-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpCPDX3RPiBliPBN75JDXd5g56OAl3eUaUfHFroa77zIlKl91A15hA8cwWf5iYr0 lbrbtSSEGx0UxJtBkdIgBA== 0000912057-00-013014.txt : 20000324 0000912057-00-013014.hdr.sgml : 20000324 ACCESSION NUMBER: 0000912057-00-013014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TICKETMASTER ONLINE CITYSEARCH INC CENTRAL INDEX KEY: 0001006637 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 954546874 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25041 FILM NUMBER: 576095 BUSINESS ADDRESS: STREET 1: 790 E COLORADO BLVD STREET 2: STE 200 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 6264050050 MAIL ADDRESS: STREET 1: 790 E COLORADO BLVD STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: CITYSEARCH INC DATE OF NAME CHANGE: 19980617 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-25041 ------------------------ TICKETMASTER ONLINE-CITYSEARCH, INC. (Exact name of registrant as specified in its charter) 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)
Registrant's telephone number, including area code: (626) 405-0050 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange Title of Each Class: on Which Registered: -------------------- -------------------- NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of class) ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TICKETMASTER ONLINE-CITYSEARCH, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE ---- 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
i 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 1 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. 2 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 3 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. 4 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 5 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 6 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. 7 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. 8 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. 9 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, 10 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 11 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. 12 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. 13 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. 14 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. 15 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. 16 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.
HIGH LOW -------- -------- 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
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. 17 (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.
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 - ---------------- ------------ ------------- -------- -------- -------- 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 ========= ======== ======= ======= ======
18
DECEMBER 31, JANUARY 31, ------------------- ------------------------------ BALANCE SHEET DATA: 1999 1998 1998 1997 1996 - ------------------- -------- -------- -------- -------- -------- 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
- ------------------------ (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. 19 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. 20 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. 21 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, 22 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 23 2.9 million tickets) and a 7.7% increase in average convenience and handling charge revenue per ticket (from $5.06 to $5.45). 24 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 24 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 25 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 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:
PAGE REFERENCE FORM 10-K -------------- Schedule II--Valuation and qualifying accounts for the year ended December 31, 1999 and the eleven months ended December 31, 1998......................................... S-1
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 The following financial statements of Ticketmaster Online--CitySearch, Inc. are included in response to Item 8 of this report.
PAGE REFERENCE FORM 10-K -------------- 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
(A)(3) EXHIBITS FILED AS PART OF THIS REPORT:
EXHIBIT NUMBER EXHIBIT TITLE NOTES - -------------- ------------- -------- 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.
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EXHIBIT NUMBER EXHIBIT TITLE NOTES - -------------- ------------- -------- 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.
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EXHIBIT NUMBER EXHIBIT TITLE NOTES - -------------- ------------- -------- 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.
30
EXHIBIT NUMBER EXHIBIT TITLE NOTES - -------------- ------------- -------- 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.
- ------------------------ * 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 (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 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. TICKETMASTER ONLINE-CITYSEARCH, INC. By: /s/ CHARLES CONN ----------------------------------------- Charles Conn CHIEF EXECUTIVE OFFICER
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:
SIGNATURE TITLE DATE --------- ----- ---- /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
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SIGNATURE TITLE DATE --------- ----- ---- /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
34 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 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 -------------------- 1999 1998 --------- -------- 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 ========= ========
See accompanying notes. F-2 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ELEVEN MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 31, 1999 1998 1998 ------------ ------------- ----------- 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 ========= ======== ======
See accompanying notes. F-3 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CLASS A CLASS B COMMON STOCK COMMON STOCK COMMON STOCK DUE TO ADDITIONAL ---------------------- ------------------- ------------------- (FROM) PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TICKETMASTER CAPITAL --------- ---------- -------- -------- -------- -------- ------------- ---------- 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 ========= ========== ======= ===== ====== ==== ======= ======== ACCUMULATED RETAINED OTHER TOTAL EARNINGS COMPREHENSIVE STOCKHOLDERS' (DEFICIT) INCOME (LOSS) EQUITY ---------- --------------- ------------- 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 ========= ===== =========
See accompanying notes. F-4 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
ELEVEN YEAR MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 31, 1999 1998 1998 ------------ ------------ ----------- 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 $ -- ========= ======== ========
See accompanying notes. F-5 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
ELEVEN YEAR MONTH YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 31, 1999 1998 1998 ------------ ------------ ----------- 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 -- --
See accompanying notes. F-6 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 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): 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 ========
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 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.
