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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-25041
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TICKETMASTER ONLINE-CITYSEARCH, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 95-4546874
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
790 E. COLORADO BOULEVARD, SUITE 200 91101
PASADENA, CALIFORNIA (Zip code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (626) 405-0050
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Name of Each Exchange
Title of Each Class: on Which Registered:
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NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based upon the closing price of the Class B
Common Stock on February 29, 2000 as reported by Nasdaq, was approximately
$34.87. Shares of voting stock held by each officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's Common Stock outstanding on
February 29, 2000 was 49,664,907 shares of Class A Common Stock and 35,932,320
shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2000 Annual
Stockholders Meeting are incorporated by reference into Part III herein.
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TICKETMASTER ONLINE-CITYSEARCH, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Market for Registrant's Common Equity and Related
Item 5. Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations................................... 19
Quantitative and Qualitative Disclosures About Market
Item 7A. Risks....................................................... 26
Item 8. Consolidated Financial Statements and Supplementary Data.... 26
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 27
Item 11. Executive Compensation...................................... 27
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 27
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14. 8-K......................................................... 27
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PART I
ITEM I. BUSINESS
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
businesses are online city guides, online ticketing and online personals. Our
family of Web sites includes citysearch.com, ticketmaster.com, match.com,
museumtix.com, cityauction.com, astroabby.com andlivedaily.com, among others. In
September 1998, our company was created by combining CitySearch, Inc. and
Ticketmaster Multimedia Holdings, Inc. (Ticketmaster Online), then a
wholly-owned online subsidiary of Ticketmaster Corporation (Ticketmaster Corp.),
to create Ticketmaster Online-CitySearch, a leading provider of local city
guides, local advertising and live event ticketing on the Internet.
CitySearch was incorporated in September 1995 and launched its first local
city guide in May 1996. Ticketmaster Online was formed in 1993 to administer the
online business of Ticketmaster Corp. and began selling live event tickets and
related merchandise online in November 1996. Subject to specified limitations,
Ticketmaster Online is the exclusive agent of Ticketmaster Corp. for the online
sale of tickets to live events presented by Ticketmaster Corp.'s clients.
In 1999, we acquired CityAuction, Inc., an online auction company,
Match.com, Inc. (match.com) and the Web Media Ventures, LLC (d/b/a One & Only
Network), which are both online personals services, and astroabby.com, an online
horoscope service. We are continuing to grow each of these operations in their
own right and we are also integrating their services with our citysearch.com
city guides. In addition, in 1999, we acquired the arts and entertainment
portion of The Microsoft Network (MSN) Sidewalk (sidewalk.com) city guides,
significantly expanding the reach of our citysearch.com city guides. We have
integrated the Sidewalk city guides with the citysearch.com city guides to
create a nationwide network. In January 2000, we acquired 2b Technology, Inc., a
Richmond, Virginia based visitor management software developer and offline and
online ticketing company targeted at venues such as higher volume museums,
cultural institutions and historic sites. We intend to continue to make
strategic acquisitions as appropriate opportunities become available.
Our portfolio of Web sites includes: citysearch.com, ticketmaster.com,
match.com, museumtix.com, cityauction.com, livedaily.com, astroabby.com and
jobs.citysearch.com, which are described in more detail below.
- CITYSEARCH.COM is a network of local portal city guide sites that offer
primarily original local content for major U.S. and foreign cities as well
as practical transactional tools to get things done online. The city
guides provide up-to-date, locally produced information about a city's
arts and entertainment events, bars and restaurants, recreation, community
activities and businesses (shopping and professional services), as well as
local news, sports and weather updates. citysearch.com city guides also
let people act on what they learn by supporting online business
transactions, including ticketing, reservations, auctions, matchmaking,
merchandise sales and classifieds. With our recent acquisition of the arts
and entertainment portion of the MSN Sidewalk (sidewalk.com) city guides,
citysearch.com now reaches more than 70 cities worldwide.
- TICKETMASTER.COM is the leading online ticketing site and live event
portal. Through our exclusive arrangement with Ticketmaster Corp.,
ticketmaster.com provides tickets for more than 100 professional sports
franchises and more than 3,750 leading arenas, stadiums, performing arts
venues and theaters. The site also offers in-context,
entertainment-related merchandise, including CDs, apparel and memorabilia
through STORE.TICKETMASTER.COM.
- MATCH.COM is a leading online matchmaking and dating service which offers
single adults a convenient, fun and private environment for meeting other
singles. In combination with the One & Only Network, another online
personals company we acquired in 1999 and which we are integrating with
match.com (the combined operations to be called match.com), match.com has
more than
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4 million user registrations and approximately 560,000 active users,
generating more than 100 million monthly page views. In addition, as part
of our recent transaction with Microsoft, match.com has become the premier
provider of online personals and matchmaking services on the The Microsoft
Network (MSN).
- MUSEUMTIX.COM is 2b Technology's online ticketing site, providing
information and ticketing for cultural institutions and other venues,
including museums, zoos, aquariums and planetariums.
- CITYAUCTION.COM is a person-to-person online auction service that provides
a local resource for online auctions. In addition to national and regional
auctions, cityauction.com lets users post and search for items in their
own locality, allowing them to trade items that would be considered too
valuable or difficult to transport, such as televisions or furniture.
cityauction.com is a member of the FairMarket, Inc. network of auction
sites. Buyers and sellers using cityauction.com have access to all of the
auctions listed in the FairMarket network of auction sites, including
listings from users of many of the largest internet portal Web sites.
- LIVEDAILY.COM is our daily online live entertainment news webzine that
offers music fans daily concert and music news, tour announcements,
reviews, interviews and exclusive national ticketing information.
livedaily.com users benefit from direct connections to our ticket
distribution network at ticketmaster.com and local music information via
citysearch.com's growing network of city guides.
- ASTROABBY.COM is an entertaining and informative horoscope site that
provides free weekly and monthly astrology forecasts, as well as astrology
advice.
- JOBS.CITYSEARCH.COM is our online source of employment classifieds and
specialists that can be viewed by city to make job searching efficient and
effective.
CITY GUIDES--CITYSEARCH.COM
As of December 31, 1999, we had launched citysearch.com sites in 70 US
markets. We own and operate 65 of the US sites, including 32 markets in which we
have local sales and content offices and 33 markets without such offices. The
remaining five sites in US markets are partner-led. We have also launched
citysearch.com sites in seven international markets, all of which are
partner-led. We have signed an agreement with an international partner to launch
an additional international city guide in Seoul, South Korea and potentially
other South Korean markets. We will continue to expand the service both in owned
and operated markets and by partnering internationally with major media
companies, although our domestic focus during 2000 will be to develop those
markets we have already launched in the US. Our international media partners
bring capital, brand recognition, promotional strength and local knowledge to
their city guides and allow us to build out our international network of sites
faster than we could solely through owned and operated sites.
CITYSEARCH.COM--BUSINESS-TO-CONSUMER PRODUCTS
We create and host citysearch.com Web sites for local and regional
businesses and organizations for a monthly fee. We offer local businesses a wide
range of options in creating Web presences, from a basic Web presence costing as
little as $280 per month to a multi-page site with additional features and
functionality costing up to $490 per month. Typically, business customers enter
into a one-year agreement that automatically converts into a month-to-month
contract upon expiration of the initial term. By aggregating each customer's Web
site with those of numerous other businesses in a comprehensive local city
guide, we provide categorical, geographic and editorial context to a customer's
Web presence to generate consumer usage, as well as significant Internet
traffic.
Based on studies conducted for us by a marketing research firm, we believe
that citysearch.com users are more evenly split between men and women, better
educated, slightly older and have higher annual incomes than the typical
Internet user. We believe that these demographics are attractive to our business
customers.
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We provide an integrated solution for businesses to establish a
citysearch.com Web presence, including design, photography, layout, posting of
updated information, hosting and maintenance. Businesses are able to provide
their targeted audience with current information about their products and
services, including photographs, prices, location(s), schedules of live
entertainment, sales and other relevant information. Unlike traditional media
such as yellow pages advertising, we offer citysearch.com business customers a
certain number of free updates each month. Business customers also receive usage
reports, e-mails from interested consumers and access to an expanded base of
potential buyers including tourists and out-of-town users.
We recently introduced a strategy of bundling enhanced features and
functionality, including panoramic images and audio clips. These services, when
bundled with our basic citysearch.com services, are typically priced from $690
to $840 per month. We believe that our broad offering of services and our prices
compare favorably to other Web advertising options available to businesses.
These options range from low cost, low quality scanned-in information to
free-standing custom-designed sites that may cost in excess of $10,000 in
up-front production fees and that rely on significant promotion to attract
traffic. By providing a high-quality Web presence at an affordable price, we
believe that our services address the demand of the large number of businesses
whose online needs fall between these market extremes.
Our proprietary site design tools and production economies enable us to
build customized multi-page Web sites for customers for a low up-front fee. The
production of business Web sites for citysearch.com owned and operated markets
and certain partner-led markets is managed centrally in our headquarters to
better control quality and cost and to provide rapid production.
Business Web site creation follows a standardized process. First, sales
representatives in the field work with customers to design their sites and
gather images and text. Once content is collected, sales representatives forward
this information to our central production site in Pasadena, California where
data entry personnel input the text. Graphic designers then use our proprietary
software to combine the text and scanned images to create custom sites designed
to reflect the nature and style of each business customer. Once the Web site
designers have completed their work, the business Web site is checked for
accuracy and published online after a 14-day customer proofing period. The
entire process, from the receipt of content by us to publishing a site online,
takes approximately 2 1/2 months to complete. Each step of the sales and
production process is monitored by an enterprise management system to make the
process more consistent and complete.
CITYSEARCH.COM--STRATEGIC ALLIANCES
We have entered into partnerships and strategic alliances with third parties
in order to:
- rapidly build our national and international network of citysearch.com
local city guides;
- generate licensing revenue in citysearch.com partner-led markets;
- facilitate branding;
- gain access to additional content; and
- drive traffic on our network of sites.
NEWSPAPER AND TELEPHONY PARTNERSHIPS. We have entered into strategic
partnerships with major newspapers and media companies including The Baltimore
Sun, The Dallas Morning News, the Los Angeles Times, The San Diego
Union-Tribune, Washingtonpost.Newsweek Interactive, Big Colour Pages (the
independent yellow pages of Australia), The Melbourne Age, Schibsted
ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Sydney Morning
Herald, Bell ActiMedia Services Inc. (the yellow pages subsidiary of Bell
Canada, Inc.), the Toronto Star and the Korea Information & Communications Co.
In these partner-led markets, the partner provides capital and management, while
we contribute technology, a business model, consulting services, business
systems and processes and network participation. We typically receive up-front
license fees, ongoing license fees for delivery of upgrades and support
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and, in many cases, royalties based on revenues that the partner generates
through the city guide service. In addition, we generally receive additional
fees for consulting services in connection with the launch of the partner's city
guides, custom engineering requested by particular partners and compensation for
business Web site production, customer service, billing and hosting services.
These partner agreements are typically five to eight years in length and contain
customary termination rights in the event of material breach or non-performance.
We believe these arrangements allow us to expand our international network of
cities in a more rapid and cost-effective manner than an exclusively owned and
operated network would allow. We do not expect to enter into additional domestic
partnerships to launch city guides.
TELEVISION AND RADIO MEDIA ALLIANCES. We have entered into co-promotion
agreements with local television and radio stations, as well as local magazine
and online sites, in most of the citysearch.com owned and operated markets.
These relationships typically offer content sharing and co-promotion to both
parties. We work with each partner to develop a multimedia Web site within the
citysearch.com site, and the partner offers promotion and a recognized brand
within the market. We typically receive significant on-air, in print or online
promotion from these television and radio stations that increases brand
awareness and drives traffic to the citysearch.com site.
MARKETING AGREEMENTS. We have entered into both local and national
marketing agreements. For example, we are party to an agreement with American
Express which included an equity investment in Ticketmaster Online-CitySearch.
The agreement provides for distribution of co-branded marketing materials to
merchant customers of American Express Travel Related Services Company, Inc. in
our local markets that will offer such merchant customers online Web site
presences through our local city guides. We entered into an extensive
distribution and marketing agreement with Microsoft as part of the Sidewalk.com
transaction. The agreement provides promotion and linking arrangements for our
various Web sites and promotion of our infosite customers' Web sites on the
Microsoft online yellow pages. We intend to continue to aggressively pursue such
marketing agreements in order to attract additional business customers and
increase usage of the citysearch.com service by consumers.
CONTENT DISTRIBUTION ALLIANCES. We have entered into agreements with a
number of companies to distribute our content and drive traffic to our Web
sites. For example, we have entered into agreements or arrangements with
Microsoft, Lycos, Yahoo!, FairMarket, Inc., ActiveUSA.com and foodline.com for
content distribution and cross promotion. We have recently begun to syndicate
our citysearch.com content to non-competitive third party Web sites in exchange
for cash payments and/or branding and promotional consideration.
CITYSEARCH.COM--MARKETING AND SALES
We emphasize marketing activities in our owned and operated markets aimed at
increasing awareness of our citysearch.com local city guides by both consumers
and business customers. We conduct advertising and public relations campaigns
through low-cost "guerrilla" marketing efforts and with our local media partners
in radio, television and print advertising to drive both business customer sales
and consumer usage. We also purchase targeted advertising on Web sites, as well
as through traditional radio, print and outdoor media.
In partner-led markets, our marketing efforts rely substantially on the
partner's existing franchise and resources in the community. Partners typically
market their city guide services through print promotion and integration into a
pre-existing news Web site. The partner's brand is also used in conjunction with
the citysearch.com brand to build credibility with local consumers. We provide
our partners with a roll-out team to launch the service and to provide ongoing
support, including assistance with recruiting, sales strategy and back office
operations.
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After a site has been launched, we, or our partners, rely upon a direct
sales force to accelerate the momentum established by the roll-out team. As of
December 31, 1999 we employed approximately 250 sales representatives and
Internet marketing advisors in our 32 sales offices. Sales representatives sell
directly to local businesses and Internet marketing advisors maintain regular
contact with customers and facilitate up-selling of Web site functionality.
Sales representatives in new markets perform both selling and active customer
relationship management. Each sales representative completes an intensive
training program at our headquarters with follow-up field training. Our
proprietary enterprise management system tracks sales leads and prospect status
and allows sales managers to track performance. Sales representatives
participate in ongoing training sessions in sales techniques and new products.
CITYSEARCH.COM--OPERATIONS
We have created a systematic approach to market roll-out of our
citysearch.com local city guides that is designed to enable us to launch our
service in owned and operated markets and to support a local service once
launched. In addition, we license our roll-out capabilities to media companies
in our partner-led markets. We have analyzed and documented the best practices
associated with our early city launches to refine and standardize our field and
home office production processes. Our software systems monitor much of the sales
and customer care functions. Additionally, we have built custom systems that
streamline the site creation and maintenance process.
Our growing network of local city sites has allowed us to refine and
streamline the content and the roll-out process of new owned and operated sites.
We refer to these new sites as "Quicksilver Sites." Quicksilver Sites
incorporate content produced by us for use nationally by all our local sites,
such as movie and music reviews, with local edits to provide a broader content
base for our new sites in their start-up phase. We believe we realize economies
of scale in the production of such content. The Quicksilver Sites are focused
more on arts and entertainment as a result of our analysis of traffic patterns
on our older and more established owned and operated sites. This traffic
analysis indicates that arts and entertainment areas are where the majority of
site visitors spend their time. Our streamlined roll-out strategy allows us to
launch a new Quicksilver Site in approximately one-half of the time that was
needed for the launch of older owned and operated sites. We also staff our
Quicksilver Sites with less than one-half of the employees needed to staff the
older sites. We attribute this to the fact that we allow the Quicksilver Site
local account managers to manage their relationships with advertisers from start
to finish and to the reduced need to generate local content due to the use of
national content feeds. As a result of the Quicksilver Site program, we were
able to launch 25 new sites in 1999. In 2000, we intend to focus on developing
our existing network of city guides.
Customer service operations are located in our Pasadena headquarters. Our
enterprise management systems enable customer service staff members to view a
customer's full profile, including billing and interactive history, as they take
such customer's call, and to use our software tools to make changes to a
business customer's site in real time.
CITYSEARCH.COM--TECHNOLOGY
We have developed and implemented a number of technologies to support our
local city guide service and business operations, including (1) an online city
guide application, (2) a set of content creation and management tools and (3) a
suite of integrated enterprise management systems.
CITYSEARCH.COM ONLINE APPLICATION. Our online application provides a user
interface intended to support novice online users, while providing easily
accessible advanced features for experienced Web users. We employ a multi-tiered
architecture, separating a standard relational database from business rules and
presentation logic. Our online application is designed to permit city guide
publishers to create and to change the appearance of the product quickly and
easily. In addition, the tiered architecture is designed to provide for rapid
development cycles and code reuse. We have made a substantial investment in our
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product development infrastructure and intend to continue to release product
enhancements that address the changing demands of business customers and
consumers.
CONTENT CREATION AND MANAGEMENT TOOLS. We have created the following
applications to support editorial and advertising content production:
- SiteWorks, for the design of business Web sites and editorial features;
- EditWorks, for editorial content entry;
- User Interface Tree editor, for defining and managing the site hierarchy;
and
- MediaWorks, to enable remote content partners, typically television and
radio stations, to submit content directly to the site.
These tools are designed to minimize the technical knowledge that editorial
and advertising content producers need to possess.
ENTERPRISE MANAGEMENT SYSTEMS. We have developed and implemented a suite of
integrated enterprise management systems designed to handle an increasing volume
of business customers. The enterprise management system consists of third-party
and internally developed applications covering sales force automation and
telemarketing, production management and tracking systems and customer service,
accounting, billing and commissions systems.
The sales force automation and production tracking systems enhance our
ability to manage the planning, scheduling, forecasting and tracking of business
Web sites, banners and other services through the various stages of design and
production. These tools enable us to manage the large number of business Web
sites and banners developed simultaneously and originating from numerous cities.
We believe the systems and processes we have developed to produce business Web
sites allow us to create high quality sites in a more cost-effective and timely
manner.
ONLINE TICKETING--TICKETMASTER.COM
TICKETMASTER.COM--SERVICE
ticketmaster.com (formerly known as Ticketmaster Online) is the leading
online ticketing service. The service enables consumers to purchase tickets for
live music, sports, arts and family entertainment events presented by
Ticketmaster Corp.'s clients and related merchandise over the Web. During 2000
we intend to make tickets for events presented by venues not ticketed by
Ticketmaster Corp. available through ticketmaster.com. Consumers can access the
ticketmaster.com service at www.ticketmaster.com, from citysearch.com owned and
operated city guides at www.citysearch.com and from some of our other Web sites
through numerous direct links from banners and event profiles. In addition to
these services, the ticketmaster.com Web site provides local information and
original content regarding live events for Ticketmaster Corp. clients throughout
the United States, Canada and the United Kingdom.
Throughout the ticketmaster.com Web site and at the conclusion of a
confirmed ticket purchase, the consumer is prompted to purchase merchandise that
is related to a particular event, such as videos, tour merchandise and sports
memorabilia from the store.ticketmaster.com site. We intend to expand the types
and range of merchandise that can be ordered by consumers through the
store.ticketmaster.com Web site. We also intend to organize membership programs
that will provide ticketmaster.com members with certain benefits centered around
entertainment, leisure and travel activities. Membership is expected to include
participation in other activities not generally available to the public.
Since the commencement of online ticket sales in November 1996,
ticketmaster.com has experienced significant growth in the volume of tickets
sold through its Web site. Gross transaction dollars for ticket sales increased
from approximately $223,000 in November 1996 to $51 million in December 1999.
Similarly, tickets sold on the ticketmaster.com Web site in November 1996
represented less than 1% of
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total tickets sold by Ticketmaster Corp., while tickets sold online in the
quarter ended December 31, 1999 represented more than 18% of tickets sold.
TICKETMASTER CORP.--CLIENTS
Ticketmaster Corp., through its wholly-owned and majority-owned
subsidiaries, is the leading provider of automated ticketing services in the
United States with over 3,750 domestic clients, including many of the country's
foremost entertainment facilities, promoters and professional sports franchises.
Ticketmaster Corp. has established its market position by providing these
clients with comprehensive ticket inventory control and management, a broad
distribution network and dedicated marketing and support services. Ticket orders
are received and fulfilled through operator-staffed call centers, independent
sales outlets remote to the facility box office and ticketmaster.com's Web site.
Revenue is generated principally from convenience charges received by
Ticketmaster Corp. for tickets sold on its clients' behalf. Ticketmaster Corp.
generally serves as an exclusive agent for its clients and typically has no
financial risk for unsold tickets.
Ticketmaster Corp. has a comprehensive domestic distribution system that
includes approximately 2,700 remote sales outlets, covering many of the major
metropolitan areas in the United States, and 17 domestic call centers with
approximately 2,000 operator positions. Ticketmaster Corp. also operates in
Great Britain, Canada, Ireland, Mexico, Australia, Chile and Argentina. The
number of tickets sold through Ticketmaster Corp. has increased from
approximately 29 million tickets in 1990 to approximately 75 million tickets in
1999.
As part of its client agreements, Ticketmaster Corp. is generally granted
the right to collect from ticket purchasers a per ticket convenience charge on
all tickets sold other than at the box office and an additional per order
handling charge on all tickets sold by Ticketmaster Corp. other than at remote
sales outlets to partially offset the cost of fulfillment. The amount of the
convenience charge is typically determined during the contract negotiation
process, and varies based upon numerous factors, including the services to be
rendered to the client, the amount and cost of equipment to be installed at the
client's box office and the amount of advertising and/or promotional allowances
to be provided, as well as the type of event and whether the ticket is purchased
at a remote sales outlet, by telephone, through the ticketmaster.com Web site or
otherwise. Any deviations from those amounts for any event are negotiated and
agreed upon by Ticketmaster Corp. and the client prior to any ticket sales.
During Ticketmaster Corp.'s 1999 fiscal year, the convenience charges generally
ranged from $1.50 to $7.50 per ticket. Ticketmaster Corp.'s client agreements
also generally establish the amounts and frequency of any increases in the
convenience charge and handling charge during the term of the agreement.
The agreements with some of Ticketmaster Corp.'s clients provide for a
client to participate in the convenience charges paid by ticket purchasers for
tickets bought through Ticketmaster Corp. for that client's events. The amount
of such participation, if any, is determined by negotiation with that client.
Some agreements also may provide for Ticketmaster Corp. to make participation
advances to the client, generally recoupable by Ticketmaster Corp. out of the
client's future right to participation. In limited cases, Ticketmaster Corp.
makes an upfront, non-recoupable payment to a client for the right to sell
tickets for that client.
Clients are routinely required by contract to include the Ticketmaster name
in print, radio and television advertisements for entertainment events sponsored
by such clients. The Ticketmaster name and logo are also prominently displayed
on printed tickets and ticket envelopes.
Ticket prices are not determined by Ticketmaster Corp., but by its clients.
Ticketmaster Corp.'s clients also generally determine the scheduling of when
tickets go on sale to the public and what tickets will be available for sale
through Ticketmaster Corp. Facilities and promoters, for example, often handle
group and season ticket sales in-house. Ticketmaster Corp. only sells a portion
of its clients' tickets, the amount of which varies from client to client and
varies as to any single client from year to year.
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If an event is canceled, Ticketmaster Corp.'s current policy is to refund
the per ticket convenience charges, but not the handling charge. Refunds of the
ticket price for a canceled event are funded by the client.
