profits in those markets, and due to foreign taxes on the Company's
Japanese partner-led market consulting income which was recognized in the second
quarter of 2000. The Company's effective tax rate differs from the statutory
federal income tax rate, primarily as a result of foreign income taxes and
operating losses not benefited. The Company expects that its tax provision will
remain small for the balance of 2000 and throughout 2001 due to the availability
of the Company's consolidated net operating losses. However, net operating loss
carryforwards of Citysearch existing at the Merger date will not be available to
further offset taxable income of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $20.9 million and $26.8
million for the nine months ended September 30, 2000 and 1999, 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 $113.8 million
and $47.1 million, respectively.
Net cash used in investing activities was $13.8 million and $12.7
million for the nine months ended September 30, 2000 and 1999, respectively.
Net cash used in investing activities in the nine months ended September 30,
2000 resulted mostly from purchases of capital expenditures for computers,
software, equipment and leasehold improvements, investments in unconsolidated
affiliates and purchases of marketable securities available for sale, offset
in part from the sale of marketable securities to fund operations and
proceeds from the sale of an equity investment. Net cash used in investing
activities in the nine months ended September 30, 1999 consisted primarily of
capital expenditures for computers, software, equipment and leasehold
improvements and investments in unconsolidated affiliates.
Net cash provided by financing activities was $3.6 million and
$583,000 for the nine months ended September 30, 2000 and 1999, respectively.
Net cash provided by financing activities in the nine months ended September
30, 2000 and 1999 was primarily attributable to proceeds from employee stock
option exercises, offset by payments on capital leases.
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We had cash, cash equivalents and marketable securities available for
sale of $47.9 million and $87.8 million at September 30, 2000 and December 31,
1999, respectively. We currently have no unfunded 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 complement 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.
Our management believes that existing cash, cash equivalents and marketable
securities available for sale will be sufficient to meet our working capital and
capital expenditures requirements for the next six months. Thereafter, we may be
required to raise additional funds. No assurance can be given 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, there can be no
assurance 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company has not
used derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company protects and preserves
its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carries 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, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if the Company sells securities which have
declined in market value due to changes in interest rates.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 23, 1999, Ticketmaster Corporation and Ticketmaster
Online-Citysearch, Inc. (collectively, "Ticketmaster"), filed a Complaint for
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,
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 and TMCS filed a motion for
preliminary injunction, requesting the Court to enjoin Tickets.com from,
among other things, deep-linking 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 and TMCS's motion for
preliminary injunction. On October 20, 2000 Ticketmaster and TMCS filed an
appeal of the denial of their request for a preliminary injunction with the
Court of Appeals for the Ninth Circuit. No hearing on that appeal has yet
been set. 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 alleges 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 claims 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 that motion was denied. On October 24, 2000
Ticketmaster and TMCS filed their Answer to Tickets.com's counterclaims
against Ticketmaster Corporation and Ticketmaster Online-Citysearch, Inc.
Ticketmaster intends to vigorously defend this litigation.
There can be no assurance that we or Ticketmaster Corporation or our
affiliates will not 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 us or Ticketmaster Corporation or our
affiliates could limit or prevent ticketmaster.com from engaging in its online
ticketing business or subject us to potential damage assessments, all of which
could have a material adverse effect on our business, financial condition or
results of operations.
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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 our business, financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 2, 2000, the Company filed a Report on Form 8-K relating to
the announcement of the Company's results for the quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 25, 2000 TICKETMASTER ONLINE-CITYSEARCH, INC.
By: /s/ JOHN PLEASANTS
-------------------------------------
John Pleasants
Chief Executive Officer
(Principal Executive Officer)
By: /s/ THOMAS MCINERNEY
-------------------------------------
Thomas McInerney
Chief Financial Officer, Executive Vice
President, Finance and Administration
and Treasurer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBITS
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27.1 Financial Data Schedule
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