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues............................................... $ 40,157 $ 15,479 Net loss............................................... $(72,598) $(80,357) Net loss per share..................................... $ (1.16) $ (1.44)
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 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 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 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 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 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 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 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 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.
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.............................................. $ 115,325 $ 47,459 Net loss.............................................. (132,955) (94,883) Net loss per share.................................... (1.70) (1.42)
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 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) 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 ======= =======
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):
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------- ---------- ---------- ---------- U.S. Government and agencies......................... $13,975 $ -- $ 63 $13,912 Corporate debt securities............................ 12,535 -- 148 12,387 ------- ------- ---- ------- $26,510 $ -- $211 $26,299 ======= ======= ==== =======
The contractual maturities of debt securities classified as available-for-sale as of December 31, 1999 are as follows (in thousands):
ESTIMATED COST FAIR VALUE -------- ---------- 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 ======= =======
F-18 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:
YEAR ELEVEN MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 31, 1999 1998 1998 ------------ ------------- ----------- (IN THOUSANDS) 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 ==== ====== ======
The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate:
ELEVEN YEAR MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 31, 1999 1998 1998 ------------ ------------ ----------- 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% === === ==
F-19 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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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................................. $ -- $ -- ======== ========
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 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 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): 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 ======
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 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 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:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE PER SHARE PRICE -------------- ------------------------------- -------- (IN THOUSANDS) 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 ======
Additional information with respect to outstanding options as of December 31, 1999 is as follows:
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) $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 ===== =====
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:
1999 1998 -------- -------- Expected life (years)....................................... 1 year 1 year Risk-free interest rate..................................... 5.64% 5.14% Dividend yield.............................................. -- -- Volatility.................................................. 65% 75%
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 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:
ELEVEN MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- (IN THOUSANDS) 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)
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 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:
OPERATING CAPITAL LEASES LEASES --------- -------- (IN THOUSANDS) 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 ======
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 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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 ---------- ----------- ---------- ---------- ------------- ---------- 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
- ------------------------ (a) Represents amounts written off against the allowance for doubtful accounts, net of recoveries and reversals. S-1 EX-10.43 2 EXHIBIT 10.43 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 TABLE OF CONTENTS
PAGE 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
i 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
ii 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
EXHIBITS 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
SCHEDULES 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
iii Schedule 4.16................................................Financial Statements Schedule 4.20................................................Tax Elections Schedule 4.23................................................Interested Party Transactions Schedule 6.4 ................................................Capital Expenditures
iv 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:
DEFINED TERM SECTION PAGE AAA..........................................................Section 9.11........................................32 Acquisition Sub..............................................Preamble.............................................1 Act..........................................................Section 4.5..........................................7 ActiveUSA....................................................Preamble.............................................1
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
2 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
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 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 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 (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 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 7 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 8 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 9 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 10 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 11 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 12 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. 13 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 14 (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. 15 (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 16 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: 17 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 18 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. 19 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 20 (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. 21 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. 22 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. 23 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 24 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. 25 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 26 (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 27 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, 28 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 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 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 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 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 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 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 EX-21.1 3 EXHIBIT 21.1 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 EX-23.1 4 EXHIBIT 23.1 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 EX-27.1 5 EXHIBIT 27.1
5 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 FEB-01-1998 DEC-31-1999 DEC-31-1998 61,455 106,910 26,299 0 3,774 1,249 (738) (58) 0 0 98,126 111,189 22,461 7,216 5,630 1,323 804,669 416,725 20,573 11,618 0 0 0 0 0 0 850 715 781,743 402,873 804,669 416,725 105,303 27,873 105,303 27,873 78,158 13,863 230,098 42,195 272 0 0 0 (4,163) (54) (120,904) (14,268) 464 2,951 (121,368) (17,219) 0 0 0 0 0 0 (121,368) (17,219) (1.59) (0.38) (1.59) (0.38)
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