TICKETMASTER.COM--LICENSE AGREEMENT
Under our license agreement with Ticketmaster Corp., subject to specified
limitations, Ticketmaster Corp. has granted us an exclusive, perpetual,
irrevocable, worldwide license to use the Ticketmaster trademark and specified
Ticketmaster Corp. databases to sell live event tickets online for Ticketmaster
Corp.'s clients. In addition, Ticketmaster Corp. authorized us to be its
exclusive, perpetual, worldwide agent for such online ticket sales. The license
agreement further provides that Ticketmaster Corp. may use and permit others to
use the Ticketmaster trademark in connection with the online promotion of ticket
sales.
Ticketmaster Corp. retains the rights to sell tickets by non-online means
and to use the Ticketmaster trademark in connection with such sales. The license
agreement defines such non-online means to include:
- by telephone;
- by other voice-to-voice means or voice-to-voice recognition unit systems;
- by non-interactive broadcast, cable and satellite television; and
- by kiosks and retail ticket outlets.
Client venues retain the rights to sell tickets at their box offices or as
otherwise provided in client venue agreements with Ticketmaster Corp.
Ticketmaster Corp. is the contracting party with client venues, promoters
and sports franchises, providing ticket inventory management, consumer
information and related data for all ticketing transactions. Ticketmaster Corp.
provides this information to ticketmaster.com for processing of online live
event ticket sales and provides all transaction processing and fulfillment
services for online live event ticket sales. ticketmaster.com is required under
the license agreement to comply with the terms of Ticketmaster Corp.'s client
agreements. Our rights, contained in the license agreement, are subject to the
client agreements. The license agreement also generally restricts us from
cooperating with, offering online links to, or entering into any agreements with
venues, ticket sellers or sales agents for online sale of tickets. This
limitation was waived by Ticketmaster Corp. in connection with our acquisition
of 2b Technology to the extent necessary to allow us to operate 2b Technology
post-acquisition.
Under the license agreement, we pay Ticketmaster Corp. a royalty which is a
percentage of the net profit we derive from online ticket sales for Ticketmaster
clients. We also reimburse Ticketmaster Corp. for Ticketmaster Corp.'s direct
expenses related to online ticket sales.
Under the license agreement, we have also been granted the non-exclusive
right to promote and sell online specified merchandise available through
store.ticketmaster.com. Ticketmaster Corp. and third parties serve as
ticketmaster.com's fulfillment providers for the online sales of this
merchandise. As long as Ticketmaster Corp.'s fees, terms and quality of service
are no less favorable than those available to us from third parties,
Ticketmaster Corp. or its affiliates will serve as our fulfillment provider for
the online sale of merchandise. However, we have entered into a number of
fulfillment arrangements covering music, clothing and videos with third parties
with Ticketmaster Corp.'s acquiescence.
TICKETMASTER.COM--STRATEGIC ALLIANCES
ticketmaster.com participates in certain strategic partnerships with leading
marketing and technology partners. We believe that these alliances continue to
build the ticketmaster.com brand name and expand our promotional opportunities.
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ADVERTISING, SPONSORSHIP AND MARKETING PARTNERSHIPS. ticketmaster.com has
entered into advertising, sponsorship and marketing alliances with Internet
content and service providers and other partners. In addition, Ticketmaster
Corp. has entered into similar agreements pursuant to which ticketmaster.com
performs services and is allocated a percentage of revenues. ticketmaster.com's
other advertisers and marketing partners include American Express, Palm
Computing Company and International Business Machines Corporation, among others.
Client advertisements and marketing opportunities are typically integrated into
our ticketmaster.com Web site through banners and links that encourage viewers
to click through for additional information. We intend to continue to pursue
such advertising, sponsorship and marketing opportunities. We also participate
in certain arrangements with technology partners to provide enhanced features
and functionality on our ticketmaster.com Web site.
TICKETMASTER.COM--MARKETING AND SALES
We believe that we will benefit from Ticketmaster Corp.'s continued
promotion of its brand name through Ticketmaster Corp.'s services and
advertising sales force. We intend to continue to leverage the Ticketmaster
brand name and Ticketmaster Corp.'s extensive distribution capabilities and core
ticketing services in an effort to offer live event venues, sports franchises,
promoters, advertisers, sponsors and other partners a wider variety of
advertising, promotional and marketing platforms for their products and
services. We also sell online-only advertising and sponsorship packages to
national and local advertisers. As of December 31, 1999, we had 14 employees
dedicated to advertising and promotion of ticketmaster.com's services. These
persons are in addition to our national sales team which sells advertising
across all of our Web sites.
TICKETMASTER.COM--OPERATIONS
Our ticketmaster.com ticketing system interfaces on a real-time basis with
the host ticketing systems developed by Ticketmaster Corp. This process is
designed to ensure that, except in limited circumstances, the inventory of
tickets available online is identical to that which is available through
Ticketmaster Corp.'s other distribution methods (e.g., telephone call centers
and independent retail outlets) and to enable consumers to order tickets on a
"best available seat" basis. Measures are taken that are designed to prevent
system failure in Ticketmaster Corp.'s computer center. Each system has a live
back-up available in the event of a primary system failure. The rooms housing
the computer-related equipment are protected by computer-safe fire protection
systems. To guard against power outages, uninterruptable power supplies are
utilized. High capacity back-up generators eliminate the dependency on public
electric sources. In addition, all data is continually recorded on back-up tape.
We utilize Secure Sockets Layer encryption technology designed to allow
users to securely transmit their personal information over the ticketmaster.com
Web site. The decrypted data is then passed through two levels of firewalls,
using an internally developed communications protocol, to the Ticketmaster Corp.
host systems where credit cards are processed and customer accounts are created.
The host systems communicate directly with bank processing centers for
instantaneous online credit card authorization and electronic deposit of credit
card receipts. Essentially, all order processing, credit card billing, order
fulfillment and consumer service functions for online ticketing orders are
handled by Ticketmaster Corp. in the same manner as orders which are placed by
telephone.
TICKETMASTER.COM--TECHNOLOGY
ticketmaster.com has an extensive database of live event information, with
event information updated 12 times every hour and more than 200 times daily.
This data base contains information on more than 30,000 events and over 3,000
clients and is designed to support an easy-to-use and reliable dynamic event
calendar and ticket-buying interface to the Ticketmaster System.
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The ticketmaster.com system is deployed as a multi-tiered system of servers
that separate database functions, Web page serving functions, transaction
processing functions and ticketing system interfacing functions. The system is
built using a combination of commercial and proprietary software and hardware
and is integrated into the Ticketmaster system. All ticketmaster.com ticket
sales occur on one of 25 geographically dispersed host systems. Credit card
authorization and deposit, inventory control for events, customer account
management and ticket printing and distribution are all handled on the
Ticketmaster system. Internet users interact with various Web servers to find an
event using various criteria including event location, event type, or performer
name. Once an event is located, users interact with forms-based HTML pages to
guide them through the ticket-buying process. The Web servers communicate via a
proprietary gateway to the host ticketing systems where the transaction actually
takes place.
ONLINE PERSONALS--MATCH.COM
MATCH.COM--SERVICE
We purchased match.com, a leading on-line matchmaking and dating service, in
June 1999. match.com provides adults with a secure, effective environment for
meeting other single adults. match.com provides users with access to other
users' personal profiles. match.Com members are, on average, upscale,
professional singles seeking meaningful romantic relationships. Users interested
in meeting others can send email messages to one another. Email recipients can
respond, or not, depending on their level of interest in the sender. match.com
allows users a seven day free trial period; thereafter match.com charges
subscribers a monthly fee with discounts for longer term subscriptions.
match.com has focused on keeping the number of users balanced between men and
women by forming relationships with women-oriented Internet sites. match.com
also expends a considerable amount of effort to keep the site secure for use by
single women.
In September 1999, we purchased One & Only Network, another leading Internet
classifieds company that also operates a large online affiliate program
primarily focused on online matchmaking. One & Only Network provides classified
personals content to large and small businesses and individual Web
entrepreneurs. These affiliates are able to join the One & Only Network for
free, and earn commissions on each customer subscription they sell into One &
Only Network's online matchmaking service.
MATCH.COM--STRATEGIC ALLIANCES
match.com has entered into partnerships and strategic alliances with third
parties in order to increase subscriptions in general as well as to target
particular segments of its potential subscriber base. For example, match.com is
the primary provider of personals on the The Microsoft Network (MSN) and the
exclusive provider of personals on the MSN local and entertainment channels. In
addition, match.com is the exclusive provider of personals on iVillage.com, a
Web site oriented towards women. Through its affiliate program, One & Only
Network has partnered with over 140,000 Web masters (persons or companies who
operate their own Web sites) whose Web sites are linked to One & Only Network's
content. match.com and One & Only Network expect to continue to pursue strategic
alliances and partnerships, both through the affiliate program and through
agreements with third parties, in an effort to expand their overall subscriber
base and to encourage subscriptions from targeted audiences.
MATCH.COM--SALES AND MARKETING
match.com purchases advertising on Web sites, including strategic placement
of ads on Web pages related to romance and personals, in an effort to increase
subscriptions and promote the match.com brand name. As part of the integration
of match.com and One & Only Network, the combined companies will use the
match.com name, and we intend to focus future advertising efforts on building
this brand.
One & Only Network expands the reach of its service by utilizing an
affiliate program which allows Web masters to customize and integrate One & Only
Network content into their Web Sites. In general,
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One & Only Network pays its affiliates a commission on all One & Only Network
revenues generated by such affiliates on their Web sites. In addition, One &
Only Network provides incentives for existing affiliates to promote the service
to other potential affiliates through the payment of commissions on referred
affiliate revenues. match.com and One & Only Network utilize our citysearch.com
national sales team to sell banner ads on their Web sites.
MATCH.COM--OPERATIONS
We have begun the process of integrating One & Only Network's personals
classifieds program with match.com. In December 1999, the match.com operations
were physically relocated to the Dallas headquarters of One & Only Network and
the One & Only management assumed responsibility for both operations. In 2000,
we plan to further integrate the two operations and to market them under the
match.com brand.
MATCH.COM--TECHNOLOGY
match.com and One & Only Network have developed and implemented several
technologies to support their matchmaking services and affiliate marketing
network.
The One & Only Network matchmaking service is deployed as a tiered system
consisting of web servers, database servers, customer support applications and
transaction processing applications. These technologies are based on commercial
application servers, databases and hardware. Internet users interact with
forms-based HTML pages to specify their desired match. One & Only Network's
database is then searched to provide the results to the user. User transactions
and customer support are accomplished with custom-built applications.
The affiliate marketing service provides registration, customization,
transaction tracking and reporting services to independent Web masters allowing
them to participate in the matchmaking service or any other service which we may
make available to the affiliate network from time to time. One & Only Network
technology provides near real-time reporting capabilities on the subscription
performance of affiliated sites.
Upon the full integration of match.com and One & Only Network, the combined
operations will utilize the One & Only Network technology with combined features
of the current match.com and oneandonly.com Web sites.
ADDITIONAL WEB SITES
We operate a number of other Web sites that have their own following on the
Internet and that round-out our citysearch.com, ticketmaster.com and online
personals offerings. These Web sites include:
- astroabby.com;
- livedaily.com;
- 2b Technology/MuseumTix.com;
- Store.ticketmaster.com;
- CityAuction.com; and
- Jobs.citysearch.com.
ASTROABBY.COM
In July 1999, we purchased all of the assets of the Web site astroabby.com.
Astroabby.com is a horoscope site that provides free weekly and monthly
astrology forecasts, as well as astrology advice. We
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have integrated astroabby.com with the citysearch.com and match.com Web sites,
allowing users of our other sites to obtain entertaining daily content.
LIVEDAILY.COM
livedaily.com is our online daily entertainment news webzine. We have
integrated livedaily.com with our citysearch.com and ticketmaster.com Web sites,
providing music fans with access to news about event tickets and promotions as
well as local music and event information.
2B TECHNOLOGY/MUSEUMTIX.COM
In January 2000, we acquired all of the outstanding shares of capital stock
of 2b Technology, Inc., a Virginia corporation. 2b Technology is a
fully-integrated visitor management and ticketing firm targeted at venues such
as higher volume museums, cultural institutions and historic sites. The initial
target purchase price for the 2b Technology shares is approximately $23 million
of our Class B Common Stock. At the closing, we issued 400,809 shares of
Class B Common Stock, representing a value of $16.85 million based on a $42.04
per share valuation, to the shareholders of 2b Technology. The number of shares
issued at closing was to be adjusted upward or downward based on the closing
price of our Class B Common Stock on the Nasdaq National Market for the five
trading days ended two days prior to the filing of the request for acceleration
of effectiveness of the registration statement we filed with the SEC to register
such shares; provided that the per share price used to calculate the adjustment
could not be greater than $47.30 or less than $36.79, which were the maximum and
minimum share prices to be used in that adjustment. Pursuant to such adjustment,
we issued 57,196 shares of our Class B Common Stock to the shareholders of
2b Technology on March 21, 2000. The remainder of the purchase price may range
from $0 to $11 million, subject to, among other things, actual revenues of 2b
Technology for the 2000 and 2001 fiscal years. The acquisition will be accounted
for using the purchase method of accounting. It is expected that the acquisition
will result in goodwill in an amount approximating the purchase price that will
be amortized by us over a period of five years.
We intend to continue to operate 2b Technology's visitor management software
development and offline ticketing operations on an independent basis while
integrating the company's online ticketing Web site into the ticketmaster.com
Web site to enhance traffic to ticketmaster.com. We will also continue to market
the museumtix.com Web site independently of the ticketmaster.com site. We have
received a waiver of our non-competition provisions in the Ticketmaster License
Agreement to allow us to own and operate 2b Technology. The 2b Technology
ticketing operations will not be subject to the convenience fee sharing
provisions of our license agreement with Ticketmaster Corp.
STORE.TICKETMASTER.COM
The store.ticketmaster.com Web site offers users in-context,
entertainment-related merchandise, including CDs, apparel and memorabilia. With
the integration of store.ticketmaster.com with ticketmaster.com, ticketing
customers have the opportunity to buy merchandise related to the events which
interest them and merchandise customers have the opportunity purchase tickets to
related events.
CITYAUCTION.COM
In March 1999, we purchased CityAuction, Inc. which provides
person-to-person online auctions through its cityauction.com Web site. In
addition to national and regional auctions, cityauction.com lets users post and
search in their own locality, allowing them to trade items that would be
considered too valuable or difficult to transport over long distances, such as
electronic equipment, office equipment, furniture and automobiles. In
September 1999, in connection with our investment in FairMarket, Inc., another
online auction company, we integrated the cityauction.com services into the
FairMarket network allowing cityauction.com users to access a greater number of
users and listings. We also licensed the cityauction.com technology systems to
FairMarket as part of the investment.
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JOBS.CITYSEARCH.COM
Our jobs.citysearch.com Web site is integrated with our citysearch.com site
and allows users to search for jobs by city. To help job searchers,
jobs.citysearch.com provides career advice, company research, industry research,
city research and other useful information.
OTHER ACQUISITIONS AND INVESTMENTS
We have made, and intend to continue to make, tactical and strategic
acquisitions and investments in third party Web sites in order to broaden our
existing Web site offerings and to gain additional distribution channels and
products.
SIDEWALK.COM
We completed the acquisition of the assets associated with the entertainment
city guide portion of the Sidewalk.com Web site from Microsoft Corporation in
September, 1999. The transaction was structured as an acquisition of assets from
a Microsoft subsidiary which held the Sidewalk assets. In connection with the
Sidewalk acquisition, we also entered into a four year distribution agreement
with Microsoft pursuant to which we are the exclusive provider of local city
guide content on The Microsoft Network (MSN) and are the premier provider of
personals content to MSN. In addition, we and Microsoft entered into additional
cross-promotional arrangements. In connection with these transactions, we issued
7 million shares of our Class B Common Stock and two warrants to purchase an
aggregate of 4.5 million shares of our Class B Common Stock. These shares
represent approximately 9%-13% of our equity depending on the extent to which
the warrants are exercised. The first warrant 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. The second warrant 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. We granted Microsoft certain registration rights in
connection with the transaction.
FOODLINE.COM
In October, 1999, we purchased a minority equity interest in
foodline.com, Inc. foodline.com is an online restaurant search and reservation
service, allowing users to make real-time reservations in local restaurants. We
acquired approximately 30% of the fully-diluted equity of foodline.com in the
form of foodline.com's Series A Preferred Stock in exchange for $5 million in
cash. We also entered into a distribution agreement making foodline.com's online
reservations available through the applicable city guides where that service is
available and providing for certain cross-selling arrangements. In March 2000,
we sold one-third of our investment in foodline.com to American Express Travel
Related Services Company, Inc. to provide an incentive for American Express to
enter into a long-term distribution agreement with foodline.com. This divestment
was contemplated at the time we initially invested in foodline.com.
ACTIVEUSA.COM
In December, 1999, we completed the purchase of approximately 19% of the
fully-diluted equity of ActiveUSA.com, Inc. in the form of preferred stock.
ActiveUSA.com is an online participatory sports registration and information
company. ActiveUSA.com is the company resulting from the merger of RaceGate.com
and ActiveUSA.com, which were each in the same business category. The total
consideration we paid to ActiveUSA.com for the preferred stock is valued at
$15.5 million, consisting of shares of our Class B Common Stock with a fixed
value of $10 million, $2.5 million in cash and $3.0 million in services we are
to provide to ActiveUSA.com under a distribution agreement.
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COMPETITION
The markets for local interactive content and services are highly
competitive. Currently, citysearch.com's primary competitors include Digital
City, Inc. (a company wholly-owned by America Online, Inc. and Tribune Company).
citysearch.com also competes against search engine and other site aggregation
companies which primarily serve to aggregate links to sites providing local
content such as Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and
Yahoo! (Yahoo! Local). In addition, citysearch.com competes against offerings
from media companies, including Cox Interactive Media, Inc., Knight
Ridder, Inc. and Zip2 Corporation, as well as offerings from several
telecommunications and cable companies and Internet service providers that
provide local interactive programming such as SBC Communications, Inc. (At Hand)
and MediaOne Group, Inc. (DiveIn). There are also numerous niche competitors
which focus on a specific category or geography and compete with specific
content offerings provided by us. We may also compete with online services and
other Web site operators, as well as traditional media such as television, radio
and print, for a share of advertisers' total advertising budgets. Furthermore,
additional major media companies and other companies with financial and other
resources greater than ours may introduce new Internet products and services
addressing these markets in the future. There can be no assurance that our
competitors will not develop services that are superior to ours or that achieve
greater market acceptance than our offerings.
The markets for the business of selling live events tickets and related
merchandise is highly competitive and diverse. Ticketmaster Corp.'s and
ticketmaster.com's competitors include event facilities and promoters that
handle their own ticket sales and distribution through online and other
distribution channels, live event automated ticketing companies with Web sites
which may or may not currently offer online transactional capabilities and
certain Web-based live event ticketing companies which only conduct business
online. Where facilities and promoters decide to utilize the services of a
ticketing company, Ticketmaster Corp. and ticketmaster.com compete with
international, national and regional ticketing services, including TicketWeb,
Telecharge (Shubert Ticketing Services), ETM Entertainment Network, Dillard's,
Prologue, Lasergate and Tickets.com. Several of Ticketmaster Corp.'s and
ticketmaster.com's competitors have operations in multiple locations throughout
the United States and compete with Ticketmaster Corp. and ticketmaster.com on a
national level, while others compete with Ticketmaster Corp. and
ticketmaster.com principally in one specific geographic region.
Some of ticketmaster.com's competitors may have financial and other
resources greater than ours and may introduce new Internet products and services
in these markets in the future. There can be no assurance that
ticketmaster.com's competitors will not develop services superior to those of
ticketmaster.com or achieve greater acceptance than our ticketmaster.com service
offerings. In addition, pursuant to our license agreement with Ticketmaster
Corp., ticketmaster.com is restricted from entering into agreements with
facilities, promoters or other ticket sellers for the online sale of live event
tickets. As a result, ticketmaster.com is dependent on the ability of
Ticketmaster Corp. to acquire and maintain live event ticketing rights,
including online ticketing rights, with facilities and promoters and to
negotiate commercially favorable terms for such rights. Furthermore,
substantially all of the tickets sold through our ticketmaster.com Web site are
also sold by Ticketmaster Corp. by telephone and through independent retail
outlets. These sales by Ticketmaster Corp. could have a material adverse effect
on our online ticket sales, and as a result, on our business, financial
condition and results of operations.
The online dating services market is very competitive. match.com's primary
independent competitors include FriendFinder, Inc. and Matchmaker.com, Inc.,
both of whom charge subscribers fees for use of their services. In addition,
match.com faces significant competition from online dating services which are
free to subscribers and which are offered by most major portal sites, including
Yahoo! Inc., Excite Inc. and America Online, Inc., among others.
We believe that principal competitive factors include depth, quality and
comprehensiveness of content, ease of use, distribution, search capability and
brand recognition.
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Many of our competitors, whether with respect to our citysearch.com,
ticketmaster.com or match.com service, have greater financial and marketing
resources than us and may have significant competitive advantages through other
lines of business and existing business relationships. There can be no assurance
that we will be able to successfully compete against our current or future
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations. Furthermore, as a
strategic response to changes in the competitive environment, we may make
certain pricing, servicing or marketing decisions or enter into acquisitions or
new ventures that could have a material adverse effect on our business,
financial condition and results of operations.
PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary software and similar intellectual property as critical to
our success, and rely on trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with employees, customers,
partners and others to protect our proprietary rights. We do not hold any
patents. We pursue the registration of certain of our key trademarks and service
marks in the United States and internationally.
Effective trademark, service mark, copyright and trade secret protection may
not be available or sought by us in every country in which our products and
services are made available online. We have licensed in the past, and expect
that we may license in the future, certain proprietary rights, such as
trademarks or copyrighted material, to third parties. In addition, we have
licensed in the past, and expect to license in the future, certain content,
including trademarks and copyrighted material, from third parties. While we
attempt to ensure that the quality of our brands is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of our proprietary rights or
reputation, which could have a material adverse effect on our business,
financial condition and results of operations.
There can be no assurance that the steps taken by us to protect our
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our copyrights, trademarks, trade dress and similar proprietary
rights. In addition, there can be no assurance that other parties will not
assert infringement claims, including patent infringement claims, against us.
We license the registered trademark "CitySearch" from a third party, and
there can be no assurance that we will be able to continue to license the
trademark on terms acceptable to us. The initial term of the license expires in
2001, subject to renewal at our option. We license the trademark "Ticketmaster"
and related trademarks from Ticketmaster Corp. pursuant to our license agreement
with them. We are dependent upon Ticketmaster Corp. to maintain and assert our
rights to the trademarks licensed from Ticketmaster Corp. and defend
infringement claims, if any, relating to our use of such marks. We may be
subject to legal proceedings and claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by us and our
licensees or licensors. Such claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources which could
result in a material adverse effect on our business, financial condition and
results of operations.
EMPLOYEES
As of December 31 1999, we employed:
- 953 persons with respect to the city guide and related operations
(including the citysearch.com, cityauction.com, astroabby.com and
jobs.citysearch.com);
- 33 persons with respect to the ticketmaster.com ticketing operations;
- 82 persons with respect to the online personals operations; and
- 104 persons in general and administrative and other technology areas.
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None of our employees is represented by a labor union, and we consider our
employee relations to be good.
ITEM 2. PROPERTIES
Our headquarters are located in Pasadena, California, where we currently
lease approximately 50,000 square feet under a lease expiring in 2002. We also
lease local office space in approximately 34 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 2004, except for the San Francisco
lease which expires in 2006.
Our internet personals businesses are currently housed in 14,130 square feet
of leased space in Dallas, Texas. We intend to move these businesses to a new
38,000 square foot leased facility in March 2000. That lease will expire in
2005. We also lease temporary office space in Los Angeles, California, as well
as temporary office space in additional cities throughout the United States, the
United Kingdom and Canada, in each case on a month-to-month basis, from
Ticketmaster Corp. on terms that we believe are at least as favorable as those
we could obtain from a third party in an arm's-length transaction. We believe
that our facilities are adequate in the locations where we currently do
business.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings seeking material
damages from us. However, we are from time to time party to various legal
proceedings arising in the ordinary course of our business. We are the plaintiff
in various legal proceedings seeking injunctive relief and/or damages from third
parties for breach of contract and unauthorized use of our intellectual
property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of 1999.
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PART II
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 the 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.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 1999:
Fourth Quarter.............................................. $44.12 $18.87
Third Quarter............................................... 40.06 22.68
Second Quarter.............................................. 41.50 22.00
First Quarter............................................... 71.12 33.00
Fiscal 1998:
Fourth Quarter (commencing December 3, 1998)................ $80.50 $32.69
</TABLE>
As of February 29, 2000, there were approximately 327 holders of record of
the Class B Common Stock. We estimate there are more than 800 beneficial holders
of the Class B Common Stock. On February 29, 2000, the last reported sale price
on the Nasdaq National Market for the Class B Common Stock was $34.87.
On February 29, 2000, there were approximately 307 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 of 1933 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 unitholders 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.
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(2) In December 1999, we issued 1,302,401 shares of our Class B Common Stock
to Ticketmaster Corp., our majority stockholder, for an aggregate purchase price
of $40 million. We intend to use the proceeds of such 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. In March 2000, we issued an additional 57,196 shares of Class B
Common Stock to such persons in the adjustment to the shares at closing.
The sales of the securities described in Items (1), (2), (3) and (4) 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. SELECTED FINANCIAL DATA
The selected financial data below as of December 31, 1999 and 1998, and the
year ended December 1999 and the eleven months ended December 31, 1998 are
derived from the audited financial statements of Ticketmaster
Online-CitySearch, Inc. The selected financial data presented below for the
years ended and at January 31, 1998, 1997 and 1996 are derived from audited
financial statements of Ticketmaster Online as the predecessor entity. The
selected Ticketmaster Online-CitySearch, Inc. 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
Online-CitySearch, Inc. and Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED JANUARY 31,
COMBINED STATEMENTS OF DECEMBER 31, DECEMBER 31, ------------------------------
OPERATIONS DATA: 1999(1) 1998(2) 1998 1997 1996
- ---------------- ------------ ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Ticketing operations................... $ 64,787 $ 15,743 $ 5,972 $ 199 $ --
City guide and related................. 33,915 5,376 -- -- --
Sponsorship and advertising............ 6,601 6,754 3,933 997 14
--------- -------- ------- ------- ------
Total revenues....................... 105,303 27,873 9,905 1,196 14
Costs and expenses:
Ticketing operations................... 47,870 9,842 3,522 635 --
City guide and related................. 30,288 4,021 -- -- --
Sales and marketing.................... 47,263 6,834 490 290 --
Research and development............... 7,455 1,728 -- -- --
General and administrative............. 15,242 3,495 1,719 1,260 548
Amortization of goodwill............... 77,744 16,275 -- -- --
Merger and other transaction
costs(3)............................. 4,236 -- -- -- --
--------- -------- ------- ------- ------
Total costs and expenses............. 230,098 42,195 5,731 2,185 548
--------- -------- ------- ------- ------
Income (loss) from operations............ (124,795) (14,322) 4,174 (989) (534)
Interest income, net..................... 4,163 54 -- -- --
Equity in loss of unconsolidated
affiliates............................. (272) -- --
----
--------- -------- ------- ------
-------
Income (loss) before provision for income
taxes.................................. (120,904) (14,268) 4,174 (989) (534)
Income tax provision (benefit)........... 464 2,951 1,827 (374) (204)
--------- -------- ------- ------- ------
Net income (loss)........................ $(121,368) $(17,219) $ 2,347 $ (615) $ (330)
========= ======== ======= ======= ======
Basic and diluted net income (loss)
(4).................................... $ (1.59) $ (0.38) $ 0.06 $ (0.02) $(0.01)
========= ======== ======= ======= ======
Shares used to compute basic and diluted
net income (loss) (4).................. 76,097 45,201 37,238 37,238 37,238
========= ======== ======= ======= ======
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
------------------- ------------------------------
BALANCE SHEET DATA: 1999 1998 1998 1997 1996
- ------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable securities
available for sale................................. $87,754 $106,910 $ -- $ 3 $ --
Working capital...................................... 77,553 99,571 (100) 218 223
Long-term debt including capital lease obligations,
less current portion............................... 333 1,082 -- -- --
Total assets (5)..................................... 804,669 416,725 688 554 354
Stockholders' equity................................. 782,593 403,588 289 489 354
</TABLE>
- ------------------------
(1) Reflects operating results including the amortization of goodwill and other
intangible assets of CityAuction, match.com, Web Media Ventures (One & Only
Network) and the Sidewalk assets 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 Online 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 terminated merger between
Ticketmaster Online-CitySearch, certain assets owned by its 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.
(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 year ended December 31, 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, 1997 and 1996, is based on the number of
shares of CitySearch common stock exchanged in the merger of Ticketmaster
Online and CitySearch.
(5) Total assets at December 31, 1999 reflect $662.9 million of goodwill and
other intangibles, net of accumulated amortization. Total assets at
December 31, 1998 reflect $299.6 million of goodwill, net of accumulated
amortization.
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 of 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.
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 peoples' 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, cityauction.com, astroabby.com and livedaily.com, among others.
In September 1998, our company was created by combining CitySearch, Inc. and
Ticketmaster Online, then the wholly-owned online subsidiary of Ticketmaster
Corp., to create Ticketmaster Online-CitySearch.
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We derive revenues from three sources: online ticketing, sales of
sponsorships and advertising and city guide and related services (which includes
online personals subscriptions). 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.
Ticket 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. Merchandise sale revenues are recognized
when the products are shipped.
Sponsorship and advertising revenues are derived from local and national
advertisers and are primarily recognized ratably over the term of the promotion.
In our owned and operated city guide markets, we derive our revenues
primarily from subscription fees resulting from the creation, hosting and
maintenance of local business Web sites. Business 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 entering into
additional domestic partnerships to launch city guides to be a critical piece of
our strategy 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. 98-1.
Royalty revenue is recognized as earned and is typically a percentage of
partner-led market revenues from Web site subscriptions, banners,
advertisements, sponsorships and other ancillary offerings. Additionally, we
derive revenue from providing back office services, including business Web site
design, hosting, customer service and billing, to certain of our partners.
In our integrated personals operations, we derive subscription fee revenue
from customers who subscribe for our online matching and dating services for one
to twelve months. Revenues are recognized monthly over the contract term.
See Note 1 of the Notes to our Consolidated Financial Statements.
RECENT DEVELOPMENTS
In January 2000, we completed the acquisition of 2b Technology, Inc, a
ticketing and software licensing company. In connection with the acquisition, we
issued an aggregate of 458,005 shares of our Class B Common Stock to the former
owners of 2b Technology representing a purchase price of approximately
$16.9 million. The purchase price will be increased for additional shares to be
granted upon achievement of revenue targets based on the stock price at that
time. The acquisition will be accounted for using the purchase method of
accounting. The acquisition resulted in $16.8 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 to be recorded
approximates the purchase price which will be amortized by us over a period of
five years.
OPERATING LOSSES
We incurred net losses of $121.4 million and $17.2 million for the year
ended December 31, 1999 and for the eleven months ended December 31, 1998,
respectively. At December 31, 1999, we had an accumulated deficit of
$137.4 million.
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GOODWILL
The merger of Ticketmaster Online and CitySearch in September 1998 and USA
Networks, Inc.'s 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 will be 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, Inc. The acquisitions of CityAuction, Inc., Match.com, Inc and Web
Media Ventures, LLC (d/b/a One & Only Network) during 1999 resulted in goodwill
of $28.0 million, $42.8 million and $36.4 million, respectively, which is being
amortized over five years. In addition, the fair value of the consideration
provided in exchange for the Sidewalk assets and distribution agreement amounted
to $338.5 million and has been recorded in goodwill and other intangible assets.
The amount allocated to the intangible asset of $333.5 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. Goodwill related to the 2b Technology
acquisition is described in the Recent Developments section above.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE ELEVEN MONTHS ENDED DECEMBER 31,
1998
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 Online 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 operations expenses consist
primarily of expenses associated with ticket fulfillment (including the license
fee to Ticketmaster Corp.), Web site maintenance, service and network
infrastructure maintenance and data communications. 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 Ticketmaster Corp.
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<PAGE>
which commenced in October 1998 in connection with the merger of CitySearch and
Ticketmaster Online. 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. City guide and related
expenses of $25.4 million are associated with the design, layout, photography,
customer service and editorial resources used in the production and maintenance
of business Web sites and editorial content, network infrastructure maintenance
and the costs of consulting services in partner-led markets. 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 Online 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. These personals costs include
costs of affiliate referral commissions, customer service and network
infrastructure maintenance. 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. 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,
advertising and travel associated with developing our owned and operated city
guide markets. 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 Online 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. We expect that sales
and marketing expenses will increase in absolute dollars in future periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include the costs to develop, test and upgrade our online service and our
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 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
Online in September 1998 and, to a lesser extent, the growth of city guide
operations in 1999. 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. As such, we expect that research and development
expenditures will increase in absolute dollars in future periods. 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
consist primarily of administrative and executive personnel costs. 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,
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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 Online 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. 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
Ticketmaster Corp. by USA Networks, the merger of CitySearch and Ticketmaster
Online and the acquisitions of CityAuction, match.com, Web Media and the
Sidewalk assets. 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, 1999, respectively, primarily relating to the
merger of CitySearch and Ticketmaster Online and the acquisition of Ticketmaster
Corp. Amortization of goodwill in the prior year periods began during the three
month period ending September 30, 1998 as the acquisition of Ticketmaster 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. Net interest income consists primarily of interest
earned on our cash and cash equivalents, less interest expense on capital lease
obligations. 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 Online in September 1998 in the year ended December 31, 1999 and
the Company's initial public offering in December 1998. We invest our cash
balances in investment grade, interest-bearing securities with maturities
predominately less than one year.
EQUITY LOSSES OF UNCONSOLIDATED AFFILIATES. Equity losses 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. We expect that any taxable income for
2000 and 1999 will be offset by the expected future net operating losses from
city guide operations, resulting in a nominal tax provision. However, net
operating loss carryforwards acquired in the Ticketmaster Online and CitySearch
merger will not be available to further offset our taxable income.
ELEVEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1998
TICKETING OPERATIONS REVENUES. Ticketing operations revenues were
$15.7 million and $6.0 million for the eleven months ended December 31, 1998 and
for the year ended January 31, 1998, respectively. The increase for the eleven
months ended December 31, 1998 over the year ended January 31, 1998 (the
difference of one month's operations is not considered to materially affect the
comparison of the two periods) is primarily attributable to a significant
increase in the number of tickets sold (from 1.1 million to
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2.9 million tickets) and a 7.7% increase in average convenience and handling
charge revenue per ticket (from $5.06 to $5.45).
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SPONSORSHIP AND ADVERTISING REVENUES. Sponsorship and advertising revenues
were $6.8 million and $3.9 million for the eleven months ended December 31, 1998
and year ended January 31, 1998, respectively. The increases are primarily
attributable to an increase in sponsorship and promotion activity with strategic
marketing partners. In the eleven month period ended December 31, 1998,
$3.0 million was attributable to one major promotional agreement.
CITY GUIDE AND RELATED REVENUE. City guide and related revenues were
$5.4 million for the eleven months ended December 31, 1998, which represents the
city guide operations for the three months subsequent to the merger of
CitySearch and Ticketmaster Online in September 1998.
TICKETING OPERATIONS EXPENSES. Ticketing operating expenses were
$9.8 million and $3.5 million for the eleven months ended December 31,1998 and
for the year ended January 31, 1998, respectively. Ticketing operations expenses
are primarily variable in nature.
CITY GUIDE AND RELATED EXPENSES. City guide and related expenses were
$4.0 million for the eleven months ended December 31, 1998 which represents the
CitySearch operations for the three months subsequent to the merger of
CitySearch and Ticketmaster Online in September 1998. City guide and related
expenses are primarily variable in nature and will 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 were
$6.8 million and $490,000 for the eleven months ended December 31, 1998 and the
year ended January 31, 1998, respectively. The increase for the eleven months
ended December 31, 1998 as compared to the fiscal year ended January 31, 1998 is
due primarily to sales and marketing cost of CitySearch for the three months
subsequent to the merger of CitySearch and Ticketmaster Online in
September 1998 and increased salary related costs and operating support costs
associated with the growth in sales and marketing activities.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were
$1.7 million for the eleven months ended December 31, 1998, which represents the
research and development costs of CitySearch for the three months subsequent to
the merger of CitySearch and Ticketmaster Online in September 1998. We have
expensed research and development costs as incurred.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3.5 million and $1.7 million for the eleven months ended December 31, 1998
and year ended January 31, 1998, respectively. The increase was due primarily to
general and administrative expenses for CitySearch for the three months
subsequent to the merger of CitySearch and Ticketmaster Online in
September 1998.
INTEREST INCOME, NET. We had net interest income of $54,000 for the eleven
months ended December 31, 1998. Included in net interest income is interest
expense of $0.7 million on a convertible note issued by us to USA
Networks, Inc. The convertible note was fully repaid as of December 31, 1998.
INCOME TAXES. The provision for income taxes was $2.9 million and
$1.8 million for the eleven months ended December 31, 1998 and fiscal year ended
January 31, 1998, respectively. The provision for income taxes for the eleven
months ended December 31, 1998 primarily consists of the provision recorded by
Ticketmaster Online prior to the merger of CitySearch and Ticketmaster Online in
September 1998. 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
We had cash, cash equivalents and marketable securities available for sale
of $87.8 million and $106.9 million at December 31, 1999 and 1998, respectively.
Prior to the merger of CitySearch and Ticketmaster Online in September 1998, our
primary sources of liquidity were cash from operations and
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funding from Ticketmaster Corp. Consistent with the cash management policies of
Ticketmaster Corp., we did not maintain any cash balances prior to the date of
the merger (September 28, 1998).
Net cash used in operating activities was $34.8 million and $438,000 for the
year ended December 31, 1999 and for 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 $82.6 million and $17.4 million, respectively. Net cash provided by operating
activities was $2.9 million for the fiscal year ended January 31, 1998.
Net cash used in investing activities was $52.4 million, $1.1 million and
$250,000 for the year ended December 31, 1999, the eleven months ended
December 31, 1998 and the fiscal year ended January 31, 1998, respectively. Net
cash used in investing activities in the year ended December 31, 1999 consisted
primarily of $26.5 million used to purchase short term marketable securities,
$12.9 million of other equity investments and $12.3 million of capital
expenditures for computers, software, equipment. Net cash used in investing
activities in the eleven months ended December 31, 1998 and the fiscal year
ended January 31, 1998 consisted primarily of capital expenditures for
computers, software, equipment and leasehold improvements.
Net cash provided by financing activities was $41.7 million and
$50.6 million for the year ended December 31, 1999 and the eleven months ended
December 31, 1998, respectively. Net cash provided by financing activities for
the year ended December 31, 1999 was primarily attributable to $40.0 million
additional investment by USA Networks (through its wholly-owned subsidiary
Ticketmaster 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 USAi. Net cash used in financing activities was
$2.7 million for the fiscal year ended January 31, 1998, attributable to
repayments to Ticketmaster Corp. for prior financing provided to us and
distributions to Ticketmaster Corp.
We currently have 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. Our management believes that existing
cash, cash equivalents and short-term marketable securities 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. 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.
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$100,000 during 1999 in connection with remediating our
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systems. We are not aware of any material problems resulting from Year 2000
issues, either with our products, our internal systems or the products and
services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that we promptly address any latent Year 2000 matters that may
arise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE>
PART III
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 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Directors" and "Executive
Officers" in the definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT
The information contained under the heading "Voting Securities and Principal
Stockholders" in the definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement for our 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C>
Schedule II--Valuation and qualifying accounts for the year
ended
December 31, 1999 and the eleven months ended
December 31, 1998......................................... S-1
</TABLE>
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:
27
<PAGE>
The following financial statements of Ticketmaster Online--CitySearch, Inc.
are included in response to Item 8 of this report.
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C>
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-2
Consolidated Statements of Operations for the year ended
December 31, 1999, the eleven months ended December 31,
1998 and the year ended January 31, 1998.................. F-3
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1999, the eleven months ended
December 31, 1998 and the year ended January 31, 1998..... F-4
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, the eleven months ended December 31,
1998 and the year ended January 31, 1998.................. F-5
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(A)(3) EXHIBITS FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE NOTES
- -------------- ------------- --------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization, among CitySearch, (A)*
Inc., MB Acquisition Corporation, MetroBeat, Inc., Mark
Davies and Joshua White, dated May 31, 1996.
2.2 Amended and Restated Agreement and Plan of Reorganization, (A)
among CitySearch, Inc., Tiberius, Inc., USA Networks, Inc.,
Ticketmaster Group, Inc., Ticketmaster Corporation and
Ticketmaster Multimedia Holdings, Inc., dated August 12,
1998.
2.3 Agreement and Plan of Reorganization, dated January 8, 1999, (F)
by and among Ticketmaster Online--CitySearch, Inc., Nero
Acquisition Corp., Inc., CityAuction, Inc., Andrew Rebele
and Monica Lee as amended.
2.4 Agreement and Plan of Reorganization, dated as of February (E)
8, 1999, by and among USA Networks, Inc., Ticketmaster
Online- CitySearch, Inc., Lycos, Inc., USA Interactive Inc.,
Lemma, Inc. and Tycho, Inc. (the "Merger Agreement"),
including Form of Certificate of Designations, Preferences
and Rights of Series A Convertible Redeemable Preferred
Stock of USA/Lycos Interactive Networks, Inc. (Exhibit B to
the Merger Agreement)
2.5 Exchange Agreement by and among Cendant Corporation, Cendant (H)
Intermediate Holdings, Inc. and Ticketmaster
Online--CitySearch, Inc. dated as of May 14, 1999.
2.6 Agreement and Plan of Reorganization dated June 10, 1999 (H)
among Ticketmaster Online--CitySearch, Inc., Web Media
Ventures LLC (dba One & Only Network) and William Bunker,
David Kennedy and Glenn Wiggins.
2.7 Agreement and Plan of Merger by and among Sidewalk.com, (I)
Inc., Microsoft Corporation and the Registrant, dated as of
July 19, 1999.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE NOTES
- -------------- ------------- --------
<C> <S> <C>
2.8 Agreement and Plan of Merger by and among the Registrant, (L)
TMCS Merger Sub, Inc., 2b Technology, Inc., Bryan Bostic,
Eric Martin, Live Oak Holdings, L.C., Clarke Holding, L.C.,
and Kenneth Bostic, dated as of January 30, 2000
3.1 Form of Amended and Restated Certificate of Incorporation. (C)
3.2 Amended and Restated Bylaws. (C)
4.1 Specimen Class B Common Stock Certificate. (C)
4.2 Class B Common Stock Purchase Warrant of the Registrant to (I)
be delivered upon closing of the Sidewalk acquisition
(3,000,000 shares).
4.3 Class B Common Stock Purchase Warrant of the Registrant to (I)
be delivered upon closing of the Sidewalk acquisition
(1,500,000 shares).
10.1 1996 Stock Option Plan and form of agreement thereunder. (C)
10.2 1998 Stock Option Plan and form of agreement thereunder. (C)
10.3 1998 Employee Stock Purchase Plan. (D)
10.4 License Agreement between CitySearch, Inc. and Perly, Inc., (A)*
dated March 9, 1996.
10.5 Marketing Agreement between CitySearch, Inc. and American (A)*
Express Travel Related Services Company, Inc., dated May 26,
1998.
10.6 Employment Agreement between CitySearch, Inc. and Charles (A)
Conn, dated May 9, 1996.
10.7 Unanimous Shareholder Agreement between Tele-Direct (A)*
(Services), Inc., Metroland Printing, Publishing &
Distributing Ltd., CitySearch Canada, Inc. and 1310818
Ontario, Inc., dated August 31, 1998.
10.8 Limited Partnership Agreement between Metroland Printing, (A)*
Publishing & Distributing Ltd., 1310818 Ontario Inc.,
CitySearch Canada, Inc., Tele- Direct (Services), Inc.,
Tele-Direct (Publications), Inc., CitySearch, Inc. and
Torstar Corporation, dated August 31, 1998.
10.9 Amended and Restated License and Services Agreement between (A)*
CitySearch, Inc. and CitySearch Canada, Inc., dated August
31, 1998.
10.10 Sublicense and Services Agreement between CitySearch Canada, (A)*
Inc. and toronto.com, dated August 31, 1998.
10.11 Non-competition Agreement between Toronto Star Newspapers (A)*
Ltd., Tele-Direct (Services), Inc., CitySearch Canada, Inc.
and Metroland Printing, Publishing & Distributing Ltd.,
dated August 31, 1998.
10.12 Lease Agreement by and between CitySearch, Inc. and West End (A)
Land Development Co., L.P., dated November 7, 1996.
10.13 Standard Form of Lease, Aeriel Center Executive Park, (A)
between Pizzagalli Investment Company and CitySearch, Inc.,
dated May 8, 1996.
10.14 Standard Office Lease between CitySearch, Inc. and Sage (A)
Realty Corporation, dated May 6, 1997.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE NOTES
- -------------- ------------- --------
<C> <S> <C>
10.15 Standard Office Lease between CitySearch, Inc. and H. Naito (A)
Corporation, dated March 6, 1997.
10.16 Standard Office Lease between CitySearch, Inc. and Brazos (A)
Austin Centre, Ltd., dated August 15, 1996.
10.17 Standard Office Lease between CitySearch, Inc. and Judge (A)
Building Group, dated September 10, 1996.
10.18 Standard Office Lease between CitySearch, Inc. and Sobel (A)
Building Development, dated May 31, 1996.
10.19 Standard Office Lease between CitySearch, Inc. and BPG (A)
Pasadena, L.L.C. (later assigned to Spieker Properties),
dated September 30, 1996.
10.20 Lease Agreement between CitySearch, Inc. And Secured (A)
Properties Investors II, L.P., dated May 13, 1998.
10.21 License and Services Agreement between CitySearch, Inc. and (A)*
Classified Ventures, L.L.C.
10.22 Convertible Promissory Note issued to CitySearch, Inc. by (A)
USA Networks, Inc., dated August 12, 1998.
10.23 Non-Competition Agreement between CitySearch, Inc., (A)
Ticketmaster Corporation, Ticketmaster Multimedia Holdings,
Inc., and Charles Conn, dated August 12, 1998.
10.24 Letter Agreement between N2K Inc. and Ticketmaster(B)* (B)*
Ticketing Co., Inc., dated April 3, 1998, as amended by a
Letter Agreement by and between the parties, dated June 16,
1998.
10.25 Development and Services Agreement between Ticketmaster (A)
Multimedia Holdings, Inc. and Starwave Corporation, dated
June 28, 1996.
10.26 License and Services Agreement between Ticketmaster (A)*
Corporation, Ticketmaster Multimedia Holdings, Inc. and USA
Networks, Inc., dated August 12, 1998.
10.27 Contribution Agreement dated as of February 8, 1999, by and (E)
among USA Networks, Inc., USANi LLC and USA Interactive Inc.
10.28 Stock Option Agreement dated February 8, 1999 between Lycos, (E)
Inc. and USA Networks, Inc.
10.29 Stock Option Agreement dated February 8, 1999 between Lycos, (E)
Inc. and Ticketmaster Online--CitySearch.
10.30 Registration Rights Agreement dated March 29, 1999 by and (G)
among Ticketmaster Online CitySearch, Inc., Charter Venture
Capital, GCA Investments, John Montgomery, Monica Lee and
Andrew Rebele.
10.31 Non-competition Agreement dated March 29, 1999 by and among (G)
Ticketmaster Online--CitySearch, Inc., CityAuction, Inc. and
Andrew Rebele.
10.32 Non-competition Agreement dated March 29, 1999 by and among (G)
Ticketmaster Online--CitySearch, Inc., CityAuction, Inc. and
Monica Lee.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE NOTES
- -------------- ------------- --------
<C> <S> <C>
10.33 Employment Agreement dated March 29, 1999 by and between (G)
Ticketmaster Online--CitySearch, Inc. and Andrew Rebele.
10.34 Employment Agreement dated March 29, 1999 by and between (G)
Ticketmaster Online--CitySearch, Inc. and Monica Lee.
10.35 Registration Rights Agreement dated May 14, 1999 among (H)
Cendant Intermediate Holdings, Inc. and Ticketmaster
Online--CitySearch.
10.36 Employment Agreement between Ticketmaster Online--CitySearch (F)
and Robert Perkins dated November 25, 1998.
10.37 Employment Agreement between Ticketmaster (F)
Online--CitySearch, Inc. and David Hagan dated November 27,
1998.
10.38 Registration Rights Agreement between the Registrant and (I)
Microsoft Corporation dated September 17, 1999
10.39 Series A Preferred Stock Purchase Agreement between (J)
Ticketmaster Online-CitySearch, Inc. and foodline.com, Inc.
dated October 25, 1999
10.40 Series D Preferred Stock Purchase Agreement between (J)
Ticketmaster Online-CitySearch, Inc. and FairMarket, Inc.
dated September 15, 1999
10.42 1999 Stock Plan and form of agreement thereunder (K)
10.43 Series D Preferred Stock Purchase Agreement, dated November
17, 1999, by and among RaceGate.com, Inc., a Delaware
corporation, RaceGate.com, Inc., a California corporation,
RG Acquisition Corp., Active USA.com, Inc., Ticketmaster
Online-CitySearch, Inc, Austin Ventures IV, L.P. and Kettle
Partners IV, L.P.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (See signature page).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment has been granted with respect to portions of this
exhibit.
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company'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 Company's Registration Statement on Form S-1 (File
No. 333-64855) filed with the Commission on October 19, 1998.
(C) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-1 (File
No. 333-64855) filed with the Commission on November 6, 1998.
(D) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-1 (File
No. 333-64855) filed with the Commission on November 20, 1998.
31
<PAGE>
(E) 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.
(F) Incorporated by reference to the Company's Report on Form 10-K filed with
the Commission on March 31, 1999.
(G) Incorporated by reference to exhibits filed in response to Item 7,
"Exhibits," of the Report on Form 8-K (File No. 000-25041) with the
Commission on April 29, 1999.
(H) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-1 (File
No. 333-81761) filed with the Commission on June 29, 1999.
(I) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits," of the Report on Form 10-Q filed with the Commission on
August 16, 1999.
(J) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits," of the Report on Form 10-Q filed with the Commission on
November 15, 1999.
(K) Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Company's Registration Statement on Form S-8 (File
No. 333-30794) filed with the Commission on February 18, 2000.
(L) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File
No. 333-30884) filed with the Commission on February 22, 2000.
(B) REPORTS ON FORM 8-K:
Not applicable.
32
<PAGE>
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.
<TABLE>
<S> <C> <C>
TICKETMASTER ONLINE-CITYSEARCH, INC.
By: /s/ CHARLES CONN
-----------------------------------------
Charles Conn
CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: March 21, 2000
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Charles Conn, 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHARLES CONN Chief Executive Officer
------------------------------------------- (Principal Executive March 21, 2000
Charles Conn Officer) and Director
Chief Financial Officer,
/s/ THOMAS J. MCINERNEY Executive Vice President,
------------------------------------------- Finance and Treasurer March 21, 2000
Thomas J. McInerney (Principal Financial and
Accounting Officer)
/s/ BARRY BAKER Director
------------------------------------------- March 21, 2000
Barry Baker
/s/ TERRY BARNES Director
------------------------------------------- March 21, 2000
Terry Barnes
/s/ BARRY DILLER Director
------------------------------------------- March 21, 2000
Barry Diller
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH GLEBERMAN Director
------------------------------------------- March 21, 2000
Joseph Gleberman
/s/ WILLIAM GROSS Director
------------------------------------------- March 21, 2000
William Gross
/s/ VICTOR A. KAUFMAN Director
------------------------------------------- March 21, 2000
Victor A. Kaufman
/s/ ROBERT KAVNER Director
------------------------------------------- March 21, 2000
Robert Kavner
/s/ DARA KHOSROWSHAHI Director
------------------------------------------- March 21, 2000
Dara Khosrowshahi
/s/ LAWRENCE JACOBSON Director
------------------------------------------- March 21, 2000
Lawrence Jacobson
/s/ WILLIAM D. SAVOY Director
------------------------------------------- March 21, 2000
William D. Savoy
/s/ ALAN SPOON Director
------------------------------------------- March 21, 2000
Alan Spoon
/s/ THOMAS UNTERMAN Director
------------------------------------------- March 21, 2000
Thomas Unterman
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ticketmaster Online-CitySearch, Inc.
We have audited the accompanying consolidated balance sheets of Ticketmaster
Online-CitySearch, Inc. (the Company) as of December 31, 1999 and December 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1999, the eleven month
period ended December 31, 1998 and the year ended January 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 the
Company'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
Online-CitySearch, Inc. at December 31, 1999, and the consolidated results of
their operations and their cash flows for each of the year ended December 31,
1999, the eleven month period ended December 31, 1998 and the year ended
January 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 26, 2000
F-1
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 61,455 $106,910
Marketable securities available for sale.................. 26,299 --
Accounts receivable (net of allowance for doubtful
accounts
of $738 and $58 respectively)........................... 3,774 1,249
Related party receivable.................................. 1,942 813
Due from licensees........................................ 830 1,440
Current portion of deferred marketing..................... 1,250 --
Prepaid expenses and other current assets................. 2,576 777
--------- --------
Total current assets.................................. 98,126 111,189
Investments................................................. 23,085 --
Computers, software, equipment and leasehold improvements,
net....................................................... 16,831 5,893
Goodwill and other intangibles, net......................... 662,921 299,643
Deferred marketing, net of current portion.................. 3,385 --
Other long-term assets...................................... 321 --
--------- --------
Total assets.......................................... $ 804,669 $416,725
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,537 $ 2,734
Accrued expenses.......................................... 9,100 4,551
Deferred revenue.......................................... 5,979 3,002
Current portion of capital lease obligations.............. 957 1,331
Total current liabilities............................. 20,573 11,618
Other long-term liabilities................................. 1,170 437
Capital lease obligations, net of current portion........... 333 1,082
Stockholders' equity:
Preferred stock, $0.01 par value;
Authorized shares--2,000,000 at December 31, 1999 and
1998 Issued and outstanding--none..................... -- --
Class A Common Stock, $0.01 par value;
Authorized shares--100,000,000 at December 31, 1999 and
1998 Issued and outstanding--52,840,565 and 63,291,653
at December 31, 1999 and 1998, respectively........... 529 633
Class B Common Stock--$0.01 par value;
Authorized shares--250,000,000 at December 31, 1999 and
1998 Issued and outstanding--32,104,352 and 8,167,000
at
December 31, 1999 and 1998, respectively.............. 321 82
Class C Common Stock--$0.01 par value;
Authorized shares--2,883,506 at December 31, 1999 and
1998 Issued and outstanding--none..................... -- --
Additional paid-in capital................................ 919,348 418,918
Accumulated deficit....................................... (137,413) (16,045)
Accumulated other comprehensive loss...................... (192) --
--------- --------
Total stockholders' equity............................ 782,593 403,588
--------- --------
Total liabilities and stockholders' equity............ $ 804,669 $416,725
========= ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1999 1998 1998
------------ ------------- -----------
<S> <C> <C> <C>
Revenues:
Ticketing operations................................ $ 64,787 $ 15,743 $5,972
City guide and related.............................. 33,915 5,376 --
Sponsorship and advertising......................... 6,601 6,754 3,933
--------- -------- ------
Total revenues.................................... 105,303 27,873 9,905
Operating costs and expenses:
Ticketing operations................................ 47,870 9,842 3,522
City guide and related.............................. 30,288 4,021 --
Sales and marketing................................. 47,263 6,834 490
Research and development............................ 7,455 1,728 --
General and administrative.......................... 15,242 3,495 1,719
Amortization of goodwill and other intangibles...... 77,744 16,275 --
Merger and other transaction costs.................. 4,236 -- --
--------- -------- ------
Total costs and expenses.......................... 230,098 42,195 5,731
--------- -------- ------
Income (loss) from operations........................... (124,795) (14,322) 4,174
Other income (expense):
Interest income....................................... 4,428 867 --
Interest expense...................................... (265) (813) --
Equity in loss of unconsolidated affiliates........... (272) -- --
--------- -------- ------
3,891 54 --
--------- -------- ------
Income (loss) before income taxes....................... (120,904) (14,268) 4,174
Income tax provision.................................... 464 2,951 1,827
--------- -------- ------
Net income (loss)....................................... $(121,368) $(17,219) $2,347
========= ======== ======
Basic and diluted net income (loss) per share........... $ (1.59) $ (0.38) $ 0.06
========= ======== ======
Shares used to compute basic and diluted net income
(loss) per share...................................... 76,097 45,201 37,238
========= ======== ======
</TABLE>
See accompanying notes.
F-3
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK DUE TO ADDITIONAL
---------------------- ------------------- ------------------- (FROM) PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TICKETMASTER CAPITAL
--------- ---------- -------- -------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997....... 1 $ -- -- $ -- -- $ -- $ 1,434 $ --
Accounts receivable transferred to
Ticketmaster Corp............... -- -- -- -- -- -- (9,953) --
Operating charges transferred from
Ticketmaster Corp., net of
federal income tax allocation... -- -- -- -- -- -- 7,406 --
Net income........................ -- -- -- -- -- -- -- --
--------- ---------- ------- ----- ------ ---- ------- --------
Balance at January 31, 1998....... 1 $ -- -- $ -- -- $ -- $(1,113) $ --
========= ========== ======= ===== ====== ==== ======= ========
Net loss.......................... -- $ -- -- $ -- -- $ -- $ -- $ --
Allocation of initial
capitalization as a result of
the Ticketmaster Acquisition by
USAi............................ -- -- -- -- -- -- -- 22,834
Allocation of basis of Tax-free
Merger of Ticketmaster by USAi.. -- -- -- -- -- -- -- 126,170
Stock exchanged in connection with
CitySearch Merger (37,238) and
USAi's initial investment in
CitySearch at cost.............. -- -- 40,483 405 -- -- -- 145,923
Contribution of tendered
CitySearch Common Stock from
USAi to Ticketmaster............ -- -- -- -- -- -- -- 17,318
Contribution of CitySearch Common
Stock from USAi to
Ticketmaster.................... -- -- 22,003 220 -- -- -- 1,100
Exercise of stock options and
warrants........................ -- -- 923 9 -- -- -- 1,600
Initial public offering of Class B
Common Stock.................... -- -- -- -- 8,050 81 -- 103,973
Class A shares converted to Class
B............................... -- -- (117) (1) 117 1 -- --
--------- ---------- ------- ----- ------ ---- ------- --------
Balance at December 31, 1998...... -- -- 63,292 633 8,167 82 -- 418,918
Comprehensive Loss:
Net loss..........................
Net unrealized loss on
marketable securities......... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment.................... -- -- -- -- -- -- -- --
Total Comprehensive loss.......... -- -- -- -- -- -- -- --
Issuance of Common Stock for
acquisitions and investments.... -- -- -- -- 11,229 112 -- 455,980
Issuance of Common Stock related
to additional investment by
Ticketmaster Corp............... -- -- -- -- 1,302 13 -- 39,987
Additional capital contributed by
USAi through advertising........ -- -- -- -- -- -- -- 207
Exercise of stock options and
warrants........................ -- -- 582 6 373 4 -- 4,256
Class A shares converted to Class
B............................... -- -- (11,033) (110) 11,033 110 -- --
--------- ---------- ------- ----- ------ ---- ------- --------
Balance at December 31, 1999...... -- $ -- 52,841 $ 529 32,104 $321 $ -- $919,348
========= ========== ======= ===== ====== ==== ======= ========
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL
EARNINGS COMPREHENSIVE STOCKHOLDERS'
(DEFICIT) INCOME (LOSS) EQUITY
---------- --------------- -------------
<S> <C> <C> <C>
Balance at January 31, 1997....... $ (945) $ -- $ 489
Accounts receivable transferred to
Ticketmaster Corp............... -- -- (9,953)
Operating charges transferred from
Ticketmaster Corp., net of
federal income tax allocation... -- -- 7,406
Net income........................ 2,347 -- 2,347
--------- ----- ---------
Balance at January 31, 1998....... $ 1,402 $ -- $ 289
========= ===== =========
Net loss.......................... $ (17,219) $ -- $ (17,219)
Allocation of initial
capitalization as a result of
the Ticketmaster Acquisition by
USAi............................ 1,174 -- 24,008
Allocation of basis of Tax-free
Merger of Ticketmaster by USAi.. -- -- 126,170
Stock exchanged in connection with
CitySearch Merger (37,238) and
USAi's initial investment in
CitySearch at cost.............. -- -- 146,328
Contribution of tendered
CitySearch Common Stock from
USAi to Ticketmaster............ -- -- 17,318
Contribution of CitySearch Common
Stock from USAi to
Ticketmaster.................... -- -- 1,320
Exercise of stock options and
warrants........................ -- -- 1,609
Initial public offering of Class B
Common Stock.................... -- -- 104,054
Class A shares converted to Class
B............................... -- -- --
--------- ----- ---------
Balance at December 31, 1998...... (16,045) -- 403,588
Comprehensive Loss:
Net loss.......................... (121,368) (121,368)
Net unrealized loss on
marketable securities......... -- (211) (211)
Foreign currency translation
adjustment.................... -- 19 19
---------
Total Comprehensive loss.......... -- -- (121,560)
---------
Issuance of Common Stock for
acquisitions and investments.... -- -- 456,092
Issuance of Common Stock related
to additional investment by
Ticketmaster Corp............... -- -- 40,000
Additional capital contributed by
USAi through advertising........ -- -- 207
Exercise of stock options and
warrants........................ -- -- 4,266
Class A shares converted to Class
B............................... -- -- --
--------- ----- ---------
Balance at December 31, 1999...... $(137,413) $(192) $ 782,593
========= ===== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
YEAR MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(121,368) $(17,219) $ 2,347
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 4,847 1,136 268
Amortization of goodwill and other intangibles............ 77,744 16,275 --
Deferred marketing........................................ 365 -- --
Loss in unconsolidated subsidiary......................... 272 -- --
Advertising contributed by USAi........................... 207 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,439) (818) (41)
Related parties receivable.............................. (1,129) (184)
Due from licensees...................................... 610 27
Prepaid expenses and other current assets............... (1,399) (475) 30
Accounts payable........................................ 677 36 158
Accrued expenses........................................ 4,765 (196) 87
Deferred revenue........................................ 2,071 969 89
Deferred rent........................................... -- 11 --
--------- -------- --------
Net cash provided by (used in) operating activities......... (34,777) (438) 2,938
INVESTING ACTIVITIES
Capital expenditures........................................ (12,306) (1,034) (250)
Investments in unconsolidated affiliates.................... (12,857) -- --
Acquisitions, net of cash acquired.......................... (472) -- --
Purchase of marketable securities available for sale........ (26,510) -- --
Other....................................................... (223) (112) --
--------- -------- --------
Net cash used in investing activities....................... (52,368) (1,146) (250)
FINANCING ACTIVITIES
Net distributions to Ticketmaster Corp...................... -- (5,549) (2,691)
Net proceeds from exercise of options and warrants.......... 4,266 1,609 --
Proceeds from initial public offering....................... -- 105,373 --
Costs associated with initial public offering............... (861) (384)
Additional investment from Ticketmaster Corp................ 40,000 -- --
Payments on capital leases.................................. (1,413) (324) --
Payment on convertible promissory note...................... -- (50,000) --
Other, net.................................................. (321) (108) --
--------- -------- --------
Net cash provided by (used in) financing activities......... 41,671 50,617 (2,691)
Effect of exchange rate changes on cash and cash
equivalents............................................... 19 -- --
Net cash acquired in CitySearch Merger...................... -- 57,877 --
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (45,455) 106,910 (3)
Cash and cash equivalents at beginning of period............ 106,910 -- 3
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 61,455 $106,910 $ --
========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
YEAR MONTH YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
Supplemental statement of cash flow information
Cash paid for:
Interest............................................. $ (265) -- --
Income taxes......................................... (2,951) -- --
Noncash investing and financing information
Mergers and acquisitions of businesses
Fair value of assets acquired (including cash and
cash equivalents and goodwill)................... $111,340 $226,339 --
Less:
Fair value of liabilities assumed.................. 4,248 61,373 --
Issuance of Class B Common Stock................... 102,702 -- --
Guaranteed additional Class B Common Stock
issuance......................................... 4,390 -- --
Issuance of Class A Common Stock................... -- 147,648 --
Contribution of tendered CitySearch Common Stock
from USAi to Ticketmaster Corp................... -- 17,318 --
-------- --------
Cash paid........................................ $ -- $ -- --
======== ========
Acquisition of Sidewalk.com assets
Issuance of Class B Common Stock................... $238,000 -- --
Issuance of Class B Common Stock Warrants.......... 100,500 -- --
--------
Fair value of assets acquired.................... $338,500 -- --
========
Investment in unconsolidated affiliates through
issuance of Class B Common Stock................... $ 10,500 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION, FORMATION AND BUSINESS
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.
F-7
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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):
<TABLE>
<S> <C>
Initial investment at cost.................................. $ 23,000
Value of portion of CitySearch acquired in the Merger....... 120,864
Tender offer................................................ 17,318
Estimated transaction costs (including non-competition
agreements)............................................... 2,464
--------
Total Merger costs...................................... 163,646
Net identifiable assets acquired............................ (2,517)
--------
Excess of Merger cost over net assets acquired.............. $161,129
========
</TABLE>
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.
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, 1997, with pro forma adjustments to give
effect to amortization of goodwill, certain other adjustments to
F-8
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION, FORMATION AND BUSINESS (CONTINUED)
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, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues............................................... $ 40,157 $ 15,479
Net loss............................................... $(72,598) $(80,357)
Net loss per share..................................... $ (1.16) $ (1.44)
</TABLE>
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.
Customers include hotels, restaurants, taverns, movie theaters, museums and
retail stores. The Company currently owns and operates sites in over 70 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
F-9
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION, FORMATION AND BUSINESS (CONTINUED)
Corporation ("Microsoft"). Through partnership and licensing agreements, the
Company has an Internet presence in five domestic cities, as well as, five
international countries.
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. In 2000, the two databases are
expected to merge and become co-branded under the name Match.Com.
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 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 maker reviews
financial information to manage the business consistent with the manner
presented in the consolidated financial statements. During the year ended
December 31, 1999, the eleven months ended December 31, 1998 and the year ended
January 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, 1999, foreign operations have not been significant in
revenue. As the Company acquires and integrates new businesses it evaluates,
based on the nature, size and integration and management strategies, whether it
has separate reportable segments.
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.
F-10
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 three to
nine years.
F-11
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. As of December 31, 1999, the
Company recorded net unrealized losses of $211,000.
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 generally been 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 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.
F-12
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
resulted in goodwill of $28.0, $42.8, and $36.4 million, respectively. The
goodwill associated with the Web Media acquisition is expected to increase in
2000 by $8.1 million based on the acquired business achieving certain 1999
revenue earn out provisions. The additional goodwill will be amortized over the
remaining five year life. In addition, the fair value of the consideration
provided in exchange for the Sidewalk assets and distribution agreement amounted
to $333.5 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, 1999 and 1998 was $94.0 and
$16.3 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.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is determined by dividing the net earnings
or (loss) by the weighted average shares of Common Stock outstanding during the
period. Diluted earnings or (loss) per share are determined by dividing the net
earnings or (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 earnings (loss) per share is the same for the year
ended December 31, 1999, the eleven month period ended December 31, 1998 because
the effects of outstanding stock options and warrants are antidilutive. No stock
options were outstanding during the year ended January 31, 1998.
F-13
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The number of shares used in computing basic and diluted earnings (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. The number of shares used in
computing basic and diluted earnings (loss) per share for the year ended
January 31, 1998 represents the number of shares of CitySearch Common Stock
exchanged in the Merger.
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 year ended December 31,
1999 and the eleven month period ended December 31, 1998, advertising costs
amounted to $16.0 and $1.5 million respectively. There were no advertising costs
for the year ended January 31, 1998.
During 1999 and 1998 CitySearch maintained certain barter arrangements
whereby the Company has assisted in the design and hosting of a Web site in
exchange for broadcast advertising. The fair value of services provided and the
services received in the barter arrangement is not readily determinable and
therefore is not used to measure the value of the broadcast advertising
received. The Company valued these barter transactions at $1,142,000 and
$349,000 for the year ended December 31, 1999 and the period from the date of
the Merger through December 31, 1998, based on the estimated cost of the
specific services provided by the Company. Such amounts are included in City
guide and related revenue as well as recognized in sales and marketing expense
in the accompanying consolidated statements of operations. Reciprocal noncash
barter advertising on the Internet is not valued in the consolidated financial
statements because of the immateriality of the associated costs and the
indeterminable fair value.
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 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,
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.
F-14
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 $27.2 million. The acquisition was accounted for using the
purchase method of accounting which resulted in approximately $28.0 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.
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 $43.3 million.
The acquisition was accounted for using the purchase method of accounting which
resulted in approximately $42.8 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.
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. The number of shares to be issued upon
payment of the quarterly installments and contingent consideration will be
determined by dividing the value of the consideration required to be issued by
the stock price at the time of issuance subject to certain minimum and maximum
prices. The last installment is subject to adjustment based on the achievement
of certain revenue targets by Web Media. The maximum number of shares to be
issued in the quarterly installments and upon the achievement of certain revenue
targets is 1,131,924. The total purchase price recorded at September 13, 1999
was $36.6 million, representing the consideration value attributed to the
initial issuance of 1,204,215 million shares of Class B Common Stock and the two
quarterly installments. The goodwill associated with the Web Media acquisition
is expected to increase in 2000 by $8.1 million based on the acquired business
achieving certain revenue earn out provisions. The acquisition was accounted for
using the purchase method of accounting. The acquisition has resulted in
$36.4 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
F-15
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. ACQUISITIONS (CONTINUED)
amount of goodwill recorded approximates the purchase price 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 the 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, 1999, the exercise price of this warrant was determined to be
$21.57. 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 amounted to $338.5 million and $333.5 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 $333.5 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.
PRO FORMA FINANCIAL DATA 1999 ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information presents a summary of results
of the Company assuming the Merger, Ticketmaster Transaction, the Tender Offer
and the acquisitions of CityAuction, Match.Com and Web Media 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 end from January 31 to
December 31. The pro forma financial information is not necessarily
F-16
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. ACQUISITIONS (CONTINUED)
indicative of the results of operations as they would have been had the
transactions been effective on January 1, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.............................................. $ 115,325 $ 47,459
Net loss.............................................. (132,955) (94,883)
Net loss per share.................................... (1.70) (1.42)
</TABLE>
In addition to the above pro forma results, the Sidewalk transaction
resulted in additional intangible assets. The amortization of these intangibles
for the years ended December 31, 1999 and 1998, had the transaction occurred on
January 1, 1998, would have resulted in net losses of $182.9 million and
$161.5 million and net loss per share of $2.20 and $2.19 on a pro forma basis,
respectively.
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. The foodline.com investment is being accounted for using the equity
method of accounting.
In December 1999, the Company purchased a minority equity position in
ActiveUSA.com, Inc. ("ActiveUSA.com"), a privately-held online local
participatory sports registration and reservation company in exchange for
$2.5 million cash, Class B Common Stock valued at $10.5 million and a commitment
by the Company to provide $3.0 million in services to ActiveUSA.com. The Company
and ActiveUSA.com also entered into a multi-year content sharing and
distribution agreement. The ActiveUSA.com investment is being accounted for
using the cost method of accounting.
F-17
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. COMPUTERS, SOFTWARE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Computers, software, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computers and software.................................... $20,179 $ 6,860
Furniture and fixtures.................................... 1,465 141
Leasehold improvements.................................... 817 215
------- -------
22,461 7,216
Less accumulated depreciation and amortization............ (5,630) (1,323)
------- -------
$16,831 $ 5,893
======= =======
</TABLE>
Depreciation and amortization expense was $4.3 million, $1.1 million and
$124,000 for the year ended December 31, 1999, the eleven month period ended
December 31, 1998 and the year ended January 31, 1998, respectively.
6. INVESTMENTS
At December 31, 1999, marketable securities available-for-sale were as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and agencies......................... $13,975 $ -- $ 63 $13,912
Corporate debt securities............................ 12,535 -- 148 12,387
------- ------- ---- -------
$26,510 $ -- $211 $26,299
======= ======= ==== =======
</TABLE>
The contractual maturities of debt securities classified as
available-for-sale as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
-------- ----------
<S> <C> <C>
Due in one year or less.................................. $23,514 $21,362
Due after one year through two years..................... 4,996 4,937
------- -------
Total.................................................... $26,510 $26,299
======= =======
</TABLE>
F-18
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1999 1998 1998
------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $2,624 $1,445
Foreign............................................... 464 82 --
State................................................. -- 754 395
---- ------ ------
464 3,460 1,840
---- ------ ------
Deferred:
Federal............................................... -- (478) (13)
State................................................. -- (31) --
---- ------ ------
-- (509) (13)
---- ------ ------
Total income tax provision.............................. $464 $2,951 $1,827
==== ====== ======
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
ELEVEN
YEAR MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit)........... (34)% (35)% 34%
Tax provision for earnings included in Ticketmaster Corp.
consolidated return.................................... -- 20 --
Non-deductible goodwill amortization..................... 20 37 --
State income tax expense (benefit)....................... (1) -- 9
Change in valuation allowance............................ 14 -- --
Other.................................................... 1 (1) 1
--- --- --
0% 21% 44%
=== === ==
</TABLE>
F-19
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities
Depreciation.......................................... $ 199 $ 400
Software development.................................. 788 824
Other................................................. 296 --
-------- --------
Total deferred tax liabilities.......................... 1,283 1,224
Deferred tax assets
Net operating loss carryforwards...................... 49,848 31,482
Research and development credit carryforwards......... 644 468
Vacation accruals..................................... 145 250
Deferred revenue...................................... 904 600
Other................................................. 1,610 124
-------- --------
Total deferred tax assets............................... 53,151 32,924
Valuation allowance..................................... (51,868) (31,700)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by approximately $20.0 million and
$1.7 million during the year ended December 31, 1999 and the eleven months ended
December 31, 1998, 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, 1999 of approximately $129.0 million and $103.0 million,
respectively. The federal carryforwards expire principally in the period from
2010 to 2019, and the state carryforwards expire principally in 2004.
Utilization of the net operating loss carryforwards is subject to limitations as
a result of ownership changes as defined in the Internal Revenue Code.
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 year ended December 31, 1999,
the eleven months
F-20
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. DEFINED CONTRIBUTION PLANS (CONTINUED)
ended December 31, 1998 or the year ended January 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 $15.1 and $1.5 million as incurred
under the License Agreement for the year ended December 31, 1999 and the eleven
months ended December 31, 1998, respectively. Included in related party
receivable at December 31, 1999 and 1998 was $1.5 million and $346,000
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 June 28, 1996, Ticketmaster.com entered into an agreement expiring on
December 31, 2003, with an affiliate of its then majority shareholder, whereby
in exchange for services rendered in connection with the development of
Ticketmaster.com's Web site, Ticketmaster.com will pay royalties equaling 5% of
net profit (as defined) from ticket convenience charges and 10% of net profit
(as defined) from merchandise sold through its Web site (net of defined
deductions). The agreement calls for an annual minimum royalty payment of
$100,000 per year. Royalty expense incurred for the year ended December 31,
1999, the eleven month period ended December 31, 1998 and the year ended
January 31, 1998 amounted to $1.2 million, $477,000 and $138,000, respectively.
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 1999, the Company
received an additional $207,000 equity investment 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 year ended December 31, 1999, the
eleven month period ended December 31, 1998 and for the year ended January 31,
1998 amounted to $1.1 million, $491,000 and $583,000, respectively, primarily
for Web site maintenance and license fee revenue. Included in related party
receivables at December 31, 1999 and 1998 was $480,000 and $467,000 receivable
from these affiliated companies.
F-21
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Stockholders' equity reflects the exchange of 1,000 shares of Common Stock
of Ticketmaster.com for 37,238,000 shares of CitySearch Common Stock
(subsequently reclassified as Class A Common Stock of the Company) and the
recording of the predecessor basis and outstanding shares of CitySearch Common
Stock (subsequently reclassified as Class A Common Stock of the Company) in
connection with the Merger. 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, 1999 the Company has reserved shares of Class B Common Stock
for future issuance as follows (in thousands):
<TABLE>
<S> <C>
1996 Stock Option Plan...................................... 1,955
1998 Stock Option Plan...................................... 3,960
1999 Stock Option Plan...................................... 4,000
1998 Employee Stock Purchase Plan........................... 1,000
Warrants to purchase Class B Common Stock................... 4,500
Maximum shares to be issued in Web Media Ventures
acquisition............................................... 1,132
------
Total....................................................... 16,547
======
</TABLE>
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, 1999 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, 1999 there were options to
purchase 1,955,257 shares of the Company's Class A Common Stock outstanding at a
weighted average exercise price of $5.06 per share. No additional shares will be
granted under this option plan.
F-22
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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, 1999, there were options to purchase 3,415,125
shares of the Company's Class B Common Stock outstanding at a weighted average
exercise price of $26.70 per share. Options to purchase 545,480 shares of
Class B Common Stock were available for future grants at December 31, 1999.
1999 STOCK OPTION PLAN
The Company adopted the 1999 Stock Plan and reserved 4,000,000 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, 1999, there were options to purchase 2,114,375 shares of the
Company's Class B Common Stock outstanding at a weighted average exercise price
of $39.10 per share. Options to purchase 1,885,625 shares of Class B Common
Stock were available for future grants at December 31, 1999.
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.
F-23
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
STOCK OPTION TABLE
The following table summarizes certain information related to options for
Common Stock:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE PER SHARE PRICE
-------------- ------------------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Options assumed in Merger............................ 3,905 $ 0.10 -- $ 8.67 $ 3.67
Granted during the period ended December 31,
1998............................................. 938 8.67 -- 32.69 16.35
Forfeited.......................................... (124) 0.50 -- 8.67 4.23
Exercised.......................................... (821) 0.10 -- 0.75 9.19
------
Outstanding at December 31, 1998..................... 3,898 0.10 -- 32.69 7.28
Granted............................................ 5,550 20.37 -- 39.37 31.97
Forfeited.......................................... (1,008) 0.10 -- 38.12 15.03
Exercised.......................................... (955) 0.10 -- 38.12 4.44
------
Outstanding at December 31, 1999..................... 7,485 0.10 -- 39.37 24.55
======
</TABLE>
Additional information with respect to outstanding options as of
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES PRICE LIFE SHARES PRICE
- ------------------------ -------------- --------- ----------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.10 to $7.00....................... 1,667 $ 4.47 7.97 1,111 $ 4.30
8.00 to 22.75........................ 2,368 19.42 9.39 312 15.29
28.00 to 38.43....................... 1,936 36.52 9.74 226 33.64
39.37 to 39.37....................... 1,514 39.37 9.99 1 39.37
-----
$0.10 to 39.37....................... 7,485 24.55 9.28 1,650 10.43
===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Expected life (years)....................................... 1 year 1 year
Risk-free interest rate..................................... 5.64% 5.14%
Dividend yield.............................................. -- --
Volatility.................................................. 65% 75%
</TABLE>
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
F-24
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net loss, as reported....................... $(121,368) $(17,219)
Pro forma net loss.......................... (132,990) (17,479)
Basic and diluted historical net loss per
share, as reported........................ $ (1.59) $ (0.38)
Pro forma basic and diluted net loss per
share..................................... (1.75) (0.39)
</TABLE>
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-average fair
value of options granted during the year ended December 31, 1999 was $11.11, for
options granted with an exercise price equal to the deemed fair market value, at
the date of grant, of the underlying 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 2004. 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.
F-25
<PAGE>
TICKETMASTER ONLINE-CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. COMMITMENTS (CONTINUED)
The following is a schedule of future minimum lease payments at
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Year ended December 31:
2000.................................................... $ 3,576 $1,389
2001.................................................... 3,545 409
2002.................................................... 1,890 39
2003.................................................... 1,435 --
2004.................................................... 1,186 --
Thereafter.............................................. 456 --
------- ------
$12,088 1,837
======= ======
Less amount representing interest......................... (547)
------
Net present value of net minimum lease payments (including
approximately $957 payable currently)................... $1,290
======
</TABLE>
During the year ended December 31, 1999, the eleven month period ended
December 31, 1998 and the year ended December 31, 1998, rent expense allocated
from Ticketmaster Corp. and related to other leased facilities amounted to
$3.3 million, $593,000 and $149,000, respectively. The total costs and
accumulated depreciation of equipment under capital leases amounted to
$4.6 million and $1.4 million, respectively, as of December 31, 1999.
12. LITIGATION
The Company is not currently subject to any legal proceedings seeking
material damages; however, 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 these matters
will have a material adverse impact on its operating results, financial position
or cash flows.
13. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITION OF 2B TECHNOLOGY, INC.
On January 31, 2000, the Company completed the acquisition 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 $16.9 million. The purchase price will be increased for additional
shares to be granted upon achievement of revenue targets based on the stock
price at that time. The acquisition will be accounted for using the purchase
method of accounting. The acquisition resulted in $16.8 million of goodwill to
be recorded initially with adjustments to be made at the issuance of additional
shares if the revenue targets are achieved. The total amount of goodwill to be
recorded approximates the purchase price which will be amortized by the Company
over a period of five years.
F-26
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE
BALANCE AT TRANSFERRED CHARGED TO CHARGED TO BALANCE AT
BEGINNING AT THE COSTS AND OTHER END OF
OF PERIOD MERGER EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD
---------- ----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1999.......... $57,800 $ -- $959,030 $821,720 $1,230,242 $608,308
Eleven months ended
December 31, 1998.......... -- 68,400 125,200 85,900 221,700 57,800
</TABLE>
- ------------------------
(a) Represents amounts written off against the allowance for doubtful accounts,
net of recoveries and reversals.
S-1
<PAGE>
EXHIBIT 10.43
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
BY AND AMONG
RACEGATE.COM, INC. (DELAWARE),
RACEGATE.COM, INC. (CALIFORNIA),
RG ACQUISITION CORP.,
ACTIVE USA.COM, INC. (FLORIDA)
AND
TICKETMASTER ONLINE-CITYSEARCH, INC.
DATED AS OF NOVEMBER 17, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS............................................................................................1
ARTICLE II AGREEMENT TO PURCHASE AND SELL STOCK..................................................................3
2.1. Authorization............................................................................3
2.2. Agreement to Purchase and Sell Stock.....................................................3
2.3. Agreement to Purchase Stock by Kettle and Austin.........................................3
2.4. Cash Adjustment to Aggregate Purchase Price..............................................4
2.5. Cost of Capital..........................................................................4
ARTICLE III CLOSING; DELIVERY....................................................................................4
3.1. The Closing..............................................................................4
3.2. Delivery.................................................................................4
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE RG COMPANIES AND ACTIVEUSA......................................5
4.1. Organization, Good Standing and Qualification............................................5
4.2. Capitalization...........................................................................5
4.3. Subsidiaries.............................................................................6
4.4. Due Authorization........................................................................6
4.5. Valid Issuance of Stock..................................................................6
4.6. Liabilities..............................................................................7
4.7. Title to Properties and Assets...........................................................7
4.8. Intellectual Property; Software..........................................................7
4.9. Material Contracts and Obligations......................................................11
4.10. Litigation.............................................................................12
4.11. Required Consents......................................................................12
4.12. Compliance with Other Instruments......................................................12
4.13. Disclosure.............................................................................12
4.14. Registration Rights....................................................................13
4.15. Insurance..............................................................................13
4.16. Financial Statements...................................................................13
4.17. Certain Actions........................................................................13
4.18. Activities Since Balance Sheet Date....................................................14
4.19. Tax Matters............................................................................14
4.20. Tax Elections..........................................................................15
4.21. Environmental Matters..................................................................15
4.22. Employee Benefits......................................................................15
4.23. Interested Party Transactions..........................................................16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
4.24. Stock Restriction Agreements...........................................................16
4.25. Minute Books...........................................................................16
4.26. Labor Agreements and Actions...........................................................16
4.27. Year 2000 Compliance...................................................................17
4.28. No Restrictions on Shares..............................................................17
4.29. Merger; Merger Agreement...............................................................17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................................................17
5.1. Authorization...........................................................................18
5.2. Investigation; Economic Risk............................................................18
5.3. Purchase for Own Account................................................................18
5.4. Exempt from Registration; Restricted Securities.........................................18
5.5. Further Limitations on Disposition......................................................18
5.6. Restrictive Legends.....................................................................18
5.7. Removal of Restrictive Legend...........................................................19
5.8. Status of Purchaser.....................................................................19
5.9. SEC Documents; TMCS Financial Statements................................................19
5.10. Valid Issuance of Purchaser Shares.....................................................19
ARTICLE VI CERTAIN COVENANTS....................................................................................20
6.1. Use of Proceeds.........................................................................20
6.2. Invention Assignment and Confidentiality Agreement......................................20
6.3. Expenses................................................................................20
6.4. Conduct of the Business.................................................................20
6.5. Further Assurances......................................................................21
6.6. Confidentiality; Public Announcements...................................................22
6.7. Other Investments.......................................................................22
6.8. Registration Statement..................................................................23
6.9. Merger..................................................................................23
ARTICLE VII CONDITIONS TO CLOSING...............................................................................24
7.1. Conditions to Each Party's Obligations..................................................24
7.2. Conditions to Obligation of the Purchasers..............................................24
7.3. Conditions to Obligation of the Company.................................................26
ARTICLE VIII INDEMNIFICATION....................................................................................26
8.1. Agreement to Indemnify..................................................................26
8.2. Survival of Representations, Warranties and Covenants...................................27
8.3. Limitation..............................................................................27
8.4. Claims for Indemnification..............................................................27
8.5. Defense of Claims.......................................................................28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IX MISCELLANEOUS........................................................................................28
9.1. Governing Law...........................................................................28
9.2. Captions................................................................................28
9.3. Successors and Assigns..................................................................28
9.4. Entire Agreement........................................................................29
9.5. Notices.................................................................................29
9.6. Amendments and Waivers..................................................................30
9.7. Delays or Omissions.....................................................................31
9.8. Finder's Fees...........................................................................31
9.9. Counterparts; Effectiveness.............................................................31
9.10. Severability...........................................................................31
9.11. Arbitration............................................................................31
9.12. Construction...........................................................................33
9.13. Cumulative Remedies....................................................................33
9.14. Third Party Beneficiaries..............................................................33
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Merger Agreement
Exhibit B Amended and Restated Certificate of Incorporation
Exhibit C Distribution Agreement
Exhibit D Escrow Agreement
Exhibit E Amended and Restated Investor Rights Agreement
Exhibit F Amended and Restated Restricted Stock and Co-Sale Agreement
Exhibit G Supplemental Stock Restriction Agreement
Exhibit H Proprietary Inventions Agreement
Exhibit I Amended and Restated Voting Agreement
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 4.2(c)..............................................Options, Warrants, Reserved Shares
Schedule 4.2(d) .............................................Outstanding Security Holders
Schedule 4.7(a) .............................................Title to Properties and Assets
Schedule 4.7(a) .............................................Real Property
Schedule 4.8(b)..............................................Intellectual Property Rights
Schedule 4.8(d)..............................................Intellectual Property
Schedule 4.8(g) .............................................Software
Schedule 4.8(h)..............................................Licensed Software
Schedule 4.8(i)..............................................Software Agreements
Schedule 4.9.................................................Material Contracts
Schedule 4.15 ...............................................Insurance
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Schedule 4.16................................................Financial Statements
Schedule 4.20................................................Tax Elections
Schedule 4.23................................................Interested Party Transactions
Schedule 6.4 ................................................Capital Expenditures
</TABLE>
iv
<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
This Series D Preferred Stock Purchase Agreement (the "AGREEMENT") is
entered into as of November 17, 1999 (the "EFFECTIVE DATE") by and among
RaceGate.com, Inc., a Delaware corporation (the "COMPANY"), RaceGate.com, Inc.,
a California corporation ("RG-CALIFORNIA"), RG Acquisition Corp., a Delaware
corporation (individually, "ACQUISITION SUB" and collectively with the Company
and RG-California, the "RG COMPANIES"), Active USA.com, Inc., a Florida
corporation ("ACTIVEUSA"; upon consummation of the Merger (defined below) all
references to ActiveUSA shall be deemed references to Acquisition Sub), and the
purchasers identified on Schedule A hereto (each a "PURCHASER" and collectively,
the "PURCHASERS").
R E C I T A L S
WHEREAS, pursuant to a Merger Agreement and Plan of Reorganization to
be entered into by and among the Company, Acquisition Sub and ActiveUSA (the
"MERGER AGREEMENT"), the form of which is attached hereto as EXHIBIT A, and the
applicable laws of the States of Delaware and Florida, the Company shall form
Acquisition Sub and ActiveUSA will be merged with and into Acquisition Sub,
after which Acquisition Sub shall continue as a wholly-owned subsidiary of the
Company (the "MERGER"); and
WHEREAS, simultaneously with or immediately following the Merger, the
Purchasers will purchase from the Company and the Company will sell to the
Purchasers 5,838,813 shares of Series D-1 Preferred Stock and 1,167,315 shares
of Series D-2 Preferred Stock of the Company (the "SHARES") allocated among the
Purchasers as set forth on Schedule A hereto, in exchange for the consideration
set forth in Article II and Schedule A hereto.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the respective meanings given
thereto in the sections indicated below:
<TABLE>
<CAPTION>
DEFINED TERM SECTION PAGE
<S> <C> <C>
AAA..........................................................Section 9.11........................................32
Acquisition Sub..............................................Preamble.............................................1
Act..........................................................Section 4.5..........................................7
ActiveUSA....................................................Preamble.............................................1
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Aggregate Purchase Price.....................................Section 2.2..........................................3
Aggregate Threshold..........................................Section 8.3.........................................27
Agreed Amount................................................Section 2.4..........................................4
Agreement....................................................Preamble.............................................1
Austin.......................................................Section 2.3..........................................4
Balance Sheet Date...........................................Section 4.16........................................13
Cash Amount..................................................Section 2.2..........................................3
CERCLA.......................................................Section 4.21........................................15
Certificate..................................................Section 2.1..........................................3
Closing Date.................................................Section 3.1..........................................4
Closing......................................................Section 3.1..........................................4
Code.........................................................Section 4.20........................................15
Common Stock.................................................Section 4.2..........................................5
Company Intellectual Property Assets.........................Section 4.8..........................................8
Company Marks and Patents....................................Section 4.8..........................................8
Company......................................................Preamble.............................................1
Conversion Shares............................................Section 4.2..........................................6
Copyrights...................................................Section 4.8..........................................7
Designated Software Agreements...............................Section 4.8.........................................11
Disputing Parties............................................Section 9.11........................................31
Disputing Party..............................................Section 9.11........................................31
Distribution Agreement.......................................Section 2.2..........................................3
Effective Date...............................................Preamble.............................................1
Employee Pension Benefit Plan................................Section 4.22........................................16
ERISA........................................................Section 4.22........................................16
Escrow Agent.................................................Section 3.2..........................................4
Escrow Agreement.............................................Section 3.2..........................................4
Exchange Act.................................................Section 5.9.........................................19
Financial Statements.........................................Section 4.16........................................13
GAAP.........................................................Section 4.16........................................13
Hazardous Materials..........................................Section 4.21........................................15
Indemnifying Party...........................................Section 8.1.........................................27
Indemnitee...................................................Section 8.1.........................................27
Intellectual Property Rights.................................Section 4.8..........................................7
Intellectual Property........................................Section 4.8..........................................8
Investment Transactions......................................Section 6.7.........................................22
Kettle.......................................................Section 2.3..........................................3
Licensed Software............................................Section 4.8.........................................10
Licensed Technology Agreements...............................Section 4.8.........................................10
Marks........................................................Section 4.8..........................................7
Material Contracts...........................................Section 4.9.........................................11
Merger Agreement.............................................Recitals.............................................1
Merger.......................................................Recitals.............................................1
Multiemployer Plan...........................................Section 4.22........................................16
Net Proceeds.................................................Section 2.4..........................................4
Owned Software...............................................Section 4.8.........................................10
Patents......................................................Section 4.8..........................................7
Proceeding...................................................Section 4.10........................................12
Purchaser Shares.............................................Section 2.2..........................................3
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Purchaser....................................................Preamble.............................................1
Real Property................................................Section 4.7..........................................7
Registration Statement.......................................Section 6.8.........................................23
Required Consents............................................Section 4.11........................................12
RG Companies.................................................Preamble.............................................1
RG-California................................................Preamble.............................................1
SEC..........................................................Section 4.14........................................13
SEC Documents................................................Section 5.9.........................................19
Shares.......................................................Recitals.............................................1
Software.....................................................Section 4.8..........................................8
Taxes........................................................Section 4.19........................................14
Tax Returns..................................................Section 4.19........................................15
TMCS Financial Statements....................................Section 5.9.........................................19
Trade Secrets................................................Section 4.8..........................................8
</TABLE>
ARTICLE II
AGREEMENT TO PURCHASE AND SELL STOCK
2.1 AUTHORIZATION. As of the Closing (as defined below), the Company
will have authorized the issuance, pursuant to the terms and conditions of this
Agreement, of (a) up to 6,582,814 shares of the Company's Series D-1 Preferred
Stock, $0.001 par value and (b) up to 1,167,315 shares of the Company's Series
D-2 Preferred Stock, $0.001 par value, each having the rights, preferences,
privileges and restrictions set forth in the Amended and Restated Certificate of
Incorporation of the Company attached to this Agreement as EXHIBIT B (the
"CERTIFICATE").
2.2 AGREEMENT TO PURCHASE AND SELL STOCK. A Subject to the terms and
conditions hereof, the Company will issue and sell to Ticketmaster
Online-CitySearch, Inc., a Delaware corporation ("TMCS"), and TMCS agrees to
purchase from the Company, the number of shares of Series D-1 Preferred Stock
and Series D-2 Preferred Stock set forth opposite TMCS's name on Schedule A
hereto at a price of $2.57 per share, for consideration consisting of (a) a cash
amount of $2.5 million (the "CASH AMOUNT"), (b) that number of shares of TMCS's
Class B Common Stock, par value $0.01 (the "PURCHASER SHARES"), determined by
dividing $10.5 million by the average trading closing trading price on Nasdaq of
TMCS's Class B Common Stock for each of the last five trading days, intended to
have a net value to the Company of $10 million and (c) a cash amount of $1500
and a credit of $2,998,500 for services to be provided by TMCS to the Company
pursuant to the terms of that certain Distribution Agreement between the Company
and TMCS, the substantially final form of which is attached hereto as EXHIBIT C
(the "DISTRIBUTION AGREEMENT"), for an aggregate purchase price of $15.5 million
(the "AGGREGATE PURCHASE PRICE") as set forth on Schedule A; provided, that TMCS
may elect to deliver a cash amount of $10 million to the Company in full
satisfaction of its obligation to deliver the Purchaser Shares pursuant to
clause (b) above.
2.3 AGREEMENT TO PURCHASE STOCK BY KETTLE AND AUSTIN. A Subject to the
terms and conditions hereof, the Company will issue and sell to Kettle Partners
LP ("KETTLE")
3
<PAGE>
and Austin Ventures VI, L.P. ("AUSTIN") the number of shares of Series D-1
Preferred Stock set forth across from their names on Schedule A hereto, at a
price of $2.57 per share, for consideration of cash payable by check to the
Company or by wire transfer to the Company's designated bank account.
2.4 CASH ADJUSTMENT TO AGGREGATE PURCHASE PRICE. The Company and TMCS
acknowledge and agree that the net proceeds (the gross proceeds minus
underwriter discounts and commissions) realized from the sale of the Purchaser
Shares by the Company following the Closing Date pursuant to the Registration
Statement (as defined below) (the "NET PROCEEDS"), will equal Ten Million
Dollars ($10,000,000) (the "AGREED AMOUNT"). Within ten (10) business days
following the sale of the Purchaser Shares by the Company, in the event that the
Agreed Amount exceeds the Net Proceeds, TMCS shall pay to the Company an amount
in cash equal to such excess; in the event that the Net Proceeds exceed the
Agreed Amount, pursuant to the terms and conditions of the Escrow Agreement (as
defined below) $10 million of the Net Proceeds will be delivered to the Company
and the remainder will be delivered to TMCS.
2.5 COST OF CAPITAL. In the event the Agreed Amount is not paid in cash
to the Company on or prior to the 60th day following the Closing, for the period
beginning on the day following the 60th day following the Closing until the
Agreed Amount is paid in cash to the Company TMCS shall pay the Company interest
on the Agreed Amount, which interest shall be calculated at a rate of the prime
rate plus 2% per annum.
ARTICLE III
CLOSING; DELIVERY
3.1 THE CLOSING. The closing (the "CLOSING") of the transactions
contemplated by this Agreement shall be held at the offices of Gibson, Dunn &
Crutcher LLP at 333 South Grand Avenue, Los Angeles, California 90071, on
November __, 1999, or at such other time and place as to which the Company and
Purchaser may agree (the "CLOSING DATE").
3.2 DELIVERY. At the Closing, the Company will deliver to each
Purchaser the certificates representing the Shares to be purchased by such
Purchaser hereunder and (i) Kettle and Austin will deliver to the Company cash
in the amount of their respective purchase price as set forth on Schedule A
hereto, and (ii) TMCS will deliver to the Company (a) the Distribution
Agreement, (b) the Cash Amount by wire transfer (to a bank account designated by
the Company in writing at least one (1) business day prior to the Closing). The
Purchaser Shares shall be delivered into an escrow account pursuant to the
Escrow Agreement (the "ESCROW AGREEMENT") to be entered into in substantially
the form attached hereto as EXHIBIT D by and among TMCS, the Company and an
escrow agent mutually agreeable to TMCS and the Company (the "ESCROW AGENT"). In
the event the Registration Statement (as defined below) has not been declared
effective by the SEC on or prior to the 120 day anniversary of the Closing, TMCS
shall pay to the Company the Agreed Amount in cash and TMCS and the Company
agree to instruct the Escrow Agent to deliver all of the Purchaser Shares to
TMCS. Any time prior to the sale of the Purchaser Shares by the Company, TMCS
may elect to pay a cash amount of $10 million to the
4
<PAGE>
Company, in which case TMCS and the Company agree to instruct the Escrow
Agent to deliver all of the Purchaser Shares to TMCS.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE RG COMPANIES AND ACTIVEUSA
The RG Companies, jointly and severally, and ActiveUSA, where expressly
included, hereby represent and warrant to the Purchasers as follows, except as
set forth in the Schedules attached hereto which may be updated prior to the
Closing:
4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the RG
Companies is a corporation duly organized, validly existing and in good standing
under, and by virtue of, the laws of its state of incorporation, and has all
requisite corporate power and authority to own its properties and assets and to
carry on its business as now conducted and as presently proposed to be
conducted. Each of the RG Companies is qualified to do business as a foreign
corporation in each jurisdiction where failure to be so qualified would have a
material adverse effect on its financial condition, business, prospects or
operations.
4.2 CAPITALIZATION. Immediately prior to the Closing, the authorized
capital stock of the Company will consist of the following:
(a) COMMON STOCK. A total of 50,000,000 authorized shares of
Common Stock, $0.001 par value (the "COMMON STOCK"), of which 13,064,661 shares
are issued and outstanding.
(b) PREFERRED STOCK. A total of 17,326,523 authorized shares of
Preferred Stock, $0.001 par value, of which:
(i) 641,500 shares are designated Series A-1 Preferred
Stock, of which 641,500 are issued and outstanding;
(ii) 750,000 shares are designated Series A-2 Preferred
Stock, of which 750,000 are issued and outstanding;
(iii) 405,882 shares are designated Series A-3 Preferred
Stock, of which 405,882 are issued and outstanding;
(iv) 5,050,000 shares are designated Series B Preferred
Stock, of which 5,050,000 are issued and outstanding;
(v) 2,729,012 shares are designated Series C Preferred
Stock, of which 2,729,012 are issued and outstanding;
(vi) 6,582,814 shares are designated Series D-1 Preferred
Stock, none of which are issued and outstanding; and
5
<PAGE>
(vii) 1,167,315 shares are designated Series D-2
Preferred Stock, none of which are issued and outstanding.
(c) OPTIONS, WARRANTS AND RESERVED SHARES. The Company has
reserved 7,750,129 shares of its Common Stock for possible issuance upon
conversion of the shares of Series D Preferred Stock to be issued hereunder
(the "CONVERSION SHARES"). Except as set forth on SCHEDULE 4.2(c), there are
no options, warrants, conversion privileges or other rights, or agreements
with respect to the issuance thereof, presently outstanding to purchase any
of the capital stock of the Company. Except as set forth on SCHEDULE 4.2(c),
no shares (including the Shares and the Conversion Shares) of the Company's
outstanding capital stock, or stock issuable upon exercise or exchange of any
outstanding options or other stock issuable by the Company, are subject to
any rights of first refusal, preemptive rights or other rights to purchase
such stock (whether in favor of the Company or any other person), pursuant to
any agreement or commitment of the Company. Except as set forth on SCHEDULE
4.2(c) and except for the transactions contemplated by this Agreement, the
Company is not currently a party to or subject to any written or oral
agreements or understandings to issue any capital stock of the Company.
(d) OUTSTANDING SECURITY HOLDERS. SCHEDULE 4.2(d) sets forth
a complete list of all outstanding shareholders, option holders and other
security holders of the Company as of the Effective Date.
4.3 SUBSIDIARIES. The Company owns all of the issued and
outstanding capital stock of RG-California and Acquisition Sub. Except as set
forth in the preceding sentence, none of the RG Companies presently owns or
controls, directly or indirectly, any interest in any other corporation,
partnership, trust, joint venture, association, or other entity.
4.4 DUE AUTHORIZATION. All corporate action on the part of each of
the RG Companies, its officers, directors and shareholders necessary for the
authorization, execution and delivery of, and the performance of all
obligations of such RG Companies under, this Agreement and the authorization,
issuance, reservation for issuance and delivery of all of the Shares being
sold under this Agreement and of the Conversion Shares has been taken or will
be taken prior to the Closing. This Agreement is a valid and binding
obligation of each of the RG Companies enforceable in accordance with its
terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles.
4.5 VALID ISSUANCE OF STOCK.
(a) The Shares, when issued, sold and delivered in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid
and non-assessable. The Conversion Shares have been duly and validly reserved
for issuance and, upon issuance in accordance with the terms of the
Certificate, will be duly and validly issued, fully paid and non assessable.
(b) The outstanding shares of the capital stock of each of the
RG Companies are duly and validly issued, fully paid and non assessable, and
such shares of such
6
<PAGE>
capital stock, and all outstanding stock, options and other securities of
such RG Company have been issued in full compliance with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended
(the "ACT"), and the registration and qualification requirements of all
applicable state securities laws, or in compliance with applicable exemptions
therefrom, and all other provisions of applicable federal and state
securities laws, including, without limitation, anti-fraud provisions.
4.6 LIABILITIES. None of the RG Companies has any indebtedness
for borrowed money that any RG Company has, directly or indirectly, created,
incurred, assumed or guaranteed, or with respect to which such RG Company has
otherwise become directly or indirectly liable.
4.7 TITLE TO PROPERTIES AND ASSETS.
(a) Except as set forth on SCHEDULE 4.7(a), (i) each of the
RG Companies has, or will have, as of the Closing, a good and valid title to
or, in the case of leased properties or properties held under license, a good
and valid leasehold or license interest in, all of its material properties
and assets and (ii) each RG Company holds title to each such property and
asset free and clear of all liens, adverse claims, mortgages, pledges,
encumbrances, security interest or charge of any kind. The representations in
this SECTION 4.7 do not apply to the Marks, Content or Intellectual Property
Rights as to which only the representations in SECTION 4.8 shall apply.
(b) All material tangible assets of each of the RG Companies,
are, or will be as of the Closing, in all material respects in reasonably
serviceable operating condition and repair and are adequate for the conduct
of the businesses of the RG Companies in substantially the same manner as has
heretofore been conducted.
(c) SCHEDULE 4.7(c) sets forth a true and complete list of
all real property owned or leased by the RG Companies (collectively, the
"REAL PROPERTY"), including the location of, and a brief description of the
nature of the activities conducted on, such Real Property.
4.8 INTELLECTUAL PROPERTY; SOFTWARE.
(a) For all purposes of this Agreement,
(i) "INTELLECTUAL PROPERTY RIGHTS" means intellectual
property rights arising from or in respect of the following, whether
protected, created or arising under the laws of the United States or any
other jurisdiction: (A) fictional business names, trade names, service names,
registered and unregistered trademarks and service marks and logos (including
any Internet domain names currently used in the business by the RG
Companies), and applications therefor (collectively, "MARKS"); (B) patents,
patent rights and all applications therefor, including any and all
continuation, divisional, continuation-in-part, or reissue patent
applications or patents issuing thereon (collectively, "PATENTS"); (C)
copyrights and all registrations and applications therefor (collectively,
"COPYRIGHTS"); and (D) know-how, trade
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secrets, inventions, discoveries, concepts, ideas, methods, processes,
designs, formulae, technical data, drawings, specifications, data bases and
other proprietary and confidential information, including customer lists, in
each case to the extent not included in the foregoing clauses (B) or (C)
(collectively, "TRADE SECRETS"; Marks, Patents, Copyrights and Trade Secrets
are, collectively, "INTELLECTUAL PROPERTY").
(ii) "SOFTWARE" means any and all (A) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, (B) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (C) descriptions, flow-charts and other work
product used to design, plan, organize and develop any of the foregoing, and
(D) all documentation, including user manuals and training materials,
relating to any of the foregoing, in each case developed or licensed by the
Company or any of its subsidiaries, or used in or necessary for the conduct
of their business, specifically excluding those items prepared for customers
in the operation of the Company's and its subsidiaries' business for which
the customer contractually has vested title.
(b) SCHEDULE 4.8(b) sets forth a complete and correct list of
all material Intellectual Property Rights, other than Trade Secrets, owned,
licensed or used by the RG Companies in the conduct of their businesses,
together with a listing of all material licenses, franchises, licensing
agreements (whether as licensor or licensee) to which any of the RG Companies
is a party, and any other material arrangement with respect to such
Intellectual Property Rights. All Intellectual Property Rights owned,
licensed or used by each of the RG Companies or used or exercised in or
necessary to the conduct of the RG Companies' businesses, are referred to
herein, collectively, as the "COMPANY INTELLECTUAL PROPERTY ASSETS."
(c) None of the RG Companies has, during the three years
preceding the date of this Agreement, been a party to any Proceeding, nor, to
the knowledge of the RG Companies, is any Proceeding threatened that involved
or is likely to involve a claim of infringement or misappropriation by any
person (including any governmental authority) of any Intellectual Property
Right of such person. No Company Intellectual Property Asset is subject to
any outstanding order, judgment, decree, or stipulation restricting the use
thereof by any of the RG Companies , or restricting the licensing thereof by
the RG Companies or any person. The current use and exploitation of the
Intellectual Property Assets by the RG Companies (including without
limitation the licensing or other distribution of Software to third parties
by any of the RG Companies) does not conflict with, infringe upon, violate or
result in the misappropriation of Intellectual Property Right of any person.
(d) Except as set forth on SCHEDULE 4.8(d):
(i) The RG Companies own all right, title and interest
in each of the Marks and Patents listed in SCHEDULE 4.8(b) (collectively, the
"COMPANY MARKS AND PATENTS"), free and clear of any and all liens and
encumbrances, and none of the RG Companies has received any notice or claim
(whether written or oral) challenging such RG Company's exclusive and
complete ownership of any Company Marks and Patents or suggesting that any
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other Person has any claim of legal or beneficial ownership or other claim or
interest with respect thereto;
(ii) The Company Marks and Patents are, to the
knowledge of the RG Companies, legally valid and enforceable without any
material qualification, limitation or restriction on their use and none of
the RG Companies has received any notice or claim (whether written or oral)
challenging the validity or enforceability of any Company Marks and Patents;
(iii) None of the RG Companies has taken any action (or
failed to take any action), or used or enforced (or failed to use or enforce)
any of the Company Marks and Patents, in each case in a manner that would
result in the abandonment, cancellation, forfeiture, relinquishment, or
unenforceability of any of the Owned Marks or any of the RG Companies' rights
therein;
(iv) Each of the RG Companies has taken reasonable
steps to protect the RG Companies' rights in and to each of the Company Marks
and Patents and to prevent the unauthorized use thereof by any other Person
and has adequately policed the Company Marks and Patents against third party
infringement of which it is aware;
(v) None of the RG Companies has granted to any Person
any right, license or permission to use any of the Company Marks and Patents
except such grant of non-exclusive rights as may be made by the RG Companies
in the ordinary course of business;
(vi) All Company Marks and Patents that have been
registered have been effectively registered in accordance with all applicable
legal requirements and are currently in compliance with all legal
requirements;
(vii) All maintenance fees and the like due on Company
Marks and Patents have been timely paid;
(viii) No Mark that constitutes a Company Mark and Patent
has been or is now involved in any opposition or cancellation proceeding and, to
the RG Companies' knowledge, no such action is threatened with the respect to
any of the Company Marks and Patents; and
(ix) No Patent that constitutes a Company Mark and
Patent has been or is now involved in any interference, reissue,
reexamination or opposition proceeding or any other litigation or proceeding
of any kind.
(e) Each of the RG Companies has taken reasonable precautions
(as determined by such RG Company's management) to protect the secrecy of any
of its Trade Secrets that derive commercial value from not being generally
known to the public. Each of the RG Companies has the absolute and
unrestricted right to use all of the Trade Secrets and none of the Trade
Secrets owned by the RG Companies is subject to any liens or encumbrances,
and none of the RG Companies has received any notice or claim challenging
such RG Company's absolute and unrestricted right to use any of the Trade
Secrets or suggesting that any other person has any
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claim with respect thereto. None of the Trade Secrets has been, or is alleged
to have been, misappropriated from any other person. Except under appropriate
confidentiality obligations, there has been no disclosure by the RG Companies
of material confidential information or other Trade Secrets that derive
commercial value from not being generally known to the public.
(f) Each of the RG Companies either owns the entire right,
title and interest in, to and under, or has acquired a license to use, any
and all Company Intellectual Property Assets which are material to the
conduct of their businesses in the manner that such businesses have
heretofore been or is presently being conducted or as contemplated to be
conducted pursuant to the RG Companies' current business plans, and to the
knowledge of the RG Companies no other Intellectual Property Rights are
necessary for the unimpaired continued operation of such businesses after the
Effective Time in the manner that such businesses have heretofore been or are
presently being conducted.
(g) SCHEDULE 4.8(g) sets forth a complete and accurate list
of all of the material Software (excluding Software that is available in
consumer retail stores and subject to "shrink-wrap" agreements). SCHEDULE
4.8(g) specifically identifies all material Software that is owned
exclusively by any of the RG Companies (the "OWNED SOFTWARE") and all
material Software that is used by any of the RG Companies in the conduct of
their business that is not exclusively owned by the RG Companies (excluding
software that is available in consumer retail stores and subject to
"shrink-wrap" agreements) (the "LICENSED SOFTWARE"). The RG Companies are the
owners of all right, title and interest in and to all Owned Software,
including without limitation all Copyrights, Trade Secrets and other
Intellectual Property Rights relating thereto, free and clear of any and all
liens and encumbrances, and none of the RG Companies has received any notice
or claim (whether written, oral or otherwise) challenging the RG Companies'
complete and exclusive ownership of all Owned Software and all such
Intellectual Property Rights relating thereto or claiming that any other
person has any claim of legal or beneficial ownership with respect thereto.
None of the RG Companies has assigned, licensed, transferred or encumbered
any of its rights in or to any Owned Software, including without limitation
any Copyrights, Trade Secrets or other Intellectual Property Rights with
respect thereto, to any person, excluding any non-exclusive licenses granted
to distributors or customers in the ordinary course of business. The RG
Companies have lawfully acquired the right to use the Licensed Software, as
it is used in the conduct of their business as presently conducted, and have
not exercised any rights in respect of any Licensed Software, including
without limitation any reproduction, distribution or derivative work rights,
outside the scope of any license expressly granted by the person from which
the right to use such Licensed Software was obtained.
(h) SCHEDULE 4.8(h) contains a complete and accurate list of
all material agreements and arrangements pertaining to any Licensed Software
or other technology used or practiced by any of the RG Companies as to which
a person other than a RG Company owns the applicable Intellectual Property
Rights (the "LICENSED TECHNOLOGY AGREEMENTS"). SCHEDULE 4.8(h) sets forth a
complete and accurate list of all royalty obligations of the RG Companies
under any Licensed Technology Agreements. All Licensed Technology Agreements
are in full force and effect, and none of the RG Companies is in material
breach thereof, nor are they aware of any claim or information to the
contrary. All Licensed Technology Agreements
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will be maintained by the RG Companies in full force and effect through the
Effective Time. There are no outstanding, and, to the RG Companies'
knowledge, no threatened disputes with respect to any Licensed Technology
Agreement. The rights licensed under each Licensed Technology Agreement shall
be exercisable by the RG Companies on and after the Effective Time to the
same extent as prior to the Effective Time. The Licensed Technology
Agreements together expressly confer on the RG Companies valid and
enforceable rights under or in respect of all of the Intellectual Property
Rights that are not owned exclusively by the RG Companies and that are used
or practiced in the RG Companies' businesses. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in the impairment of any rights under, any
Licensed Technology Agreement.
(i) SCHEDULE 4.8(i) contains a complete and accurate list of
all material agreements and arrangements involving the grant by the RG
Companies to any person of any right to distribute, prepare derivative works
based on, support or maintain or otherwise commercially exploit any Software,
including without limitation any value-added reseller agreements, joint
development or marketing agreements or strategic alliance agreements
involving any Software (collectively, "DESIGNATED SOFTWARE AGREEMENTS"). All
Designated Software Agreements are in full force and effect, and none of the
RG Companies is in material breach thereof, nor are they aware of any claim
or basis for a claim to the contrary. All Designated Software Agreements will
be maintained by the RG Companies in full force and effect through the
Effective Time. There are no outstanding and, to the RG Companies' knowledge,
no threatened disputes or disagreements with respect to any Designated
Software Agreement. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in any
impairment of rights under any Designated Software Agreement.
(j) To the knowledge of the RG Companies, each of the RG
Companies has taken commercially reasonable actions in accordance with
industry practice to protect its Intellectual Property Rights in relation to
employees, independent contractors and consultants including entering into
agreements with such persons that assign to the relevant RG Company all of
the employee's, contractor's or consultant's rights, including all
Intellectual Property Rights, in any Intellectual Property created or
developed thereby that is used in connection with, or that relates to, the
business of the RG Companies. To the knowledge of the RG Companies, no
employee of the RG Companies has entered into any contract or other agreement
with any person (other than the relevant RG Company) that restricts or limits
in any way the scope or type of work in which the employee may be engaged for
the relevant RG Company or such subsidiary or requires the employee to
transfer, assign, or disclose information concerning the employee's work with
the RG Companies to any other person.
4.9 MATERIAL CONTRACTS AND OBLIGATIONS. All agreements, contracts,
leases, licenses, instruments, commitments (oral or written), indebtedness,
liabilities and other obligations to which one of the RG Company is a party
or by which it is bound that (a) are material to the conduct and operations
of its business and properties, (b) involve any of the officers, consultants,
directors, employees or shareholders of the RG Companies or (c) obligate one
of the RG Companies to share, license or develop any product or technology
(the "MATERIAL
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CONTRACTS") are listed in SCHEDULE 4.9 and have been made available for
inspection by Purchaser and its counsel. For purposes of this SECTION 4.9,
"material" shall mean any agreement, contract, indebtedness, liability or
other obligation having an aggregate value, cost or amount in excess of U.S.
$25,000.
4.10. LITIGATION. There is no action, suit, proceeding, claim,
arbitration or investigation ("PROCEEDING") pending (or, to the RG Companies'
knowledge, currently threatened) against any of the RG Companies, its
activities, properties or assets or, to the RG Companies' knowledge, against
any officer, director or employee of any of the RG Companies in connection
with such officer's, director's or employee's relationship with, or actions
taken on behalf of any of the RG Companies. To the RG Companies' knowledge,
there is no factual or legal basis for any such Proceeding that might result,
individually or in the aggregate, in any material adverse change in the
business, properties, assets, financial condition, affairs or prospects of
any of the RG Companies. None of the RG Companies is a party to or subject to
the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality and there is no Proceeding by
any RG Company currently pending or which any RG Company intends to initiate.
4.11 REQUIRED CONSENTS. All consents, approvals, orders,
authorizations or registrations, qualifications, designations, declarations
or filings on the part of the Company with any federal, state or local
governmental authority or otherwise required in connection with the
consummation of the transactions contemplated herein, including, without
limitation, the Merger (the "REQUIRED CONSENTS"), shall have been obtained
prior to and be effective as of the Closing except for such Required Consents
the failure to obtain will not have a material adverse effect on the RG
Companies. Based in part on the representations of Purchaser set forth in
ARTICLE V below, the offer, sale and issuance of the Shares in conformity
with the terms of this Agreement are exempt from the registration and
prospectus delivery requirements of the Act.
4.12 COMPLIANCE WITH OTHER INSTRUMENTS. None of the RG Companies is
in any violation, breach or default of any term of such RG Company's charter
or bylaws or in any material respect of any term or provision of any
mortgage, indenture, contract, agreement or instrument to which such RG
Company is a party or by which it may be bound, or of any provision of any
foreign or domestic state or federal judgment, decree, order, statute, rule
or regulation applicable to or binding upon such RG Company. The execution,
delivery and performance of and compliance with this Agreement and the
consummation of the transactions contemplated hereby will not result in any
such violation or default, or be in conflict with or constitute, with or
without the passage of time or the giving of notice or both, either a default
under any RG Company's charter or bylaws, or any material agreement or
contract of any RG Company, or, to the best of the RG Companies' knowledge, a
violation of any statutes, laws, regulations or orders, or an event which
results in the creation of any lien, charge or encumbrance upon any asset of
any of the RG Companies.
4.13. DISCLOSURE. No representation or warranty by the RG Companies,
or any of them, in this Agreement or in any statement or certificate signed
by any officer of any of the RG Companies furnished or to be furnished to the
Purchasers pursuant to this Agreement
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contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading.
4.14. REGISTRATION RIGHTS. Except as provided in the Second Amended
and Restated Investor Rights Agreement, the Company has not granted or agreed
to grant any person or entity any rights (including "piggyback" registration
rights) to have any securities of the Company registered with the U.S.
Securities and Exchange Commission ("SEC") or any other governmental
authority.
4.15. INSURANCE. Set forth on SCHEDULE 4.15 is a complete and
correct list of all insurance policies of the RG Companies of any kind
currently in force and also sets forth for each insurance policy the type of
coverage, the name of the insureds, the insurer, the premium, the expiration
date, the deductibles and loss retention amounts and the amounts of coverage.
4.16. FINANCIAL STATEMENTS. SCHEDULE 4.16 sets forth (1) a balance
sheet of the Company dated September 30, 1999 (the "BALANCE SHEET DATE"), (2)
an income statement of the Company for the period ended September 30, 1999,
(3) a balance sheet of ActiveUSA dated September 30, 1999, and (4) an income
statement of ActiveUSA for the period ended September 30, 1999 (the
"FINANCIAL STATEMENTS"). Such Financial Statements (a) are in accordance with
the books and records of the Company or ActiveUSA, as applicable, (b) are
true, correct and complete and present fairly the financial condition of the
Company or ActiveUSA, as relevant, at the date or dates therein indicated and
the results of operations for the period or periods therein specified and (d)
have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis, except for the omission of
notes thereto and normal year-end audit adjustments or as otherwise noted
therein. The balance sheets of the Financial Statements disclose all of the
Company's or ActiveUSA's, as applicable, material debts, liabilities and
obligations of any nature, whether due or to become due, as of its date
(including, without limitation, absolute liabilities, accrued liabilities and
contingent liabilities) to the extent such debts, liabilities and obligations
are required to be disclosed in accordance with GAAP. The RG Companies have
good and marketable title to all assets set forth on the balance sheet of the
Financial Statements, except for such assets as have been spent, sold or
transferred in the ordinary course of business since the Balance Sheet Date.
4.17. CERTAIN ACTIONS. Since the Balance Sheet Date, none of the RG
Companies has: (a) declared or paid any dividends, or authorized or made any
distribution upon or with respect to any class or series of its capital
stock; (b) incurred any indebtedness for money borrowed or incurred any other
liabilities individually in excess of $25,000 or in excess of $100,000 in the
aggregate among all the RG Companies; (c) made any loans or advances to any
person, other than ordinary advances for travel expenses; (d) sold, exchanged
or otherwise disposed of any material assets or rights other than the sale of
inventory in the ordinary course of its business; or (e) entered into any
transactions with any of its officers, directors or employees or any entity
controlled by any of such individuals.
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4.18. ACTIVITIES SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, there has not been:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of any of the RG Companies
(as presently conducted and as presently proposed to be conducted);
(b) any waiver by any of the RG Companies of a valuable right or
of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by any of the RG Companies, except such
a satisfaction, discharge or payment made in the ordinary course of business
that is not material to the assets, properties, financial condition, operating
results or business of such RG Company;
(d) any material change or amendment to a material contract or
arrangement by which any RG Company or any of its assets or properties is bound
or subject, except for changes or amendments which are expressly provided for or
disclosed in this Agreement;
(e) any material change in any compensation arrangement or
agreement with any present or prospective employee, contractor or director not
approved by the applicable RG Company's Board of Directors; or
(f) to the RG Companies' knowledge, any other event or condition
of any character which would materially and adversely affect the assets,
properties, financial condition, operating results or business of any of the RG
Companies.
4.19. TAX MATTERS.
(a) Definitions. For purposes of this Agreement:
(i) the term "TAXES" means (A) all federal, state, local,
foreign and other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties or other taxes, fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties, additions to tax or additional amounts with respect thereto,
(B) any liability for payment of amounts described in clause (A) whether as a
result of transferee liability, of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise through
operation of law and (C) any liability for the payment of amounts described
in clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax
allocation agreement or any other express or implied agreement to indemnify
any other person; and
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(ii) the term "TAX RETURNS" means all returns,
declarations, reports, statements and other documents required to be filed in
respect of Taxes.
(b) There have been no examinations or audits of any Tax
Returns of any of the RG Companies by any applicable federal, state or local
governmental agency, and there are in effect no waivers of applicable
statutes of limitations with respect to Taxes of any of the RG Companies for
any year.
(c) Each RG Company has accurately completed and timely filed
in correct form all Tax Returns required to have been filed by it, and each
RG Company has paid all Taxes required to be paid by it.
(d) There are no liens for Taxes (other than for current Taxes
not yet due and payable) upon the assets of the Company.
4.20. TAX ELECTIONS. The Company has not filed a consent pursuant to
the collapsible corporation provisions of Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "CODE") (or any corresponding provision
of state, local or foreign Tax law). SCHEDULE 4.20 sets forth all elections
with respect to Taxes that would have a material effect on the Company, its
financial condition, its business as presently conducted or presently
proposed to be conducted, or any of its properties or material assets.
4.21. ENVIRONMENTAL MATTERS. During the period that the RG Companies
have owned or leased their respective properties and facilities, (a) there
have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on, from or under such properties or facilities,
(b) none of the RG Companies, nor, to the RG Companies' knowledge, any third
party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or
facilities any Hazardous Materials. None of the RG Companies has any
knowledge of any presence, disposals, releases or threatened releases of
Hazardous Materials on, from or under any of such properties or facilities,
which may have occurred prior to such RG Company having taken possession of
any of such properties or facilities. For purposes of this Agreement, the
terms "disposal," "release" and "threatened release" shall have the
definitions assigned thereto by the U.S. Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et
seq., as amended ("CERCLA"). For the purposes of this SECTION 4.22,
"HAZARDOUS MATERIALS" shall mean any hazardous or toxic substance, material
or waste which is regulated under, or defined as a "hazardous substance,"
"pollutant," "contaminant," "toxic chemical," "hazardous material," "toxic
substance" or "hazardous chemical" under (i) CERCLA; (ii) the Emergency
Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 ET SEQ.;
(iii) the U.S. Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, ET SEQ.; (iv) the U.S. Toxic Substances Control Act, 15 U.S.C. Section
2601 ET SEQ.; (v) the U.S. Occupational Safety and Health Act of 1970, 29
U.S.C. Section 651 ET SEQ.; (vi) regulations promulgated under any of the
above statutes or (vii) any applicable state or local statute, ordinance,
rule, or regulation that has a scope or purpose similar to those statutes
identified above.
4.22 EMPLOYEE BENEFITS.
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(a) For all purposes of this Agreement,
(i) "EMPLOYEE PENSION BENEFIT PLAN" means any employee pension
benefit plan, as defined in Section 3(2) of ERISA, that is subject to Title
IV of ERISA, other than a Multiemployer Plan.
(ii) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
(iii) "MULTIEMPLOYER PLAN" means a multiemployer plan, as defined
in Section 3(37) and 4001(a)(3) of ERISA.
(b) None of the RG Companies currently sponsors or has ever
sponsored, maintained, contributed to, or incurred an obligation to contribute
to, any Employee Pension Benefit Plan on behalf of or with respect to any
employee of the RG Companies. None of the RG Companies currently sponsors,
maintains or contributes to any Multiemployer Plan covering its employees.
4.23. INTERESTED PARTY TRANSACTIONS. Except as set forth SCHEDULE 4.23,
no officer or director of any of the Company or any "affiliate" or "associate"
(as those terms are defined in Rule 405 promulgated under the Act) of any such
person has had, either directly or indirectly, a material interest in: (a) any
person or entity which purchases from or sells, licenses or furnishes to any of
the RG Companies any goods, property, technology, intellectual or other property
rights or services or (b) any contract or agreement to which any RG Company is a
party or by which it may be bound or affected.
4.24. STOCK RESTRICTION AGREEMENTS. Each person who, pursuant to any
benefit, bonus or incentive plan of the Company, holds any currently outstanding
shares of common stock or other securities of Company or any option, warrant or
right to acquire such shares or other securities, has entered into or is
otherwise bound by, an agreement granting the Company (a) the right to
repurchase the shares, or to cancel the option, warrant or right, in the event
the holder's employment or services with the Company terminate for any reason,
subject to release of such repurchase or cancellation right pursuant to such
agreement or on terms and conditions specified by the Board of Directors of the
Company and (b) a right of first refusal with respect to all such shares. The
Company has furnished to Purchaser true and complete copies of the forms of all
such stock restriction agreements.
4.25 MINUTE BOOKS. The minute books of each of the RG Companies
provided to Purchasers contain a complete summary of all meetings of directors
and stockholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
4.26 LABOR AGREEMENTS AND ACTIONS. None of the RG Companies is
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
knowledge of the RG Companies, has sought to represent any of
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the employees, representatives or agents of such RG Company. There is no
strike or other labor dispute involving any RG Company pending, or to the
knowledge of the RG Companies, threatened, which could have a material
adverse effect on the assets, properties, financial condition, operating
results or business of the RG Companies, nor are the RG Companies aware of
any labor organization involving their employees. The RG Companies are not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with any of the RG Employees, nor do
any of the RG Companies have a present intention to terminate the employment
of any of the foregoing. The employment of each officer and employee is
terminable at the will of the applicable RG Company.
4.27 YEAR 2000 COMPLIANCE. Each of the RG Company's information
technology, including such RG Company's internal computer systems and all
software and other products designed by and/or sold by such RG Company, is
Year 2000 compliant. "Year 2000 compliant" means the information technology
is designed to be used prior to, during, and after the calendar Year 2000
A.D., and the information technology used during each such time period will
accurately receive, provide and process date/time data (including, but not
limited to, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries, including the years 1999 and 2000, and
leap year calculations and will not malfunction, cease to function, or
provide invalid or incorrect results as a result of date/time data.
4.28 NO RESTRICTIONS ON SHARES. Other than as set forth in this
Agreement, the Certificate, the Second Amended and Restated Investor Rights
Agreement to be entered into in substantially the form attached hereto as
EXHIBIT E, the Amended and Restated Restricted Stock and Co-Sale Agreement to
be entered into in substantially the form attached hereto as EXHIBIT F, the
Supplemental Stock Restriction Agreement to be entered into in substantially
the form attached hereto as EXHIBIT G, there are no restrictions on the
Shares or Conversion Shares.
4.29 MERGER; MERGER AGREEMENT. All corporate action on the part of
each of the Company and ActiveUSA, its officers, directors and shareholders
necessary for the authorization, execution and delivery of, and the
performance of all obligations of the Company, Acquisition Sub and ActiveUSA,
respectively, under the Merger Agreement has been taken or will be taken
prior to the Closing. The Merger Agreement, when entered into, will be a
valid and binding obligation of each of the Company, Acquisition Sub and
ActiveUSA enforceable in accordance with its terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, moratorium,
reorganization and similar laws affecting creditors' rights generally and to
general equitable principles. As of the Closing, the Merger will be effective
and properly consummated under applicable laws of the States of Delaware and
Florida and all actions pursuant to obligations, covenants and agreements of
the Company, Acquisition Sub and ActiveUSA provided in the Merger Agreement
will have been taken.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Each Purchaser severally represents and warrants to the Company as
follows:
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5.1 AUTHORIZATION. This Agreement when executed and delivered by
Purchaser will constitute a valid and legally binding obligation of Purchaser,
subject, as to enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium, reorganization and similar laws affecting creditors' rights
generally and to general equitable principles.
5.2 INVESTIGATION; ECONOMIC RISK. Purchaser acknowledges that it has
had an opportunity to discuss the business, affairs and current prospects of the
Company with its officers. Purchaser further acknowledges having had access to
information about the Company that it has requested. Purchaser acknowledges that
it is able to fend for itself in the transactions contemplated by this Agreement
and has the ability to bear the economic risks of its investment pursuant to
this Agreement.
5.3 PURCHASE FOR OWN ACCOUNT. The Shares and the Conversion Shares will
be acquired for its own account, not as a nominee or agent, and not with a view
to or in connection with the sale or distribution of any part thereof.
5.4 EXEMPT FROM REGISTRATION; RESTRICTED SECURITIES. Purchaser
understands that the Shares and the Conversion Shares will not be registered
under the Act, on the ground that the sale provided for in this Agreement is
exempt from registration under the Act, and that the reliance of the Company on
such exemption is predicated in part on Purchaser's representations set forth in
this Agreement.
5.5 FURTHER LIMITATIONS ON DISPOSITIONS. Without in any way limiting
the representations set forth above, Purchaser further agrees not to make any
disposition of all or any portion of the Shares or Conversion Shares unless and
until:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a reasonably detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Purchaser shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such Shares or Conversion Shares
under the Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
5.6 RESTRICTIVE LEGENDS. It is understood that each certificate
representing (a) the Share, (b) the Conversion Shares and (c) any other
securities issued in respect of the any of the foregoing upon any stock split,
stock dividend, recapitalization, merger or similar event shall be stamped or
otherwise imprinted with a legend substantially in the following form:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE
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SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM.
(b) Any legend required by state blue sky or corporation laws.
5.7 REMOVAL OF RESTRICTIVE LEGEND. The legend set forth above shall be
removed by the Company from any certificate evidencing Shares or Conversion
Shares upon delivery to the Company of an opinion by counsel, reasonably
satisfactory to the Company, that a registration statement under the Act is at
that time in effect with respect to the legended security or that such security
can be freely transferred in a public sale without such a registration statement
being in effect and that such transfer will not jeopardize the exemption or
exemptions from registration pursuant to which the Company issued the Shares or
Conversion Shares.
5.8 STATUS OF PURCHASER. Purchaser is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D of the Act.
5.9 SEC DOCUMENTS; TMCS FINANCIAL STATEMENTS. TMCS has furnished or
made available to the Company true and complete copies of all reports or
registration statement filed by it with the SEC under the Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), for all periods since January 1, 1998, all in
the form so filed (all of the foregoing being collectively referred to as "SEC
DOCUMENTS"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Act, or the Exchange Act, as
the case may be, and none of the SEC Documents contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a document subsequently filed with the SEC. The financial
statements of TMCS, including the notes thereto, included in the SEC Documents
(the "TMCS FINANCIAL STATEMENTS") comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) and present fairly
the consolidated financial position of TMCS at the dates thereof and the
consolidated results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal audit adjustments).
Since January 1, 1998, there has been no change in TMCS's accounting policies
except as described in the notes to the TMCS Financial Statements.
5.10 VALID ISSUANCE OF PURCHASER SHARES. The Purchaser Shares, when
issued, will be duly and validly issued, fully paid and nonassessable.
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ARTICLE VI
CERTAIN COVENANTS
6.1 USE OF PROCEEDS. The Company will use the proceeds from the
purchase of the Shares under this Agreement for general working capital and such
other uses as approved by the Board of Directors of the Company.
6.2 INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT. The Company
shall require each new employee of the RG Company to enter into and execute a
Proprietary Inventions Agreement in the form attached to this Agreement as
EXHIBIT H or an employment or consulting agreement containing substantially
similar terms.
6.3 EXPENSES. All costs and expenses incurred in connection with this
Agreement and in closing and carrying out the transactions contemplated hereby
shall be paid by the party incurring such cost or expense. This section shall
survive the termination of this Agreement.
6.4 CONDUCT OF THE BUSINESS. From the date hereof until the Closing
Date, each of the RG Companies and ActiveUSA will conduct its business in the
ordinary course and use its commercially reasonable efforts, without paying or
increasing the compensation, payments, remuneration or fees payable to any
person other than in the ordinary course of business, to preserve intact the
business organizations and relationships and goodwill with third parties.
Without limiting the generality of the foregoing, from the date hereof until the
Closing Date:
(a) except as provided in the Merger Agreement, without the
Purchasers prior consent (which consent shall not be unreasonably withheld),
each of the RG Companies and ActiveUSA will not and will not agree to agree:
(i) purchase or otherwise acquire assets from any other person,
or sell or transfer any assets of its business, other than in the ordinary
course of business;
(ii) incur any liability, except liabilities (A) incurred in the
ordinary course of business where the aggregate dollar amount of all such
liabilities incurred does not exceed One Million Dollars ($1,000,000), (B)
incurred pursuant to existing obligations of the RG Companies or ActiveUSA
that are disclosed in the Schedules hereto or (C) expressly contemplated by
the terms of this Agreement;
(iii) amend or modify in any material respect or terminate any
Material Contract or any other contract entered into by the RG Companies or
ActiveUSA after the date hereof which, if in existence on the date hereof,
would be considered a Material Contract; or
(iv) make or commit to make any capital expenditure, or group of
related capital expenditures, in excess of One Million Dollars
($1,000,000), other than
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(A) capital expenditures set forth on SCHEDULE 6.4 and (B) capital
expenditures expressly required under any Material Contract.
(b) Each of the RG Companies and Active USA will:
(i) (A) maintain its assets in the ordinary course of business in
reasonably serviceable operating order and condition, reasonable wear and
tear, damage by fire and other casualty excepted, (B) promptly repair,
restore or replace any material assets in the ordinary course of business
and (C) upon any damage, destruction or loss to any of such assets, apply
any and all insurance proceeds received with respect thereto to the prompt
repair, replacement and restoration thereof to the condition of such assets
before such event to the extent reasonably practicable;
(ii) comply with all material applicable laws;
(iii) not allow any liens for taxes to be placed on any of its
assets, except for liens arising from taxes which are due but not yet
payable;
(iv) use its commercially reasonable efforts to obtain, prior to
the Closing Date, all Required Consents;
(vi) promptly notify each Purchaser in writing if it has
knowledge of any action, event, condition or circumstance, or group of
actions, events, conditions or circumstances that materially effect the
business of the RG Companies and ActiveUSA, other than changes in general
economic conditions;
(vii) promptly notify each Purchaser in writing of the
commencement of any Proceeding by or against it, or of becoming aware of
any material claim, action, suit, inquiry, proceeding, notice of violation,
subpoena, government audit or disallowance that could reasonably be
expected to result in a Proceeding; and
(viii) pay accounts payable and pursue collection of its accounts
receivable in the ordinary course of business.
6.5 FURTHER ASSURANCES. The parties hereto shall execute and deliver
such other documents, certificates, agreements and other writings and shall take
such other actions as may be reasonably necessary or desirable (including,
without limitation, obtaining the Required Consents and making necessary filings
with all governmental authorities) in order to consummate or implement
expeditiously the transactions contemplated by this Agreement. Notwithstanding
the foregoing, no party hereto shall have any obligation to expend any funds or
to incur any other obligation in connection with the consummation of the
transactions contemplated hereby (including, by way of illustration only, any
payment in connection with obtaining the Required Consents) other than normal
out-of-pocket expenses (such as fees and expenses of counsel and accountants)
reasonably necessary to consummate such transactions.
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6.6 CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS. The parties hereto shall use
their best efforts to keep this Agreement and the execution and terms hereof
confidential, and shall consult with each other before issuing any press release
or making any public statement with respect to this Agreement or the
transactions contemplated hereby. The parties may, however, disclose such
matters to its directors, officers, executive employees and professional
advisors and those of prospective financing sources to such extent as may be
reasonable for the negotiation, execution and consummation of this Agreement.
Each party shall keep confidential all information concerning the other obtained
pursuant to this Agreement and shall not use such information except in
connection with the transactions set forth herein. If for any reason such
transactions shall not be consummated, each party will return all such
information (including all copies thereof) regarding the other, to the other
party. The foregoing obligations of confidentiality in this SECTION 6.6 do not
pertain to the disclosure of information which is available publicly, is
required to be disclosed by any court or any party discloses, upon advice of
counsel, in order to comply with applicable law. The parties hereto recognize
and agree that in the event of a breach by a party of this section, money
damages would not be an adequate remedy to the injured party for such breach
and, even if money damages were adequate, it would be impossible to ascertain or
measure with any degree of accuracy the damages sustained by such injured party
therefrom. Accordingly, if there should be a breach or threatened breach by a
party of the provisions of this section, the injured party shall be entitled to
an injunction restraining the breaching party from any breach without showing or
proving actual damage sustained by the injured party. Nothing in the preceding
sentence shall limit or otherwise affect any remedies that a party may otherwise
have under applicable law.
6.7 OTHER INVESTMENTS. The RG Companies and their respective officers
and other employees with managerial responsibilities, directors, representatives
and agents shall immediately cease any discussions or negotiations with any
parties with respect to any investment by such parties in the securities of any
of the RG Companies other than with respect to strategic relationships in the
ordinary course of business ("INVESTMENT TRANSACTIONS"). Until the Closing, none
of the RG Companies shall or any of their respective officers, directors,
employees representatives or agents will, directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with or provide
any non-public information to any person or group (other than any Purchaser or
any designees of any Purchaser) concerning any Investment Transactions;
PROVIDED, HOWEVER, that nothing herein shall prevent the RG Companies from
conducting such "due diligence" inquiries (which shall be in writing to the
extent possible) in response to any Investment Transaction proposal as the
directors of any RG Company in their good faith judgment, after consultation
with and based upon the advice of legal counsel, may be required in order to
comply with its fiduciary duties. The applicable RG Company shall promptly
notify each Purchaser in the event it receives any proposal or inquiry
concerning an Investment Transaction, including the terms and conditions thereof
and the identity of the party submitting such proposal, and shall advise each
Purchaser time to time of the status and any material developments concerning
the same, including the nature and content of any "due diligence" inquiries made
by it concerning any such proposal and furnishing copies of any such written
inquiries.
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6.8 REGISTRATION STATEMENT. TMCS shall promptly prepare, with the
cooperation of the Company with respect to information relating to the Company
or its sale of the Purchaser Shares, and TMCS shall file with the SEC as soon as
practicable after Closing a Registration Statement on Form S-1, or, if Purchaser
is eligible to file a Registration Statement on Form S-3, on Form S-3 (the
"REGISTRATION STATEMENT") under the Act, with respect to the Purchaser Shares,
but in any event within 30 days following the Closing. TMCS, with the
cooperation of the Company with respect to information relating to the Company
or its sale of the Purchaser Shares, shall cause the Registration Statement to
comply as to form in all material respects with the applicable provisions of the
Act and the rules and regulations thereunder. TMCS shall use all reasonable
efforts, and the Company will cooperate with TMCS, to have the Registration
Statement declared effective by the SEC as promptly as practicable. TMCS shall
use its reasonable efforts to obtain, prior to the effective date of the
Registration Statement, all necessary state securities law or "Blue Sky" permits
or approvals required to carry out the sale of the Purchaser Shares by the
Company and will pay all expenses incident thereto. TMCS agrees that the
Registration Statement and each amendment or supplement thereto at the time it
is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that the foregoing
shall not apply to the extent that any such untrue statement of a material fact
or omission to state a material fact was made by TMCS in reliance upon and in
conformity with information concerning the Company furnished to TMCS by the
Company specifically for use in the Registration Statement. The Company agrees
that the information provided by it for inclusion in the Registration Statement
and each amendment or supplement thereto at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. TMCS shall advise the Company, promptly after it receives notice
thereof, of the time when the Registration Statement has become effective. TMCS
shall cause the Registration Statement to remain effective until the earlier of
(1) the date at which all of the Purchaser Shares have been sold by the Company
or (2) the three month anniversary of the date on which the Registration
Statement was declared effective.
6.9 MERGER. The RG Companies shall use their best efforts to enter into
the Merger Agreement and to cause the Merger to be properly consummated and
effective pursuant to the terms of the Merger Agreement and the applicable laws
of Florida and Delaware as soon as practicable. The Company shall use its best
efforts to cause the Certificate to be duly adopted by the Company by all
necessary action of its Board of Directors and shareholders and to be duly filed
with and accepted by the Secretary of State of the State of Delaware as soon as
practicable.
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ARTICLE VII
CONDITIONS TO CLOSING
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of each of
the Company and Purchasers to consummate the Closing are subject to the
satisfaction of each of the following conditions:
(a) DISTRIBUTION AGREEMENT. The Company and TMCS shall have
entered into the Distribution Agreement in substantially the form attached as
EXHIBIT C.
(b) INVESTOR RIGHTS AGREEMENT. The Company and the Purchasers
shall have entered into an Amended and Restated Investor Rights Agreement in
substantially the form attached as EXHIBIT E.
(c) STOCK RESTRICTION AND CO-SALE AGREEMENT. The Company and the
Purchasers shall have entered into an Amended and Restated Stock Restriction and
Co-Sale Agreement in substantially the form attached as EXHIBIT F.
(d) VOTING AGREEMENT. The Company and the Purchasers shall have
entered into an Amended and Restated Voting Agreement in substantially the form
attached as EXHIBIT I (the "Voting Agreement").
(e) SUPPLEMENTAL STOCK RESTRICTION AGREEMENT. The Company and
Purchaser shall have entered into a Supplemental Stock Restriction Agreement in
substantially the form attached as EXHIBIT G.
(f) MERGER. The Certificate shall have been duly adopted by the
Company by all necessary corporate action of its Board of Directors and
shareholders and shall have been duly filed with and accepted by the Secretary
of State of the State of Delaware. The Merger shall be effective pursuant to the
terms of the Merger Agreement and the applicable laws of the States of Florida
and Delaware.
(g) BOARD COMPOSITION. The Board of Directors of the Company
shall be composed of seven members which shall include: Ronald Taylor, Lee
Rosenberg, Scott Kyle, James Woodman and Dan Marriott, with two vacancies to be
named in accordance with the Voting Agreement. The Compensation Committee of the
Board of Directors shall be composed of Dan Marriott, Ronald Taylor and Lee
Rosenberg.
7.2 CONDITIONS TO OBLIGATION OF THE PURCHASERS. The obligation of the
Purchasers to purchase the Shares at the Closing is subject to the satisfaction
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the RG Companies and ActiveUSA in ARTICLE IV hereof shall
be true and correct in all material respects when made, and shall be true and
correct in all material respects as
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of the date of Closing with the same force and effect as if they had been
made on and as of such date, subject to changes contemplated by this
Agreement; and the RG Companies and ActiveUSA shall have performed all
obligations and conditions herein required to be performed or observed by it
on or prior to the Closing.
(b) PERFORMANCE OF OBLIGATIONS. Each of the RG Companies and
ActiveUSA shall have performed and complied with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before the Closing and shall have obtained all
approvals, consents and qualifications necessary to complete the purchase and
sale described herein.
(c) CONSENTS AND WAIVERS. The Company shall have obtained any and
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
(d) COMPLIANCE CERTIFICATE. At the Closing, the Company shall
deliver to Purchasers a certificate, dated the date of Closing, signed by the
Company's President certifying that the conditions specified in SECTION 7.2(a),
(b), (c) and (f) have been fulfilled.
(e) SECURITIES LAWS. The offer and sale of the Shares to the
Purchasers pursuant to this Agreement shall be exempt from the registration
requirements of the Act and the registration and/or qualification requirements
of all applicable state securities laws.
(f) OPINION OF COUNSEL. The Company shall have furnished
Purchasers with a legal opinion, dated as of the date of Closing, of Brobeck,
Phleger & Harrison LLP in a form reasonably acceptable to the Purchasers.
(g) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement,
there shall have been no material adverse change in the business, operations,
prospects, condition (financial or otherwise) or results of operations of the RG
Companies.
(h) OWNERSHIP OF TECHNOLOGY. The Purchasers shall have received
from the Company all documents and other materials requested by the Purchasers
for the purpose of examining and determining the RG Companies' rights in and to
any technology, products and proprietary assets now used, proposed to be used
in, or necessary to, the RG Companies' business as now conducted and proposed to
be conducted, and the status of the RG Companies' ownership rights in and to all
such technology, products and proprietary assets shall be reasonably
satisfactory to the Purchasers.
(i) SCHEDULES. Any changes or updates to the Schedules hereto
which have been made by the RG Companies subsequent to the date of this
Agreement and prior to Closing shall be reasonably acceptable to Purchasers.
(j) FINANCIAL STATEMENTS OF ACTIVEUSA. ActiveUSA shall have
furnished Purchasers with the Financial Statements of ActiveUSA, as described in
Section 4.16, which Financial Statements shall be reasonably acceptable to the
Purchasers.
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7.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to sell the Shares at the Closing is subject to the satisfaction of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Purchasers contained in ARTICLE V hereof shall be true and
correct in all material respects as of the Closing.
(b) PAYMENT OF PURCHASE PRICE. The Purchasers shall have
delivered to the Company the cash portion of the purchase price and the
Purchaser Shares in accordance with the provisions of ARTICLE III and Schedule
A.
(c) SECURITIES EXEMPTIONS. The offer and sale of the Shares and
the Conversion Shares to the Purchasers pursuant to this Agreement shall be
exempt from the registration requirements of the Act, and the registration
and/or qualification requirements of all applicable state securities laws.
ARTICLE VIII
INDEMNIFICATION
8.1 AGREEMENT TO INDEMNIFY.
(a) The Purchasers shall be indemnified and held harmless to the
extent set forth in this ARTICLE VIII by each of the RG Companies in respect of
any and all demands, claims, actions or causes of action, assessments, losses,
damages, costs, expenses, liabilities, judgments, awards, fines, sanctions,
penalties, charges and amounts paid in settlement (net of insurance proceeds
actually received), including (i) interest on cash disbursements in respect of
any of the foregoing at the per annum rate of interest publicly announced from
time to time by the Bank of America as its prime rate (or reference rate),
compounded quarterly, from the date each such cash disbursement is made until
the person incurring the same shall have been indemnified in respect thereof and
(ii) reasonable costs, fees and expenses of attorneys, accountants and other
agents of such person (collectively, "Damages") reasonably and proximately
incurred by Purchaser as a result of any inaccuracy or misrepresentation in or
breach of any representation, warranty, covenant or agreement made by any of the
RG Companies or ActiveUSA in this Agreement as of the Closing; and
(b) The RG Companies shall be indemnified and held harmless to
the extent set forth in this ARTICLE VIII by Purchaser in respect of any and all
Damages reasonably and proximately incurred by any RG Company as a result of any
inaccuracy or misrepresentation in or breach of any representation, warranty,
covenant or agreement made by the Purchaser in this Agreement.
(c) Except as set forth in SECTIONS 8.1(a), and (b) and except to
the extent of confidentiality provisions in this Agreement, no person shall have
any claim or cause of action as a result of any inaccuracy or misrepresentation
in or breach of or failure to perform any representation, warranty, covenant,
agreement or obligation of a party providing indemnification
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(each, an "INDEMNIFYING PARTY") against any affiliate, stockholder, director,
officer, employee, consultant or agent of such Indemnifying Party. Nothing
set forth in this ARTICLE VIII shall be deemed to prohibit or limit the right
of a party entitled to indemnification (each, an "INDEMNITEE") at any time
before, on or after the Closing Date, to seek injunctive or other equitable
relief for the failure of any Indemnifying Party to perform any covenant or
agreement contained herein.
8.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties, covenants, agreements and obligations of each
Indemnifying Party contained herein and all claims of any party in respect of
any breach of any representation, warranty, covenant, agreement or obligation of
any Indemnifying Party contained in this Agreement, shall survive the Closing
and shall expire on the second anniversary of the Closing Date, except for (a)
covenants or obligations which by their terms shall be performed after the
Closing, which shall survive the Closing and not expire unless otherwise
provided in this Agreement, (b) (i) the inaccuracy or misrepresentation in or
breach of any representation, warranty, covenant or agreement made by the RG
Companies at any time in this Agreement arising out of fraud or (ii) any
inaccuracy or misrepresentation in or breach of any representation or warranty
made in SECTIONS 4.19 or 4.20, which shall survive the Closing Date until the
thirty (30) days after the expiration of any applicable statute of limitations,
including extensions thereof and (c) the representations and warranties of the
RG Companies made in SECTION 4.8, which shall survive the Closing Date until the
third anniversary of the Closing Date. Notwithstanding anything herein to the
contrary, indemnification for claims for which written notice as provided in
SECTION 8.5 has been timely given shall not expire until the final resolution of
such claim in accordance with SECTION 9.13.
8.3 LIMITATION. The Purchaser shall be entitled to indemnification
pursuant to Section 8.1(a) only if the total aggregate Damages under SECTION
8.1(a) exceeds Two Hundred Fifty Thousand Dollars ($250,000) (the "AGGREGATE
THRESHOLD"); PROVIDED, HOWEVER, that once such aggregate Damages reach the
Aggregate Threshold, the Purchasers shall be entitled to receive the full amount
of its Damages. The aggregate amount which the Purchasers shall be entitled to
be indemnified for under SECTION 8.1(a) will not exceed the cash received by the
Company, consisting of the cash amount received by the Company for each of the
Purchasers plus the cash received upon sale of the Purchaser Shares, plus the
value of services actually provided by TMCS pursuant to the Distribution
Agreement.
8.4 CLAIMS FOR INDEMNIFICATION. If any Indemnitee shall believe that
such Indemnitee is entitled to indemnification pursuant to this ARTICLE VIII in
respect of any Damages, such Indemnitee shall give the appropriate Indemnifying
Party prompt written notice thereof. Any such notice shall set forth in
reasonable detail and to the extent then known the basis for such claim for
indemnification. The failure of such Indemnitee to give notice of any claim for
indemnification promptly, but within the periods specified by SECTION 8.2 shall
not adversely affect such Indemnitee's right to indemnity hereunder except to
the extent that such failure adversely affects the right of the Indemnifying
Party to assert any reasonable defense to such claim. Each such claim for
indemnity shall expressly state that the Indemnifying Party shall have only the
twenty (20) Business Day period referred to in the next sentence to dispute
or deny
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such claim. The Indemnifying Party shall have twenty (20) Business Days
following its receipt of such notice either (a) to acquiesce in such claim and
its respective responsibilities to indemnify the Indemnitee in respect thereof
in accordance with the terms of this ARTICLE VIII by giving such Indemnitee
written notice of such acquiescence or (b) to object to the claim by giving such
Indemnitee written notice of the objection. If the Indemnifying Party does not
object thereto within such twenty (20) Business Day period, such Indemnifying
Party shall be deemed to have acquiesced in such claim and their respective
responsibilities to indemnify the Indemnitee in respect thereof in accordance
with the terms of this ARTICLE VIII.
8.5 DEFENSE OF CLAIMS. In connection with any claim brought by a person
who is not a party hereto which may give rise to Damages, the Indemnitee shall
promptly notify the Indemnifying Party in writing and the Indemnifying Party
shall assume the defense of such action, including the employment of counsel
reasonably satisfactory to the Indemnitee and the payment of all fees and
expenses of such counsel, as incurred. Any Indemnitee shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnitee unless the employment of such counsel shall have been
specifically authorized in writing by the Indemnifying Party. In any event, the
Indemnifying Party shall not, in connection with any one action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel). Each Indemnitee shall, and shall cause each of its affiliates,
officers, employees, consultants and agents to, cooperate fully with the
Indemnifying Party in the defense of any claim or Proceeding being defended by
the Indemnifying Party pursuant to this SECTION 8.5. No Indemnifying Party
shall, without the prior written consent of the Indemnitee, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the Indemnitee is or
could have been a party and indemnity or contribution may be or could have been
sought hereunder by the Indemnitee, unless such settlement, compromise or
judgment (1) includes an unconditional release of the Indemnitee from all
liability on claims that are the subject matter of such action and (2) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the Indemnitee.
ARTICLE IX
MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the internal laws (without reference to choice or conflict of
laws) of the State of Delaware.
9.2 CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns,
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<PAGE>
heirs, executors and administrators of the parties hereto whose rights or
obligations hereunder are affected by such amendments. This Agreement and the
rights and obligations therein may not be assigned by Purchasers without the
written consent of the Company except to a parent corporation, a subsidiary
or affiliate. This Agreement and the rights and obligations therein may not
be assigned by the Company without the written consent of the Purchasers.
9.4 ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits referred to herein which are hereby incorporated by reference and the
other agreements executed simultaneously herewith) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter of this
Agreement; PROVIDED, HOWEVER, that nothing in this Agreement shall be deemed to
terminate or supersede the provisions of any confidentiality and nondisclosure
agreements executed by the parties hereto prior to the date hereof, which
agreements shall continue in full force and effect until terminated in
accordance with their respective terms. Neither this Agreement nor any provision
hereof is intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
9.5 NOTICES. Except as may be otherwise provided herein, all notices,
requests, waivers and other communications made pursuant to this Agreement shall
be in writing and shall be conclusively deemed to have been duly given (a) when
hand delivered to the other party, (b) when received when sent by facsimile at
the address and number set forth below, (c) three business days after deposit in
the U.S. mail with first class or certified mail receipt requested postage
prepaid and addressed to the other party as set forth below or (d) the next
business day after deposit with a national overnight delivery service, postage
prepaid, addressed to the parties as set forth below with next-business-day
delivery guaranteed, PROVIDED that the sending party receives a confirmation of
delivery from the delivery service provider.
To each of the RG Companies: RaceGate.com, Inc.
1295 Prospect Street
La Jolla, California 92037
Attention: Chief Financial Officer
Fax No.: (619) 551-9987
With copies to: Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Attention: Rick Fink, Esq.
Fax No.: (250) 832-5303
29
<PAGE>
To ActiveUSA ActiveUSA.com, Inc.
4300 Southwest 73rd Avenue
Suite 107B
Miami, Florida 33155
Attention: Jim Woodman
Fax No.: (305) 265-0906
With copies to: Akerman, Senterfitt & Edison, P.A.
One Southeast Third Avenue
28th Floor
Miami, Florida 33131-1704
Attention: David Beckett
Fax No.: (305) 982-5554
To TMCS: Ticketmaster Online-CitySearch, Inc.
790 E. Colorado Blvd., Suite 200
Pasadena, California
Attention: Bradley K. Serwin, Esq.
Fax No.: (626) 405-9929
With copies to: Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Kenneth M. Doran, Esq.
Fax No.: (213) 229-7520
Each person making a communication hereunder by facsimile shall
promptly confirm by telephone to the person to whom such communication was
addressed each communication made by it by facsimile pursuant hereto but the
absence of such confirmation shall not affect the validity of any suzach
communication. A party may change or supplement the addresses given above, or
designate additional addresses, for purposes of this SECTION 9.5 by giving the
other party written notice of the new address in the manner set forth above.
9.6 AMENDMENTS AND WAIVERS.
(a) Any provision of this Agreement may be amended or waived if,
and only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by all parties hereto, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) No waiver by a party of any default, misrepresentation or
breach of warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation or breach
of warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent occurrence. No failure
30
<PAGE>
or delay by a party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by
law.
9.7 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to the RG Companies or to Purchasers, upon any breach
or default of any party hereto under this Agreement, shall impair any such
right, power or remedy of the RG Companies or Purchasers, nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of any similar breach of default thereafter occurring; nor shall any
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
RG Companies or Purchasers of any breach of default under this Agreement or any
waiver on the part of the RG Companies or Purchasers of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, or by law or otherwise afforded to the RG Companies or
Purchasers shall be cumulative and not alternative.
9.8 FINDER'S FEES. Each party hereby agrees to indemnify and to hold
harmless the other party hereto from and against any liability for any
commission or compensation in the nature of a finder's fee of any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the indemnifying party or any of its
employees or representatives are responsible.
9.9 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts and the signatures delivered by telecopy, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument and delivered in person. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other parties hereto.
9.10 SEVERABILITY. If any provision of this Agreement, or the
application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect only if, after
excluding the portion deemed to be unenforceable, the remaining terms shall
provide for the consummation of the transactions contemplated hereby in
substantially the same manner as originally set forth at the later of the date
this Agreement was executed or last amended..
9.11 ARBITRATION.
(a) Any dispute or difference between or among the parties (such
parties being referred to individually as a "DISPUTING PARTY," and, together, as
the "DISPUTING PARTIES") arising out of this Agreement or the transactions
contemplated hereby, including without limitation any dispute between an
Indemnitee and any Indemnifying Party under ARTICLE VIII, which the parties are
unable to resolve themselves shall be submitted to and resolved by arbitration
as herein provided. Any Disputing Party may request the American Arbitration
31
<PAGE>
Association (the "AAA") to designate one arbitrator, who shall be qualified as
an arbitrator under the standards of the AAA, and who shall have been engaged in
the private practice of law for not less than fifteen (15) years immediately
prior to appointment as arbitrator pursuant to this Agreement, who, in any such
case, (i) is not affiliated with any party in interest to such arbitration, (ii)
is not a law firm that has within the last three years rendered, or is then
rendering, services to any party hereto, (iii) has not appeared, or is not then
appearing, as counsel of record in opposition to any party hereto and (iv) is
qualified to serve by training for and experience in the matters for which such
arbitrator is designated to serve.
(b) The arbitrator shall consider the dispute at issue in Irvine,
California, at a mutually agreed upon time within one hundred twenty (120) days
(or such other period as may be acceptable to the Disputing Parties or as
directed by the arbitrator) of the designation of the arbitrator. The
arbitration proceeding shall be held in accordance with the rules for commercial
arbitration of the AAA in effect on the date of the initial request by the
Disputing Party, that gave rise to the dispute to be arbitrated (as such rules
are modified by the terms of this Agreement or may be further modified by mutual
agreement of the Disputing Parties) and shall include an opportunity for the
parties to conduct discovery in advance of the proceeding using all of the
authorized methods of discovery allowed by the Federal Rules of Civil Procedure
in effect on the date of the initial request by the Disputing Party.
Notwithstanding the foregoing, the Disputing Parties shall agree that they will
attempt, and they intend that they and the arbitrator should use its best
efforts in that attempt, to conclude the arbitration proceeding and have a final
decision from the arbitrator within one hundred twenty (120) days from the date
of selection of the arbitrator; PROVIDED, HOWEVER, that the arbitrator shall be
entitled to extend such one hundred twenty (120) day period for a total of two
one hundred twenty (120) day periods. The arbitrator shall be bound to follow
the laws of the State of Delaware, both decisional and statutory, in reaching
any decision and making any award and shall deliver a written award, including
written findings of fact and conclusions of law, with respect to the dispute to
each of the parties, who shall promptly act in accordance therewith. Each
Disputing Party to such arbitration agrees that any award of the arbitrator
shall be final, conclusive and binding and that they will not contest any action
by any other party thereto in accordance with an award of the arbitrator;
provided, HOWEVER that any party may appeal based on statutory grounds. It is
specifically understood and agreed that any party may enforce any award rendered
pursuant to the arbitration provisions of this SECTION 9.13 by bringing suit in
any court of competent jurisdiction.
(c) All costs and expenses attributable to the arbitrator shall
be allocated among the parties to the arbitration in such manner as the
arbitrator shall determine to be appropriate under the circumstances.
(d) The arbitrator chosen in accordance with these provisions
shall not have the power to alter, amend or otherwise affect the terms of these
arbitration provisions or the provisions of this Agreement or any other
documents that are executed in connection therewith.
(e) Arbitration under this SECTION 9.13 shall be the sole and
exclusive remedy of the parties for any dispute arising out of this Agreement.
32
<PAGE>
9.12 CONSTRUCTION. The parties hereto intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty or covenant contained herein
in any respect, the fact that there exists another representation, warranty or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) that the party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
9.13 CUMULATIVE REMEDIES. The rights, remedies, powers and privileges
herein provided are cumulative and not exclusive of any rights, remedies, powers
and privileges provided by law.
9.14 THIRD PARTY BENEFICIARIES. No provision of this Agreement shall
create any third party beneficiary rights in any person, including any employee
of Purchasers or employee or former employee of the RG Companies or ActiveUSA
(including any beneficiary or dependent thereof).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
33
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year herein above first written.
RACEGATE.COM, INC.,
a Delaware corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
RACEGATE.COM, INC.,
a California corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
RG ACQUISITION CORP.,
a Delaware corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
ACTIVEUSA.com, INC.,
a Florida corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
34
<PAGE>
TICKETMASTER ONLINE CITYSEARCH, INC.,
a Delaware corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
KETTLE PARTNERS IV, L.P.,
By: Morain L.L.C., its general partner
By: ___________________________
Name: ___________________________
Title: ___________________________
Address:
AUSTIN VENTURES IV, L.P.,
By: A.V. Partners VI, L.P., its general partner
By: ___________________________
Name: ___________________________
Title: ___________________________
Address:
35
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF TICKETMASTER ONLINE-CITYSEARCH, INC.
SUBSIDIARY PLACE OF INCORPORATION
Ticketmaster Multimedia Holdings, Inc. Delaware
Match.com, Inc. Delaware
CityAuction, Inc. California
2b Technology, Inc. Virginia
Web Media Ventures, Inc. (d/b/a One and Only Texas
Network)
Sidewalk.com, Inc Nevada
Ticketmaster Online-CitySearch UK Limited United Kingdom
Ticketmaster Online-CitySearch Canada, Ltd. Canada
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements:
Form S-8 dated January 22, 1999 pertaining to the 1996 Stock Option Plan, 1998
Stock Plan and 1998 Employee Stock Purchase Plan; Form S-3/S-8 dated May 5, 1999
pertaining to the registration of 671,929 shares of Class B Common Stock issued
and 6,274 shares of Class B Common Stock issuable under the exercise of stock
options in connection with the acquisition of CityAuction, Inc.; Form S-4
No. 333-83753 dated July 26, 1999 as amended September 8, 1999 pertaining to the
registration of Class B Common Stock issued and issuable in connection with the
acquisition of Web Media Ventures LLC; Form S-3 dated January 31, 2000
pertaining to the registration of 400,809 shares of Class B Common Stock;
Form S-8 dated February 18, 2000 pertaining to the registration of 4,000,000
shares of Class B Common Stock issuable under the 1999 Stock Plan, of our report
dated January 26, 2000, with respect to the financial statements of Ticketmaster
Online-CitySearch, Inc. included in the Annual Report Form 10-K for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
Los Angeles, California
March 21, 2000
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
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